gdp and happiness -- 7/16/14

Today's selection -- from GDP: A Brief But Affectionate History by Diane Coyle. There has been much debate over whether a country's GDP growth correlates to its citizens' happiness. (GDP or gross domestic product is a measure of a country's size based on income and spending.) Many have concluded that there is little or no correlation, but economist Diane Coyle disagrees, even though she concedes that much of this "happiness" is rooted in that sort of consumeristic satisfaction that wears off quickly:

"The anti-GDP campaign has its roots in a famous article by the economist Richard Easterlin. He recorded an apparent paradox. Looking at the evidence at a single point in time, people are happier in richer countries than in poorer ones (we are talking about averages); but looking at one country over time, rising GDP per capita does not translate into increased happiness. As a number of economists have noted, the paradox is due to the nature of the statistics: GDP is an artificial figure that can increase without limit, whereas happiness (reported by people in surveys or diaries) has an upper limit. The relationship between the two is like that between GDP and, say, height, or life expectancy -- they are strongly linked, just not proportionately over time. The silliness of the notion that rising GDP does not increase happiness is even easier to see when you remember that a recession, when GDP declines just a little, makes people very unhappy. What's more, given that productivity increases over time, GDP has to rise to keep unemployment from going up; and higher unemployment would also make people unhappy.

"So the apparently obvious conclusion is based on a misunderstanding of the kinds of statistics being used to relate happiness and GDP. 'Happiness' is measured from surveys, with respondents asked to rate their feelings on a scale of 1 to 3 or 1 to 10. It can never climb above the top of the scale, even with centuries of data. GDP is a constructed statistic that can rise without limit. If you plot a line that climbs extremely gently over time against a line that rises steadily by 2-3 percent a year, they will look unrelated even if they are not [unrelated]. It turns out from a number of more recent studies that reported happiness is strongly positively linked with the change or growth in GDP per capita from year to year.

"There is a valid point that economic growth measured by GDP over time is not an accurate indicator of well-being or social welfare. (I'm going to use the term social welfare, but bear in mind that it does not mean welfare payments.) In the children's book The Lion, the Witch and the Wardrobe, the White Witch uses enchanted Turkish Delight candy to ensnare Edmund. Once he has had one piece, he cannot resist more. Consumerism is an addiction too. Psychology offers insights into the rat race and consumerism. The experimental evidence is that most people care more about status and therefore their relative income than they do about the absolute level of income. The 'conspicuous consumption' first named by Thorstein Veblen is a kind of arms race of status, and one that the excesses of corporate pay have let rip in the past quarter century. What's more, the satisfaction we get from extra income and purchases wears off quickly, leaving us, like Edmund in the story, hungry for another fix. The evocative technical term for this is the hedonic treadmill.

"If money is an addiction, it's not surprising that some people think society needs help being weaned off it. Economists such as Robert Frank and Richard Layard advocate a tax on purchases of luxury items. Another policy recommendation has had more traction: that instead of measuring GDP we should be measuring happiness. In the United Kingdom there is even a Campaign for Happiness. The government leapt on its bandwagon, ordering the Office for National Statistics to start a survey to measure happiness levels around the country. Grotesquely, there are cheerleaders for the king of Bhutan because of his claim that he seeks to increase gross national happiness, when Bhutan is one of the poorest and one of the more authoritarian countries in the world.

"The fashion for measuring happiness is based on two approaches to the evidence. One kind is the approach using top-down aggregate economic data that Richard Easterlin used in his original paper. Other studies look at the statistical links between the level of happiness people report in surveys and their personal circumstances: are they married? Employed? In good health? The results are comfortingly sensible. People are happier if they are in a job, married, healthy, or have a religious faith. People like spending time with their friends and family but not their boss, and hate commuting. There is a life cycle of happiness: in general, we are least happy in middle age ('middle age' ranging from thirty-six in the United Kingdom to sixty-six in Portugal). Women tend to be happier than men, although that relative advantage may have diminished over the decades. It is not clear, however, that there are all that many policy implications in these results. We already knew that voters hate it when unemployment goes up. The government can hardly start mandating marriage and churchgoing to enforce greater happiness. The most important new practical finding from these studies is that mental ill-health is a major contributor to unhappiness, and yet almost everywhere it is a low priority in public health policies.

"Still, no matter that the empirical evidence for the happiness bandwagon is weak. The idea that once countries had grown comfortably rich, it is folly to pursue further economic growth, has struck a chord. It is important, though, to be clear that GDP is not and was not intended to be a measure of national welfare. Economists have repeatedly cautioned themselves and others not to get the two mixed up."


Diane Coyle


GDP: A Brief but Affectionate History


Princeton University Press


Copyright 2014 by Diane Coyle
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