Happiness Economics

Article byNanditha Saravanakumar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Happiness Economics? 

Happiness economics is a multidimensional field of study that examines the impact of economic, social, and political factors on human satisfaction. It goes beyond financial parameters like income and wealth, considering various metrics such as healthcare, education, governance, community, cultural diversity, and living standards.

Happiness Economics

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While different measures may be used to assess happiness, the aim is to identify the factors that enhance or diminish citizens’ well-being. By exploring these relationships, happiness economics provides insights for policymakers to improve overall happiness and quality of life. The study also identifies factors that enhance and decrease citizens’ satisfaction.

Key Takeaways

  • Happiness economics, a branch of economics, examines the relationship between economic factors and individual satisfaction. It explores how economic variables impact people’s well-being and happiness.
  • While happiness and satisfaction were overlooked in conventional economics, many countries focus on fulfilling their citizens by stressing economic, political, and social benefits that enhance contentment.
  • A few countries that view happiness as development include Bhutan, Finland, Denmark, Netherlands, Iceland, etc.
  • Econometrics is an invaluable tool in happiness economics, as quantitative and qualitative methods are employed in estimating national happiness.

Happiness Economics Explained 

Happiness economics is an evolving concept beyond monetary aspects, delving into the complex factors contributing to human well-being and satisfaction. While it acknowledges money’s influence in today’s world, it recognizes that its impact on happiness is limited.

Easterlin paradox suggests that money can make people happy up to a certain point, but beyond that threshold, any increase in income has minimal effect. The law of diminishing marginal utility further reinforces this notion, stating that the additional satisfaction gained from owning more of a product diminishes over time.

Abraham Maslow’s hierarchy of needs theory also sheds light on the relationship between money and happiness. While financial resources may contribute to self-esteem and social status, the highest requirements, such as love and belonging, self-actualization, and self-esteem (not solely based on wealth), are not directly associated with money.

Happiness economics theory challenges the conventional focus on material needs and wants in economics, recognizing that true fulfillment extends beyond financial considerations. It emphasizes the significance of factors like a safe neighborhood, social recognition, basic infrastructure, and political stability, which often go unrecognized in traditional economic frameworks.

Bhutan serves as an exemplary model in prioritizing happiness over national income. The country measures its development through the gross national happiness (GNH) index, which evaluates people’s happiness across nine domains and ranks them accordingly. Bhutan believes that economic and social development will naturally follow by improving people’s happiness.

The World Happiness Report is published annually and evaluates national happiness economics. The report consistently ranks countries like Finland, Denmark, Iceland, Israel, Netherlands, Sweden, Norway, Switzerland, Luxembourg, and New Zealand among the top positions. It is worth acknowledging that most of these countries have occupied the top 10 places for years.

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Factors 

Happiness depends on various social, economic, political, and cultural factors. Here’s a list of all such determinants:

  1. Income: There is a correlation between income and satisfaction levels, although the exact relationship can vary for individuals. Higher income generally contributes to higher happiness levels, but it is not the sole determinant.
  2. Health care: Access to quality healthcare and health infrastructure positively impact happiness and well-being. Universal healthcare systems and preparedness for health crises can enhance satisfaction.
  3. Education: Quality education and equal access to resources positively affect happiness. Countries that provide free education have higher happiness levels among their citizens.
  4. Governance: Political systems, government efficiency, and corruption’s absence can influence citizens’ happiness. Good governance and social justice contribute to higher satisfaction levels.
  5. Community: Humans are social beings. The need to foster social relationships and maintain status is so deep-rooted in human beings. Lack of a respectful neighborhood or inability to affiliate with a social group can decrease people’s contentment. 
  6. Diversity: While diversity can be enriching, some individuals may struggle with cultural, social, racial, or religious differences, impacting their satisfaction. Stereotyping and discrimination can also decrease overall happiness.
  7. Ecology: Environmental changes and concerns like climate change can contribute to anxiety and reduced fulfillment.
  8. Psychological health: Mental well-being plays a crucial role in happiness. Communities prioritizing open conversations about mental health and providing support foster a healthier environment.
  9. Living standards: Apart from basic facilities and income, overall quality of life is essential. Imagine living in an underdeveloped country but belonging to the top 1% in wealth; there would be little to zero living standards. Therefore, this combines individual, social, and political factors.

How To Measure? 

Happiness economics research employs a few techniques to measure how certain factors make individuals happy. One of the tools used in happiness economics is surveys. Surveys ask people to rate their happiness concerning each element, such as governance, healthcare, income, etc. 

Then, a statistical method is used to find the median, mean, or standard deviation of the score, which helps determine the entire population’s happiness. While it is impossible to survey the whole population, a certain percentage is chosen randomly or algorithmically and surveyed. For instance, Bhutan analyzes around 10% of its people to determine the GNH.

The measure of happiness is a combination of qualitative and quantitative techniques. Econometrics plays a significant role in this area. Regardless, the process has a few demerits. The biggest problem is that happiness is subjective and abstract. It is not countable. 

For instance, two individuals may assign a rating of 8 to their satisfaction on a scale of 1 to 10. However, their actual experiences of happiness can vary significantly due to personal factors such as confidence levels or resilience. Thus, the happiness assessment must consider individual nuances and cannot rely solely on numerical ratings.

Criticism 

Happiness economics has been the recipient of many criticisms since it was introduced. Part of this stems from people’s reluctance to accept that emotion as abstract as happiness can significantly influence a solid academic discipline, such as economics

Here are a few criticisms of happiness economics:

  • Some people believe that happiness is inherent and even genetic. They argue that external forces, such as income, social status, etc., do not impact one’s happiness. They also add that the logic is flawed as the additional satisfaction gained by holding an extra dollar is significant, especially for low-income earners.
  • The move to include happiness as a metric of economic development is often seen as political propaganda by some people. Nevertheless, propaganda or not, if it does good to people, it must be accepted. 
  • Further, other opponents of happiness economics argue that any dissatisfaction or unhappiness derived due to economic factors are only short-term.

However, a significant criticism of happiness economics, particularly the gross national happiness index, is its failure to address income inequality. While the gross domestic product (GDP) has been criticized for not accounting for disparities in income, where a few individuals earn significantly higher incomes while the majority earn much lower wages, the average income appears decent. 

Similarly, the GNH index overlooks the disparity in how people experience happiness. This limitation raises concerns about whether these measures adequately capture the complexities of societal well-being and the distribution of happiness among different groups.

Frequently Asked Questions (FAQs)

1. Who introduced happiness economics?

The origin of happiness economics can be traced to economics professor Richard Easterlin. He is the first modern economist to conduct happiness economic research. In 1974, he proposed a theory, the Easterlin Paradox, stating that income can make people happy only up to a certain point. 

2. Whose happiness does utilitarianism require that you promote?

John Stuart Mill, a politician-cum-economist, propagated utilitarianism as a way of maximizing happiness. The theory of utilitarianism requires that any social or economic initiative should invariably benefit everyone, which will make the whole population happy.

3. Can money buy happiness in economics?

The relationship between money and happiness is complex. While income can contribute to happiness up to a certain point, the correlation becomes weaker once basic needs are met. Factors like relative income, adaptation, and spending choices also influence the impact of money on overall happiness.

4. How does the pursuit of happiness relate to economics?

The term pursuit of happiness is being increasingly studied even within happiness economics. Generally, people who believe that their happiness comes from wealth are more likely to feel threatened by a society that does not maintain wealth as their ultimate goal.

This has been a guide to What Is Happiness Economics. Here, we explain it with how to measure it, its factors, & criticism. You can learn more about it from the following articles –

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