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What makes us happy?

I am attending a conference on The Economics of Happiness in a couple of weeks.  It will be held in Byron Bay NSW where I spent some time in my surfing youth. Given the location, I should at least emerge from the conference very happy indeed. I posted once before on this topic when I examined the argument that those who identify inequality are anti-social trouble makers rather like office-gossips who create dissension.   A more sensible view is that if you understand how “other regarding” behaviour can reduce your happiness you might train yourself not to “other regard” in order to increase your happiness!

Below I provide some new preparatory notes (mainly for myself) on the economics of happiness.  I conclude with some remarks on applications of well-being research for environmental economics. Comments are welcome on these rough notes which draw heavily on the World Happiness Report.  


Utilitarianism and the maximization of happiness might not provide the best guide to the good life but individual happiness is an important concern.  A core question is whether economic growth, which increases consumption, is a major path to greater happiness. An age-old belief is that material prosperity, while important to life, is insufficient in itself to meet many human needs.  Indeed affluence has created its own set of problems – adult onset diabetes, tobacco-illnesses, eating disorders, psychosocial problems as well as addictions to shopping, TV, gambling and chemical substances.  There is a sense that community spirit has fallen and anxiety levels have increased because of increased feelings of insecurity over such things as threatened unemployment.

The economics of happiness (EOH) combines ideas, conventionally used in economics, with those more commonly used by psychologists.  Graham (2008), Clark et al. (2008) and Helliwell et al. (2012) provide surveys of EOH.

While Aristotle and the early utilitarians included the pursuit of happiness in their work later “de-ethicized” economics has generally employed a narrower idea of utility as revealed preference reflecting rational choice constrained by income.  More income then relaxes this constraint creating greater utility. The EOH (or the “economics of subjective well-being”) has been developed to include broader ideas of utility and welfare. These include interdependent and procedural utilities as well as the interaction between rational and irrational influences on behavior.

The EOH approach is based on surveys across countries of factors which affect happiness, including income, but also such things as health, marital status and employment status.  It relies on expressed rather than revealed preferences. This enables analysis to focus on the welfare effects of policies or institutional arrangements that individuals are powerless to change.  Examples include the welfare effects of inequality, poverty and environmental degradation.  Conventional choice approaches are limited when it comes to assessing poverty issues where the poor can’t make choices. Addictive behaviors are also an area where choice-based approaches don’t work well.

Happiness measures an agent’s evaluation of their quality of life or their “subjective well-being”. In EOH individuals are asked questions about how happy or satisfied they are with their life. Answers are given on a 4-11 point scale.  Despite statistical difficulties there are consistent patterns in the determinants of happiness.   Answers to EOH surveys are correlated with psychological measures of happiness such as frontal brain movements and the number of “genuine” Duchenne smiles – smiles that involve contracting muscles around the mouth and eyes which particularly indicate positive emotion.  Thus, even though happiness is a subjective experience, it can be reasonably objectively measured.  Simply asking people about their happiness status or whether they are satisfied with their lives provides useful information.

There are two broad measures of happiness. Affective happiness, as measured by emotional reports, refers to the ups and downs of daily emotions – the day-to-day joys of friendship, family, sex and the downsides of work and commuting.  Evaluative happiness or cognitive life evaluations measures an individual’s overall valuation of life measure the overall satisfaction with one’s position in society – this will be driven by income, health of body and mind, trust and the extent of social capital.

Empirical studies of happiness

Micro-econometric happiness equations take the linear form Wit = α + βxit it where W is the reported well-being of individual i at time t and X is a vector of socio-economic and socio-demographic characteristics.  Measurement errors and unobserved characteristics are captured by  the error term.  Since Wit is qualitative such relations are best estimated by logit or probit although using OLS produces similar estimates.   These equations can, for example, estimate how much income an individual must lose to achieve the same loss in happiness as a job loss, a divorce or loss of an environmental amenity.

