What can economists tell us about happiness?

Given the discoveries of modern "Happiness Studies", is there any role left for virtue? Does ethics continue to have a say on happiness, or should it give up the turf to economics and psychology?

Modern Happiness Studies refers to empirical research dating back to the 1970s carried out by economists and psychologists. Their work was premised on an understanding of happiness as “subjective well-being”. Economists favored an objective approach, focusing on what could be externally observed and brushing aside as irrelevant whatever the subject said about his emotional state and behavior.

Psychologists, on the other hand, did the opposite. They followed a subjective method, considering what the individual affirmed about his internal state as primary data and relegating external and objectively observable indicators to second place. Since then, however, there has been a growing awareness of the methodological limitations on each side; and although economists have not entirely gotten rid of their objectivist bias, nor psychologists, of their subjectivist one, both groups are increasingly more open to listen to each other.

Partly because of this convergence in subject matter and method, it makes sense nowadays to speak of studies on well-being or happiness, notwithstanding the variety in the researchers’ backgrounds.

Economists on happiness

The title of “Father of Modern Happiness Studies” is often attributed to the welfare economist Richard Easterlin, thanks to his pioneering work “Does economic growth improve the human lot? Some empirical evidence” published in a Festschrift for Moses Abramovitz in 1974.

Following the British economist A.C. Pigou, Easterlin recognized the difference between happiness or subjective well-being and economic welfare; there exists a wider sense of social welfare that goes beyond economic welfare measured purely in terms of GNP. And just like Abramovitz, Easterlin initially embraced the hypothesis that an increase in income does not by itself bring about a parallel increase in subjective well-being.

But not until he wrote the paper was he able to prove it. Basing himself on data sets obtained through Gallup polls and Cantril’s scales in nearly 20 countries after World War II, Easterlin discovered that the neoclassical assumption according to which augmenting one’s opportunity set through income necessarily entails greater satisfaction is false. Past a certain threshold of income, countries with greater per capita wealth do not always report higher levels of subjective well-being; at least not in strict proportion to wealth differentials.

Apparently, there is a decreasing marginal utility for income among countries. Neither does an increase in income for individuals over time necessarily translate into greater subjective well-being, due to adaptation. And lastly, in a given a country, richer people are not invariably happier than poorer ones, because of the effects of social comparison: a lot depends on whom one compares himself with.

Aside from income, other macroeconomic indicators correlated with happiness include employment and inflation. Once more, contrary to neoclassical intuitions, employment exerts a greater net effect on subjective well-being than inflation. Work-satisfaction brings both individual and social benefits, and is more strongly linked to intrinsic than extrinsic motivations. As for the effect of inflation on subjective well-being, it depends on whether it is anticipated or not and whether the rate is slow or galloping.

Following Easterlin’s lead, several economists surmised that it is not the absolute amount of income, but how one spends it that matters for happiness.

At the turn of the previous century, Thorstein Veblen already warned about the perils of “conspicuous consumption”. Fred Hirsch and Robert Frank probed deeper into this phenomenon through the concepts of “positional goods” and “luxury goods” respectively. These provoke instances of wasteful spending or zero-sum games that leave everyone worse off. Indeed, it would be better to use resources on goods such as health or social relations, since we never really adapt to their lack or absence, unlike having a larger house, for example, to which we quickly grow accustomed. In effect, the neoclassical man does not infallibly know the best way to dispose of income.

Tibor Scitovsky provided a more thorough critique through the difference between pleasures and comforts. He complained that Western societies have been very successful in achieving comforts, that is, satisfying wants and maintaining arousal levels near optimum, but to the detriment of pleasures or joys, which proceed from experiencing proper stimulation and coming ever closer to optimum arousal levels.

The poor in the West are doubly deprived; not so much because of their limited access to material comforts as because of their incapacity to enjoy the superior pleasures of culture. Due inadequate preparation or education, they often turn to “sex, drugs and rock & roll” to relieve their boredom, instead of the inexhaustible novelty and variety of cultural products, ultimately more fulfilling or satisfying.

Still within the realm of economics, an equally fruitful approach to happiness studies has been that of Institutionalists, represented by Bruno Frey and Yew Kwang Ng. Ng called our attention to the need of a more comprehensive view of happiness than that traditionally offered by economists (objective) and psychologists (subjective), thereby introducing institutions as the mediating factor.

Institutions arise from the interactions of individuals among themselves and with their environment. Frey, for example, has afforded us with compelling empirical evidence on the positive impact of institutions such as direct democracy and federalism in Switzerland on the subjective well-being of its inhabitants. Participation and subsidiarity in government seems to correlate positively with happiness.

At the same time, discordant voices pre-empt us on the possible misuse of “Gross National Happiness” measures by governments in lieu of GNP, as a cover-up for unwarranted state intervention or ideological manipulation.

Psychologists on happiness

Contemporary psychological studies on happiness owe their development largely to contributions from hedonic psychology (Ed Diener), positive psychology (Martin Seligman, Mihalyi Csikszentmihalyi), and evolutionary psychology (David Nettle, David Gilbert).

