Social issues

48 – Thinking like an economist 15: Economics and happiness

Richard Layard is an economist who works on happiness. He is interested in which factors are positively related to it, and what governments should do with that knowledge. His findings partly reinforce the old saying that money can’t buy happiness, at least at the scale of comparing countries, but the story is actually more complicated than that.

There was a fascinating interview on ABC Radio National last week. It featured Professor Richard Layard of the London School of Economics, talking about his work on the determinants of human happiness.

“We have this extraordinary paradox, that although we are now two or three times richer than we were 50 years ago, we are no happier.”

Apparently, money can’t buy you happiness. Actually it’s more complicated than that. Layard notes that the international survey evidence shows that at incomes below about US$20,000 per year, increasing overall national income is positively related to average happiness. Above that level, average income makes little difference to average happiness.

There is another way in which more money can be better: it allows you to climb the wealth ladder in your country. No matter what the average income in a country, people who are relatively well off are, on average, happier than people who are relatively poor. This applies at high average income levels as well as low. People seem to care a lot about their relative income, sometimes more than their absolute income. There is some experimental evidence showing people being willing to take a lower income if other people took even greater cuts!

One explanation for this (proposed in a book called Social Limits to Growth by Fred Hirsch) is that some important goods are in fixed supply, including some environmental goods (e.g. views) and some social goods (e.g. status). So increasing average incomes simply results in the price of those goods being bid up. They are always bought by more-or-less the same people (those in the high-income brackets), so nobody gets happier.

So here’s Layard’s overall summary:

“In every society, extra income makes an individual happier. The effect however is much bigger in poorer countries than the richer ones, because you’re nearer the breadline. It’s also true that in poorer countries, as they get richer, the country as a whole gets happier, and that is why those Third World countries which are still way behind the First World, are less happy than the First World countries. But it’s in the First World countries that we don’t see the increase in happiness as they get richer, because it’s become less important and comparisons [of relative incomes within their country] have taken over.”

If you think about this, it has major implications, including for government policy. Another finding with policy implications is that it is much easier to raise the happiness of really unhappy people than of already happy people. Common sense really, but it takes someone to point it out.

For those with enough wealth already (everyone reading this, I would guess), the key determinants of happiness are relationships and mental health with contributions also by physical health, a sense of purpose and/or spirituality, residential mobility, and so on. The importance of relationships inside a family is pretty self evident, but even at a more macro scale it matters. A survey question that has been asked in many countries now over many years is “Do you think most other people can be trusted?” There is a strong trend that the greater the number of people in a country who answer “yes”, the higher the average happiness rating for the country.

Of course there is much more to the issue than these few points. Some of it is covered in the transcript, which is here. I’ll be buying the book.

David Pannell, The University of Western Australia

Further Reading

“Happiness: Richard Layard at the LSE” (transcript of interview with Andrew Marr of the BBC). (link now dead).

Layard, R. (2005). Happiness: Lessons from a New Science, Penguin.

Hirsch, F. (1976) Social Limits to Growth, Harvard University Press, Cambridge Mass.