An early study by Easterlin (1974) showed that within countries wealthier people are happier than poorer people. Poverty and deprivation are very bad for happiness so that it is certainly desirable to increase incomes in the poorest countries to maximise global happiness. However studies across countries, and studies that examine happiness trends over time, find little relations between income and happiness.  Wealthier countries (as a group) tend to be happier than poor countries (as a group) but studies across individual countries and for given countries over time show little relationship between happiness and income.   One reason is that happiness rises with income up to some not very large point but not beyond that level.  Other factors, such as cultural traits operate and, once basic needs are met, other factors such as rising aspirations, relative income differences and the security of gains become important.  For example, in the United States from 1973-2004 real income per capita almost doubled while measured happiness was almost trendless (Clark et al, 2008, p. 96). That average happiness remained trendless over time despite sharp rises in income per head is the Easterlin Paradox. It suggests that achieving economic growth should not be a priority policy for increasing happiness in developed countries.

At higher incomes, Easterlin suggested that relative rather than absolute incomes matter because of “other regarding” behaviour or “keeping up with the Jones’” aspirations. Individuals compare themselves to others. Thus middle class people in a rich neighborhood have lower subjective well-being than middle class people in a middle class neighborhood. Thus while poorer people in a developed country may have less happiness than wealthier people if the incomes of both groups rise and the same income disparity remains then happiness need not increase.  In addition, income increases in developed countries have gone disproportionately to those at the top of the income and education distribution so that equity concerns in themselves limit happiness gains.

An alternative interpretation that rationalizes the inter-temporal stability of happiness is the psychologist “set point theory” of happiness: See Brickman et al. (1978). This suggests that individuals are adaptable and revert to some happiness level even after major events such as large income gains such as a lottery win, suffering a major accident or getting divorced (Easterlin, 2003).  Set point theories suggest that not much can be done to permanently increase happiness since even major changes in life circumstances will then have no lasting effect on subjective well-being.  But as Helliwell et al (2012) point out,  the set point theory has only limited empirical support. For example, people with long-term disabilities do have lower well-being. Moreover, if set point theory was correct the large discrepancies between countries in happiness measures could not arise nor could changing trends in happiness over time be understandable.

This Easterlin findings have led to an enormous literature. Veenhoven & Hagerty (2003), using new data, found no evidence of paradox with countries indeed getting happier when incomes increased. Stevenson & Wolfers (2008) used new time-series data and likewise concluded that increases in absolute income were linked to increased self-reported happiness, for both individuals and countries. The relationship identified was between happiness and the logarithm of absolute income, so happiness increased more slowly than income, but no “saturation point” was reached.  Easterlin et al. (2010) reaffirmed the Easterlin Paradox with data for 37 countries arguing that the contrary findings reported exist only short-term.

A major recent study is the Helliwell et al. (2012) World Happiness Report. Helliwell and Wang (2012) provide a summary picture of the world’s happiness status in the first decade of the 21st century. Both cognitive life evaluations (affective happiness) and emotional reports are provided for almost all countries and emotional reports are also provided separately for positive affect (a range of positive emotions) and negative affect (a range of negative emotions).   A number of global data bases are used. The broadest in terms of countries covered are the Gallop World Polls covering 2005-mid 2011. Measures cover adults aged 15+ and in global happiness summary findings weight countries by their populations in this category.  Happiness measures are calculated on an 11-point Cantril ladder which is an ordinal scale with 0 minimum happiness and 10 maximum.

About one quarter of the world’s population give the midpoint answer of 5 but responses cover the whole range in every country. Happiness varies among countries although midst of the variation is within rather than between countries.  The four happiest countries are all in northern Europe (Denmark, Finland, Norway and Netherlands). The four least happy are all in sub-Saharan Africa (Sierra Leone, Central African Republic, Benin and Togo). Specific country results and their interpretations are discussed in Helliwell and Wang. Australia and the United States rate quite high in the overall rankings.

What creates happiness?

