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Economics of happiness in the time of recession.

Byline: Special to Gulf News

Subject: Subjective well-being, what it is and why it matters.

Significance: Subjective well-being measures individual welfare and examines its determinants through statistical analysis. Its rising influence among economists and policymakers as an alternative, or complementary, measure to growth in terms of per capita income is provoking debate on its intellectual credibility and public policy applicability.

Behavioural economics - a field that has highlighted discrepancies between actual human behaviour and behaviour modelled in economic theory - is gaining more recognition.

It is much more difficult to raise the well-being of those who already report leading a very satisfied life than improve the well-being of miserable individuals.

Subjective well-being data can be used to evaluate the utility of public goods, such as clean air, environmental amenities and national security.

Analysis

The global economic downturn has revived discussion about, and increased the importance of, concepts that extend beyond Gross Domestic Product (GDP). The crisis has spurred political consensus around the need for a more suitable norm than growth in economic output to quantify countries' economic and social performance. New national and international initiatives to benchmark economic and social progress often aim at composite measures that - among others - include indicators of subjective well-being.

The economics of subjective well-being attempts to demonstrate empirically what determines human well-being.

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Subjective well-being is a contribution to efforts to benchmark economic and social progress, beyond conventional measures of per capita income.

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Subjective well-being studies can be used to inform policymakers better by correlating the well-being of individuals and level of public goods.

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Private sector firms may utilise subjective well-being to understand consumers' non-material needs.

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Criticism that GDP is too narrow a concept to measure development and guide policy choices has featured in public debate ever since the UN system of national accounting was instituted in 1953. Nonetheless, early attempts to extend the system of national accounts to include non-market goods and services, and take account of some detrimental effects of economic growth, have fallen short.

Social indicators such as the Human Development Index, while gaining prominence, mainly have had a niche function, targeting specific policy areas. Economist Simon Kuznet's proposal of measuring welfare through growth in economic output - in its revised 1993 standard - has remained the yardstick for most policymakers.

However, with the current crisis shaking accepted economic notions, the prevailing paradigm of welfare economics again has come under scrutiny.

As such, behavioural economics - a field that has highlighted discrepancies between actual human behaviour and behaviour modelled in economic theory - is gaining more recognition. Instead of taking orthodox economic theory as a starting point to demonstrate how individuals ought to behave, behavioural economics utilises descriptive accounts of human behaviour to reveal theoretical shortcomings. Consequently, present-day discussion in economic policy increasingly focuses on 'the world as is' as a reference point to assess the utility of economic theory.

The descriptive approach used in psychology, and economic research experiments at the root of behavioural economics, also have fathered a second field of study: the economics of subjective well-being. Similar to behavioural economics, this takes its starting point in empirics - what determines human well-being - rather than a theory of welfare itself.

A growing body of literature has used survey data to quantify quality of life and evaluate the impact of demographic, socio-economic and institutional factors on subjective well-being. Resulting empirical evidence from an array of non-material and non-monetary components of individual well-being extends the concept of welfare beyond incomes and growth in economic output.

Economic theory assumes that higher income leads to higher well-being via an expanded opportunity set and increased utility. Yet economist Richard Easterlin, in research published in the 1970s, showed that while average income rose seven-fold in Japan over the 1950s and 1960s, Japanese citizens did not seem happier. Similar trends have been noticeable in a number of countries, including the US, France, Germany and the United Kingdom.

Easterlin's conclusion that economic growth does not necessarily lead to more life satisfaction has become known since as the 'Easterlin Paradox'.

Since Easterlin's work appeared, numerous studies have verified a positive correlation between income and life satisfaction, albeit with diminishing returns. Most empirical research finds little correlation between wealth and subjective well-being beyond average purchasing power parity-adjusted per capita income of about $10,000. New research disputes that there is a satiation point beyond which income ceases to affect life satisfaction, but evidence remains debated.

Research into the determinants of quality of life relies on a large pool of self-reported data on subjective well-being from national and international surveys.

The most widely used indicators of subjective well-being are survey items that ask respondents to rate:

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Satisfaction with life overall on a ten-point scale.

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Their life today in terms of worst possible or best possible life on a ten-point scale.

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Happiness on a four-point scale.

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Psychological experiments have provided evidence to underpin validity and reliability of survey data as measures of individual welfare.

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Measures of subjective well-being correlate with physiological responses such as electrical brain activity, heart rate, and frequency of smile; lower average well-being is associated with higher national suicide rates.

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Measures of subjective well-being are reliable in that they respond to changes in individual circumstances, but otherwise remain relatively stable.

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Measures of subjective well-being retain validity across different linguistic and cultural contexts. Experiments with bilingual respondents and speakers of different languages in the same country tend to be highly correlated.

While use of subjective well-being measures has gained academic recognition and support among policymakers, they remain disputed.

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1. Dictatorship of happiness

Many express fear of a 'dictatorship of happiness', alluding to a state that claims to know what makes individuals happy, and consequently prescribes how citizens ought to live. This is unlikely, even if use of well-being indicators spreads.

