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ECON 208 (113)
Chapter 6

Chapter 6 (TEXT).pdf

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Economics (Arts)
Course Code
ECON 208
Wendy Dickinson

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06_raga_ch06_topic_01.qxd 2/19/10 10:27 PM Page 1 WHAT MAKES PEOPLE HAPPY? 1 What Makes People Happy? In the eighteenth century, Jeremy Bentham (1748–1832) became the leading philoso- pher of utilitarianism, a view holding that an individual’s prime concern should be their own happiness. 1 The philosophy also urged that the objective of public policy should be the maximization of the sum of all people’s happiness. Bentham’s implicit view was that happiness could be measured and that it could also be compa red across different individuals. That no obvious ways then existed to measure happi ness was rec- ognized as a challenge, but was not seen to undermine the basic philosophy. In the early twentieth century, however, a new breed of economists (then called “political economists”) argued that a measurable concept of happin ess (or utility) was not necessary in order to derive unambiguous predictions about individual behaviour. It was only necessary that individuals had a stable set of preferences—th at is, they could always specify whether bundle A was preferred to bundle B, bundle B was p referred to bundle A, or that the individual was indifferent between the two bundles. For the next several decades, economists built models based on the idea that individuals strive to max- imize their utility, even though it was also recognized that utility could be neither observed nor measured. In addition, in most economic models individual ut ility was assumed to be a function of the individual’s level of real income, or perhaps real con- sumption. Economists were usually quick to admit (when the question aros e) that other things also matter for an individual’s utility, but their models continued to emphasize the market-based, easily quantifiable variables such as real income or real c onsumption. In recent years, however, economists have been asking whether it might, after all, be possible to measure individual happiness and, if so, what is it that actu ally makes people happy? In this research program, economists rely heavily on progress made by psychol- ogists and others in the social sciences. Here we offer a brief introduct ion to some of the results from this research. As you will see, the results contrast with a few standard 2 assumptions in economic theory, and also lead to some unusual policy implications. Happiness: Definition and Trends Richard Layard, one of the leading current scholars on the economics of h appiness, defines the concept as “feeling good” and “enjoying life,” an d bases his research on survey responses in which individuals rate their happiness on a numeric s cale. Some studies ask people to reconstruct their activities in the previous day an d report how happy they were during each activity. Perhaps not surprisingly, the highest rated activ- ity was having sex while the lowest-rated activity was the morning commut e to work or school. Though this ranking may give us some comfort that the survey r esponses are indeed accurately indicating people’s happiness, there is a general concern that what people say about their happiness may not accurately reflect their genuine happiness. At this point some neuroscience can shed light on the situation. Layard r eports medical studies showing that the spatial pattern of an individual’s brain activity depends significantly on what they are thinking. Specifically, when viewing an image of a positive event, the activity is located in the left side of the brain. At the same time, the 1 See the “Timeline of Great Economists” at the back of the textbook criptions of the life and work of several great economists as well as notable historical events of the time. 2 This topic draws heavily on Richard Layard, Happiness: Has Social Science Got a the Lionel Robbins Memorial Lectures, 2002–2003, London School of Economics. See also the more recent book by the same author, Happiness: Lessons from a New Science, Penguin Press, 2005. Ragan and Lipsey, Economics,13th Canadian Edition Copyright © 2011 Pearson Canada Inc. 06_raga_ch06_topic_01.qxd 2/19/10 10:27 PM Page 2 2 WHAT MAKES PEOPLE HAPPY? individuals tend to respond that the image is one that makes them happy. On the other hand, when viewing an image of a negative event, the right side of t ain is activated and the individual tends to reports that the image makes them less happy. These types of results from neuroscience strongly suggest that when people report t they are happy or unhappy, there really is something genuine happening. If survey-based measures of happiness actually measure an individua happiness, then economists should be able to determine the validity of a long-standi ng assumption in economics—that individuals are happier when their income is higher. Is this assump- tion supported by the evidence? There are three striking empirical findings that relate to happiness and real income. The first is that despite a doubling (or more) of average real per capi ta income over the past 50 years, there has been almost no change in the average level o ppiness reported in the population. The second result, somewhat paradoxically, is that at any time within a given country, the highest income earners report themselves to be signifi- cantly happier than the lowest income earners. Both results not only appl y to the United States, but also to Europe and Japan. A third result is about the relationship across countries between ave er capita income and average happiness. In the group of countries with average i me less than U.S.$15 000, there is a positive relationship between per capita inco nd average happiness. But in those countries with average income above this threshol d level, there is no evidence that income and happiness move together. Some may wonder whether the concept of happiness has the same meaning in different languages and c ures, but the same results are found even when different versions of the survey qu ns are used. Interpreting the Happiness/Income Results One interpretation of these empirical results is that an individual’s happiness depends on their income relative to some “norm,” and that the norm has been increasing broadly in line with average per capita incomes. For example, suppose t your hap- piness depends on your income relative to the Canadian average income. average income in Canada has increased by 35 percent over the past decade, and your income has also increased by 35 percent, then you will be no happier now than u were a decade ago, although you will clearly have greater real income. However, if average Canadian income increased by 35 percent while your income increased by 7 percent, you would be happier now than a decade ago because your relative income increased. Some evidence for the importance of relative income for individual hap ess is presented in Table 1, which shows happiness in the United States across income groups TABLE 1 Happiness by Income in the United States Top 25% of Income Bottom 25% of Income 1975 1998 1975 1998 Very Happy 39% 37% 19% 16% Pretty Happy 53% 57% 51% 53% Not Too Happy 8% 6% 30% 31% (Source: Richard Layard, Happiness: Has Social Science Got a Clue? Based on data from the General Social Survey.) Ragan and Lipsey, Economics,13th Canadian Edition Copyright © 2011 Pearson Canada Inc. 06_raga_ch06_topic_01.qxd 2/19/10 10:27 PM Page 3 WHAT MAKES PEOPLE HAPPY? 3 in 1975 and 1998. In both income groups, real incomes increased over this 23-year period, and standard economic theory would predict that people in both gr oups would therefore feel happier as their real incomes rise. But the table shows that for both high- income and low-income groups, the fraction of people who are “very hap py,” “pretty happy,” and “not too happy” was virtually unchanged between 1975 and 1998. This is consistent with the idea that people’s happiness comes much more from their relative income levels than from their absolute income levels. The importance of an individual’s relative income for their happiness can explain the first two empirical results just mentioned. As real per capita income s were growing considerably over the post–World War period, average happiness would be relatively unchanged as long as the distribution of income was also roughly unchanged. In addi- tion, at any given time, people in the upper-income groups would be happier than the people in the lower-income groups for the simple reason that incomes in the first group are higher than average while incomes in the second group are lower than average. In order to explain the third result we need to add some consideration to the role of genuine poverty. In countries with very low per capita incomes, an increase in real income may have noticeable effects in reduced hunger, disease, and mortality. The emergence from extreme poverty that higher real income allows might natur ally account for an increase in happiness. In higher-income countries, however, almost everyone lives far above these subsistence levels, and increases in incom e will not lead to such drastic changes. In this higher-income world, it may be therelative income that matters more for happiness. Habituation and Rivalry Layard offers two possible explanations for why indi- viduals may care more about their relative income than about their absolu te income levels. The first is habituation; the second is rivalry. Habituation is the idea that people quickly adapt to changes in their personal situations, either negative or positive, and that the long-run effects of these changes on happiness are rel
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