If income increases do not increase our happiness what does?  Many studies suggest that mental health, satisfying and secure work, a secure and loving private life, strong social networks, freedom and sound moral values create happiness. A discussion of these issues is in Daly & Farley (2011, p. 239-240).  Behavioural economists stress the importance of procedural utility which is the pleasure derived from doing something, not owning something (Benz, 2007) while others argue that, because identity is fundamental to behaviour, choice of identity may be the most important ‘economic’ decision people make.” (Akerlof & Kranton, 2000).  Hence being may be more important than having.

Conversely being envious of others, yearning for possessions and seeking fame do not provide  happiness. Nor, the evidence suggests, does a sudden increase in income such as a lottery win increase happiness for “set point” reasons although this is disputed.  There is evidence that devoting resources to others creates higher self-esteem, better health and less stress (Wilson, 2007).

Layard et al. (2012) provide a comprehensive survey of the factors that create happiness and misery.

  • Within a country life satisfaction is well-described as a logarithmic function of income.  Thus an extra dollar increases the satisfaction of a poor person by 10 times as much as it increases the utility of a person 10 times richer. There is, as has been conjectured for centuries, diminishing marginal utility of income. This has the strong implication that egalitarian income distributions strongly increase social happiness.
  • Within a country the effects of rising incomes on happiness are not as straightforward as Easterlin (1974) suggested. Certainly relative income is important so that time series effects of increased absolute income will be less than those revealed by cross section studies.  The evidence for the United States and Germany is compelling in suggesting absolute income has no effects.  There are other countries where increases in absolute income have increased happiness.
  • On average, the world has become a little happier in the last 30 years (by 0.14 times the standard deviation of happiness around the world).
  • Happier countries tend to be richer countries. But more important for happiness than income are social factors particularly the strength of social support, the absence of corruption and the degree of personal freedom.
  • Unemployment causes as much unhappiness as a bereavement or separation and this unhappiness continues until people regain employment. At work, job security and good relationships do more for job satisfaction than high pay and convenient hours. Quality of work in terms of a sense of purpose, autonomy and support and recognition, is specifically important.
  • Self-employed people often report higher levels of job satisfaction than do the employed although this need not imply greater overall happiness given different economic outcomes.
  • People enjoy life more after their retirement than before if they are well educated.  Other’s well-being falls.  Education seems to increase the value of both employment and retirement. People in poor quality jobs do not therefore enjoy a big boost in their happiness when they retire.
  • Define the quantity and quality of social relations in a community as its social capital.  Then increased social capital increases happiness substantially.  Trust in fellow citizens, for example, increases happiness a fact that may explain the weak effects of economic growth on happiness in the United States and some European countries.  Freedom also is important for human flourishing.  Income equality increases happiness because, as mentioned,  the marginal utility of income diminishes and social tensions are reduced.
  • Some 68 per cent of the world’s adults say that religion is important in their lives but its effects on happiness are unclear.  Religious belief tends to be more fervent in countries or areas of a country where life is harder in terms of income, life expectancy, education and personal safety.  Correcting for such effects there is no difference in life satisfaction between more and less religious countries.  Emotional life is more positive in religious countries.  At the individual level greater religious belief is associated with having fewer depressives and with more positive emotions.
  • Behaving well makes people happier. There is substantial evidence that altruism benefits those who give as well as those who receive.  In addition, happy people are more likely to be altruistic.  Materialism reduces happiness in the sense that people who care focus mainly on money are less happy.  Watching TV provides lots of enjoyment but it is associated with lower happiness partly because social life is reduced and partly because TV watches see so many rich people on the TFV that they underestimate their own relative income.
  • Happiness depends very much on personality. Mental health is the biggest single factor affecting happiness in any country. Yet mental illnesses – for example anxiety and depressive conditions – are often treatable or avoidable. However only a quarter of mentally ill people get treatment for their condition in advanced countries and far fewer than this in poorer countries.
  • It is difficult to relate physical health to happiness if health is subjectively assessed because of biases.  However accounting for the difficulties here suggests better physical health does create extra happiness and vice versa.  For example people with positive affect are less likely to catch a cold and recover faster when they do.
  • Stable family life and enduring marriages are important for the happiness of parents and children. This is a strong effect.  In most countries too married people are happier than those who cohabit.  However those who live in a marriage of (self-assessed) poor quality are less happy than unmarried people.  Surprisingly the presence of children in a household appears not to be associated with higher life satisfaction.  Children are more likely to boost happiness in wealthy households or in societies with extensive child support. The costs of having children in terms of time and money conditions their happiness impacts.
  • Education is not directly linked to happiness though it is indirectly linked since those who are better educated enjoy higher incomes.  Thus increasing the minimum school age increases happiness but mainly through its effects on income.
  • In advanced countries, women are happier than men, while the position in poorer countries is mixed with the weallthy country “gender gap” reduced or even reversed. Women are happier in countries where gender rights are more equal.
  • Happiness is lowest among middle aged people  (here, those between 40 and 50) so the age happiness profile is roughly U-shaped. However between ages 70-80 years health declines and happiness begins to decline once more.