From the beginning, psychologists have always tended to identify happiness with pleasant feelings (level 1) or satisfactory judgments about one’s overall emotional state (level 2) and avoided ethical evaluations of what a good life should be (level 3). Surprisingly, despite recognizing three different levels in which happiness could be discussed, most psychologists consciously limit themselves to the first two, ignoring the third altogether. There are numerous studies exploring the demography of happiness, that is, the myriad ways in which subjective well-being may be correlated with age, sex, health, civil status, offspring, race, employment, profession, social class, residence (urban or rural) and so forth, often with counterintuitive results. These findings certainly enrich and nuance economists’ discoveries of how income or wealth affects happiness, for instance. All of these factors are relevant to psychologists in the measure that they add to or subtract from the degree of satisfaction an individual experiences.

Other than health, there are other heritable characteristics such as personality traits (Seligman) which may predispose one to happiness —self-esteem, a sense of control, optimism and extraversion, to name a few— and they have also constituted an object of study for psychologists.

Insofar as positive psychologists concentrate on the healthy (as opposed to the pathological) psyche, they have taught us the importance of friendships, love and marriage, faith or belief and “flow” —that is, our abilities rising up to the challenge in work and play (Csikszentmihalyi)— as sources of satisfaction. Some psychologists get nervous with this, as it treads perilously close to the terrain of ethical or value judgements they wish to avoid at all costs.

Perhaps the closest economists and psychologists have ever gotten to each other in happiness studies is through the research tradition commenced by Daniel Kahneman and Amos Tversky. Their original interest lay in decision-making under conditions of uncertainty or risks, leading to reformulations of the way we understand choice, value and rationality.

Under the name of “Prospect Theory”, they have successfully used mathematical models in analyzing the psychological process of decision-making, giving rise to psychophysical tendencies or generalizations. They have shown the non-linearity of decision weights, the reference-dependent characteristics of value functions, the significance of framing effects and mental accounting, and the need to distinguish experienced utility from decision utility. Thanks to their efforts, the irreducible subjectivity of psychological events —such as decisions involving happiness— has become less so, now lending themselves to objective mathematical calculations.

The findings of the Kahneman and Tversky team have also served to add muscle to the ideas of Daniel Nettle and Daniel Gilbert, heavily influenced by evolutionary psychology, regarding happiness. For Nettle and Gilbert, happiness is something like a will-o’-the-wisp which evolution has programmed all human beings to seek, despite having little substance or perhaps not even existing. That human beings believe and behave as if it did, however, is vital for evolution’s purposes. Happiness, as a pleasant future feeling, is the fruit of prospection.

Yet the tools with which we wish to conquer it, such as our senses, memory, imagination, reason and emotions, often lead us astray. We project too much of the present into the future, we fail to recognize how different things look once they’ve happened and we’re so often blinded, as many of Kahneman and Tversky’s experiments show. There’s a regularity, nonetheless, in the errors of our foresight, which would be good for us to be aware of, although that’s no promise that such knowledge will ever get us to our goal.

Aristotle and happiness

After going through the main findings of modern economic and psychological research on happiness, one gets the impression of receiving a list of ingredients and ever so slight clues on how some of the ingredients might mix, but there is no proper recipe. Instead, there is considerable skepticism that the happiness cake may not even be there for the eating at all!

The contrast with the Aristotelian attitude toward happiness cannot be stronger. From the Nicomachean Ethics and the Politics Aristotle teaches us that eudaimonia —happiness as a flourishing human life— is the object of the kingly-craft or science of politics. But politics, as well as its object, rests on the twin pillars of ethics and economics. Economics concerns itself with the external, material goods necessary for happiness, while ethics­, with the internal goods, primordially virtue. Human flourishing in the polis, therefore, requires both material goods and virtues, economics and ethics; it cannot be achieved with just one or the other. And among the different goods that constitute human flourishing, Aristotle is careful to establish a hierarchy, such that instrumental goods (material, economic goods) should be subject to goods in themselves (ethical goods or virtues), and these, in turn, to the superior good in itself, happiness as the “common good” or the “final end”.

Certainly, Aristotle also expressed some doubts regarding happiness. He acknowledged that “a single swallow does not a summer make” and he asked whether we should wait for a person’s demise or that of his descendants in order decide if he had lived a happy life. Likewise, after ruling out a life dedicated to commerce or trade and a life of pleasure as the best life for man, he had vacillations between a political life in pursuit of honor and a contemplative life of study. But he never grew skeptical about the possibility of happiness itself, despite the difficulties of achieving it.

Although the greater part of the Nicomachean Ethics and the Politics deals with the human good and the virtues, they also contain a lot of valuable discussion regarding the role of our different psychological faculties or powers, the best political regime, pleasure, friendship, family and economic well-being. With the exception of virtue, therefore, there are numerous overlaps in the topics covered by Aristotle and modern happiness studies.

There may well be some truth behind Ingrid Bergman’s words “Success is getting what you want; happiness is wanting what you get”. Only the wanting she referred to is not raw, untutored desire, but desire transformed and ennobled by virtue.

Alejo José G. Sison is a Business Ethics scholar at the University of Navarre. His latest book is entitled Corporate Governance and Ethics: An Aristotelian Perspective (Edward Elgar, 2008).

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