What is happiness economics? How it works?

Happiness economics is the formal academic study of the relationship between individual satisfaction and economic issues such as employment and wealth.

Understanding happiness economics

Where standard economics relies on measurements of income and consumption or other observed behaviors to demonstrate the immeasurable concept of utility, or the satisfaction of material wants and needs, happiness economics uses surveys and related methods to elicit people to directly reveal their level of satisfaction. Happiness economics apples econometric analysis to discover which factors might increase or decrease human well-being and quality of life.

Happiness economics is a relatively new branch of research. Mainstream economics has long relied on the concept of utility, the enjoyment that people experience from the satisfactions of wants and needs. However, because the subjective, internal experience of happiness, joy, or felt unease cannot be directly observed or measured by an external observer, economists rely on observing people's actions to reveal what gives the utility.

To measure this utility, economists use various observable proxies, mostly market prices in terms of money, to indicate how much utility people experience from various economic goods or activities. The basic idea is that measuring the amount of money that people are willing to pay or accept for various goods and services on a market demonstrates the amount of utility they expect to receive from those things. This also means that economists often use indicators like a person's income or total consumption to indicate their total utility.

Happiness economics is an attempt to overcome certain shortcomings of this traditional approach by trying to measure utility, or happiness, more directly. One major shortcoming of traditional utility theory is that because it relies on observed market prices, quantities, and incomes, it cannot account for the enjoyment that people receive from goods, services, activities, or amenities that occur outside of markets.

This means that impact on human happiness of anything that is not or cannot be traded on a market will be at best difficult or impossible to measure. It also assumes that the observed market prices and quantities capture the full value of those goods and services that are traded on markets, which may not always be the case. Those who study happiness economics argue that it is essential to examine factors affecting quality of life, beyond typical areas of economic studies such as income and wealth.

Happiness economics seeks to overcome these problems mainly by asking people to fill out surveys that directly ask people to rank or score the happiness they receive or to reveal how much they might be willing to pay or accept for things that do not have explicit market prices. They also analyze indices tracking the quality of life in different countries, focusing on factors such as access to health care, life expectancy, literacy levels, political freedom, gross domestic product (GDP) per capita, cost of living, social support, and pollution levels.

Happiness economics indices

Over the past 30 or so years, a number of happiness economics metrics have emerged. Common ones include Gross Domestic Happiness (GDH) and happiness indices that aim to track the well-being of people living in several countries in the world.

According to the 2021 World Happiness report, the happiest countries are:

Finland, Iceland, Denmark, Switzerland, Netherlands, Sweden, Germany, Norwaym New Zealand and Austria.

Europe, home to most of the countries topping the 2021 list, is particularly engaged with happiness economics. The region’s Organization for Economic Cooperation and Development (OECD) gathers data on happiness economics and ranks its 35 member countries based on factors such as housing, income, employment, education, environment, civic engagement, and health.

Criticism of happiness economics

Happiness economics has several major problems in terms of theory, method, and application. Economists have traditionally eschewed survey research methods as unreliable. Surveys are known to be prone to numerous biases. For one, respondents can answer survey however they want, with no actual consequence or trade-off required, which often leads to paradoxical results.

A classic example of this is that survey respondents will routinely respond that they support increasing total public services spending and will also respond that they oppose tax increases to pay for that increased spending. By measuring utility through observed market phenomena, where people have real skin in the game and have to acknowledge scarcity and make trade-offs, the traditional economic approach avoids this kind of problems.

The results of happiness economics research is often found to be redundant or duplicative of simply measuring human well-being using more objective measures such as income, GDP per capita, or direct observation of the quality of economic institutions. The research of happiness economics has generally found that people in wealthier countries with high-quality institutions tend to be happier than people in countries with less wealth and poorer institutions. Simple comparison of self-reported life satisfaction and real GDP per capita shows a strong, positive correlation that is consistent over time.

This suggests that simply referring to GDP per capita already measures happiness, and that attempts to directly measure happiness are a waste of time.

These and other criticisms lead many economics to see happiness economics as an inferior way of measuring human welfare compared to established methods.

Source: Investopedia