Considering such issues the EOH has been applied to public policy issues such as the welfare effects of inequality and poverty issues, macroeconomic policies to address inflation and unemployment and, to environmental problems.

Environmental issues

An implication of the Easterlin Paradox is that there is at most a limited inter-temporal tradeoff between the environmental destruction that developed countries are imposing on the planet – for example via climate change – and living standards. This destruction is not yielding happiness benefits either now or in the future. There are simply long-term losses that are not being offset by short-term gain. This is a major insight.

Environmental economists sometimes seek to slow down growth or to redirect it so that the earth can remain within its ecological limits (Jackson, 2009).  The message of the EOH literature is that from the viewpoint of optimizing human happiness growth, anyway, might not be worth pursuing even in the absence of such resource constraints.

Application of happiness research to specific environmental problems is limited though there is scope for its use: See Welsch (2009).  Thus measures of subjective well-being that are elicited in surveys can proxy for people’s utility.  Such measures can then be used to test the validity of standard assumptions in environmental economics (for example that environmental valuations depend on the absolute quantities of goods consumed, that agents maximize utility, that the valuation of environmental goods can be revealed by choices of marketed goods) and such EOH work can be used to study such issues independent of these assumptions.

For example, with respect to non-market environmental valuation, measures of subjective well-being can be related to income and to the provision of environmental amenities along with demographic and other controls.   The resulting utility function can then be used to estimate the utility-constant tradeoffs – the marginal rate of substitution – between income and environmental quality.  Welsch (2009) cites applications for air pollution, water pollution, aircraft noise, climate parameters and drought problems.  These applications seem cognitively less demanding than conventional “stated” and “revealed preference” techniques.

Generally however while the EOH literature drives a case for thinking about the determinants of happiness more generally there are few links between this work and the goal of pursuing environmental sustainability.  The latter also require us to rethink the way we think about economic policy.

Policy implications

The main policy conclusion of the EOH work is that, in developed countries at least, government policies should target happiness rather than income per capita alone.  Except in the very poorest countries happiness varies more with the quality of human relationships than with income (Helliwell et al, 2012, chapter 4).   This re-targeting involves a substantial change in perspective.

Governments might target the happiness consequences of workplace arrangements (for example fostering reduced working hours, greater flexibility with respect to time with family) and particularly address unemployment.  In classrooms inculcating the values of cooperation and altruism, both to receivers and givers, is worth emphasising.  Strengthening social capital by creating more resilient social communities, providing more public goods and emphasizing local businesses and local government can help promote resilience. Health and particularly mental health concerns are key ways of increasing happiness.  Education is crucial to many aspects of happiness since it increases incomes and the general quality of life of all.  Tackling economic inequality is a straightforward way of promoting greater social happiness both because it reduces social tensions and exploits the diminishing marginal utility of income.