The popular term 'economics of happiness' can be misleading in that it suggests a focus on pleasure. Research considers a variety of subjective well-being indicators that relate to survey items on happiness, life satisfaction, evaluation of life today and others. Psychologists differentiate between measures dominated by emotional effect (happiness) and those that have a larger cognitive component (life satisfaction or life today), with the latter dominating empirical research on subjective well-being.

Economics of subjective well-being uses an empirical approach that looks at which social, demographic or institutional factors correlate with higher reported individual well-being. It does not provide a concept of what constitutes human happiness per se. A well-being approach in policy-making would not aim to raise individuals' happiness itself, but rather improve liveability of citizens' environment, creating living conditions conducive to individual well-being.

Research has demonstrated a robust correlation between perceived individual freedom of choice, self-determination and subjective well-being. Individuals that report little 'freedom of choice and control over the way their life turns out' on average also report much lower levels of subjective well-being. Any consistent application of well-being-oriented policies would have to consider this.

Some have argued that instead of 'maximising happiness', well-being policies should focus on the 'miserable minority'. They contend that it is much more difficult to raise the well-being of those who already report leading a very satisfied life than improve the well-being of miserable individuals by changing their circumstances for the better.

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2. Correlation is not causation

As in most other fields of empirical research, many studies on subjective well-being are unable to assign cause and effect. In many cases, statistical analysis only provides evidence of correlation, not causation or its direction. Only household panel studies that follow citizens over time, and survey individuals before and after a change in life circumstances, can suggest an interpretation. For instance, such studies have shown that decreasing life satisfaction tends to follow layoff from a job rather than precede it.

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3. Adaptive expectations

Subjective well-being research based on panel data also has demonstrated that individuals are able to adapt expectations to life events and circumstances. According to most studies, adaptation is not complete- unemployed individuals tend to still be unhappier even if the negative effect of being laid off becomes less the longer they are unemployed. Nonetheless, adaptation effects complicate interpretation of empirical evidence. If individual expectations change to approximate circumstances, evaluation of these will reveal few consistent findings.

Adaptation poses a particular problems in statistical analysis that assesses institutional determinants of well-being across countries.

However, this should not discredit the usefulness of the study of subjective well-being.

Several international and national level initiatives consider subjective well-being as part of revised approaches to evaluating countries' prosperity.

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1. International level

The OECD in October will hold its 3rd World Economic Forum on Statistics, Knowledge and Policy in Busan, South Korea. The forum presents the platform for the OECD initiative on 'Measuring the Progress of Societies', an international proposal to develop a set of political, economic and environmental indicators that reflects more comprehensively societies' progress and well-being.

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This effort brings together a range of stakeholders from public and private sectors, international and regional initiatives to evaluate the potential of alternative statistical benchmarks - including subjective well-being indicators - to inform political decision-making and shape public policy.

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The initiative's charter, the Istanbul Declaration of 2007, has been backed by the European Commission, Organisation of the Islamic Conference, UN and UN Development Programme, as well as the World Bank, and OECD itself.

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2. National level

Pre-dating the economic crisis, there have been a number of government-led initiatives to re-define national measures of prosperity in developed and developing economies:

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The Sarkozy Commission, an initiative from French President Nicolas Sarkozy, has assembled prominent academics such as Nobel laureates Joseph Stiglitz and Amartya Sen to propose a new statistical standard to measure French economic performance and social progress.

The government of Bhutan has developed of a measure of 'gross national happiness' comprises nine, equally-weighted core dimensions of which 'psychological well-being' incorporates measures of subjective well-being.

Subjective well-being data can be used to evaluate the utility of public goods, such as clean air, environmental amenities, and national security. Traditional economic methods typically have difficulty identifying the value and preferences for public goods. Revealed-preferences approaches infer the value of public goods from market transactions with private goods that are complementary or substitutive. These rely on stringent assumptions and do not capture 'non-use' value of public goods.

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1. No stringent assumptions

By contrast, the subjective well-being approach avoids stringent assumptions regarding actual behaviour; is unlikely to evoke strategic responses; and to some extent can measure 'non-use' values.

It correlates levels of public goods with individuals' well-being, and evaluates these goods' value in terms of well-being. If income effects are measured at the same time, utility of public goods in well-being terms can be monetised. Therefore, subjective well-being not only measures the value of public goods - thereby indicating public spending utility - but also directs resources by evaluating trade-offs and preferences for different public goods.

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2. Private sector's role

While the influence of the concept of subjective well-being currently relates mainly to public policy, it is relevant to private companies. For instance, businesses in the service sector might profit from re-orienting offerings towards human needs and well-being, rather than satisfying material demands. Development and marketing could use scientific evidence on well-being to increase and highlight benefits that are additional to the material value of services.

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Conclusion The concept of subjective well-being falls short of capturing a complex phenomenon such as human happiness in its entirety. However it can inform policymaking - provided, as with any economic theory, its limits are recognised.

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Publication:Gulf News (United Arab Emirates)
Date:Aug 14, 2009
Words:1930
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