One proposed reform is dismantling the culture of consumerism  (Jackson, 2009, p. 183).  This promotes unproductive status competition and has damaging social and psychological impacts on people’s lives.  Reducing the overwhelming intrusions of advertising into our lives by promoting “ad free” public media and legislating generally to reduce advertising is another possibility.

The EOH is a recent innovation and its policy conclusions are piecemeal.  The suggestions above are only possibilities. Research needs to continue in this area and data relevant to this research needs to be collected. For example the EOH literature has driven data collection efforts. The OECD publishes annually a Better Life Index that enables people to compare their well-being based on 11 topics – housing, income, jobs, community, education, environment, governance, health, life satisfaction, safety and work-life balance. Since 2002 the Australian Bureau of statistics has published annually Measures of Australia’s Progress that seeks to measure whether society has improved in a number of areas including the environment using self-determined measures of well-being.


Australian Bureau of Statistics, Measures of Australia’s Progress, annual at:

G. Akerloff & R. Kranton, “Economics and Identity”, Quarterly Journal of Economics, 115, 2000.

M. Benz, “The Relevance of Procedural Utility for Economics” in B. Frey & A. Stutzer (eds) Economics and Psychology: A Promising New Cross-Disciplinary Field, MIT Press, Cambridge,  2007.

P. Brickman, D. Coates & R. Janoff-Bulman, Lottery Winners and Accident Victims: Is Happiness Relative?”, Journal of Personality and Social Psychology, 36, 8, 1978, 917-927.

A. Clark, P. Frijters & M. Shields, “Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles, Journal of Economic Literature, 46, 1, 2008, 95-144.

H. Daly & J. Farley, Ecological Economics: Principles and Applications, Island Press, Washington, 2nd ed, 2011.

R. Easterlin, “Does Economic Growth Improve the Human Lot? Some empirical evidence”, in P. David & M. Reder (eds) Nations and Households in Economic Growth, Academic Press, New York, 1974.

R. Easterlin, “Explaining Happiness”, Proceedings of the National Academy of Sciences, 100, 19, 2003, 11176-11183.

R. Easterlin, L. McVey, M. Switek, O. Sawangfa, J.  Zweig, “The Happiness–Income Paradox Revisited”, Proceedings of the National Academy of Sciences. 107, 52, 2010, 22463–22468.

C. Graham, “The Economics of Happiness” in S. Durlauf & L. Blume (eds) The New Palgrave Dictionary of Economics, Palgrave, McMillan, 2nd edition, 2008.

M. Hagerty & R. Veenhoven, Wealth and Happiness Revisited: Growing Wealth of Nations Does Go With Increased Happiness, Social Indicators Research, 64, 2003, pp. 1-27.

J. Helliwell & S. Wang, “The State of World Happiness” in J. Helliwell, R. Layard & J. Sachs (eds), World Happiness Report, Earth Institute at Columbia University, CIFAR and Centre for Economic Performance at the LSE, 2012.

J. Helliwell, R. Layard & J. Sachs (eds), World Happiness Report, Earth Institute at Columbia University, CIFAR and Centre for Economic Performance at the LSE, 2012.  Online at:

J. Helliwell, R. Layard & J. Sachs, “Some Policy Implications”, in World Happiness Report, Chapter 4, 2012.

T. Jackson, Prosperity Without Growth: Economics for a Finite Planet,  Earthscan, London, 2009.

R. Leyard, A. Clarke & C. Senik, “The Causes of Happiness and Misery”, in World Happiness Report, Chapter 2, 2012.

OECD, Better Life Index, annual at:

B. Stevenson & J. Wolfers, “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox”, NBER Working Paper, 14282, August 2008.  Online at:

H. Welsch, “Implications of Happiness Research for Environmental Economics”, Ecological Economics, 68, 2009, 2735-2742.

D. Wilson, Evolution for Everyone: How Darwin’s Theory Can Change the Way We Think About Our Lives, Delacorte Press, New York, 2007.




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