EH 401 Historical Analysis of Economic Change

How useful is the use of indicators such as “happiness” as a measure of living standards and well-being?
I. Introduction

Ludovico Antonio Moratori saw public policy as finding the best economic means to achieve public happiness. Thus in 1749 he published a book entitled Della Pubblica Felicida and introduced the word happiness in economic thinking (Dixon 1997, 1912). As since 2000 the Kingdom of Bhutan uses a “Gross National Happiness Index” instead “Gross National Product” to measure the well-being of its citizens and its national progress (Graham 2005, 51), Moratori’s prophecy is fulfilled. As one could argue that the traditional way of measuring development through aggregated goods and services in a certain period of time is onedimensional one could also argue that focusing on psychological aspects of well-being and living standard such as happiness only considers one dimension of development. As our living standard and its improvement depend on the quality, variety and most importantly the accessibility of goods a pure economic measurement reflect the level of living standard. However as GDP is the market value of all final goods and services and excludes non-market economic activities and social external effects a broader index is needed to cover living standard in a modern sense. But still living standard is an economically measurable objective – even though in a wider context as GDP. So people’s well-being is a broader matter and depends on the living standard – but not exclusively and always. According to Sen human well-being is not only defined by possession over goods and services. He suggests that education, access to public services, life expectancy and even civil liberties contribute to well-being (Frey/Stutzer 2000, 920). Thus living standard and economic production is only a part of measurement of well-being. All those indicators can be measured objectively. But they must affect individual opinions and feelings. “Happiness” as an indicator tries to measure the effect of objectively measurable facts on individuals. Thus the measurement approach of well-being has to be taken taken from psychology rather than from economics. Even though there is a correlation between income and therefore living standard and happiness, various surveys had shown that relative income matters more than absolute – human beings are not acting as a pure “homo economicus”.
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II. Based on the Gallup World Poll. 469). it has to be taken serious but with great care. at a given time people with higher income will be happier than people with lower income (Easterlin 2001. 16 per cent of the people in the lowest income group considered themselves to be happy. As income usually increases towards the retirement age. 468). But the psychological explanation is that aspirations of individuals change over time (Easterlin 2001. But what can also be seen is that the proportional rather than the absolute increase in income leads to the same increase in happiness in both groups (Easterlin 2001. 471). This is partly because other factors overwhelm the importance of income (Easterlin 2001. 467). as happiness is a subjective indicator and strongly depends on relative positions of individuals. Another finding is that measuring happiness at a certain point of time does contort the result respectively the answer: People always think that they will be happier in the future than they were in the past (Easterlin 2001. The average life satisfaction scores of   . a map of average life satisfaction levels by country looks very similar like a map of per capita income of the world (Deaton 2008. The Correlation between happiness / life satisfaction and income From a geographical view and in a comparison over space. Even though the example of Japan shows that there is despite a five-fold increase in per capita income only a slight increase of the happiness indicator since World War II. This means the prospective happiness is higher and can be explained by psychology thus meaning that human beings have a positive look in the future and tend to be irrational. For those reasons. 468). This significant positive relationship had been found in every representative national survey (Easterlin 2001. 468). On average. In the United States in the year 1994. the cross-sectional view on the world proves the argument again. 56). Furthermore the relation between income and happiness does not occur in a life cycle of an individual. If one looks and compares the correlation over space the positive relationship is remarkable as well. whereas 44 per cent in the highest-income group did so (Easterlin 2001. 470) – this makes it less paradox and seems logical: A rising income creates rising expectations. life satisfaction does not go up significantly in the same time (Easterlin 2001. the correlation between happiness and income seems to be quite strong. 470). Furthermore it must always be seen in the objectively measurable context of other indicators. happiness and other subjective indicators are useful to the extent that they help to complete the measure of living standard and well-being and conduct through pure economic indicators. However.

As the example of Switzerland shows direct democratic participation in political decision making processes can extent individuals’ well-being for two major reasons (Frey/Stutzer 2000. there are exceptions as well: high suicide rates in countries with high-income levels and sophisticated institutions such as Switzerland or South Korea imply that the indicator happiness is nor solely adjustable through economic impacts.1 to 3. it can also be found that life satisfaction generally increases when GDP doubles. health care and higher life expectancy but also civil liberties and democratic institutions. The first reason is that a bigger involvement of citizens leads to a better control of politicians. However there are also exceptions. inhabitants in rich countries such as Saudi-Arabia. But as this is an exceptional case of artificial wealth the correlation between good institutions. Haiti or Cambodia where life satisfaction scores only reach 3. If one looks at different countries over time. In countries such as Saudi-Arabia the effect of high incomes on life satisfaction seem to outweigh the lack of democratic participation and institutions – overall satisfaction is as high as in Western countries (Deaton 2008. Japan or wealthy regions such as North America. The effect of Institutions and social security on happiness / life satisfaction As mentioned in the introduction the well-being can be increased through access to education. 56).5 to 8.5. but less when it is already high (Deaton 2008.5 (Deaton 2008. 920). The second reason is that the involvement in the political process itself increases life satisfaction. 56). III. Thus the decisions being made by the government are much closer to the original wishes of the citizens than in an indirect democracy. high income and a high level of life satisfaction or happiness seems obvious. 921). As a high income and sophisticated institutional frameworks usually go hand in hand it seems to be worth to examine the relationship between democratic political institutions and happiness. In the long-term. This is more than double the score of poor regions like Sub-Saharan Africa. 921). Europe and Australasia are in the range of 7. 57).   . The feeling of having a say and being needed in state and society helps to effect happiness as well as a more decentralized governmental structure as the individual is closer to decision making processes (Frey/Stutzer 2000. However. Therefore the satisfaction with government performance and output is higher and thus reflected in life satisfaction (Frey/Stutzer 2000. participation in shaping society helps to increase individual life satisfaction.

it should not be taken as an objective measurement. Especially economic policy should not adapt implications directly as people adjust to positive shocks. So these indicators are rather helpful in understanding how what we measure is effecting individuals rather than actually helpful for measuring individual living standards. e. Even though measuring happiness is difficult and economists still have prejudices against the use of indicators (Dixon 1997. Concluding remarks All in all indicators such as “happiness” or “life satisfaction” help us to complete our understanding of the measurement of living standard and well-being. e.   . But from a scientific point of view. But subjectively this is not considered as relative income often matters more than absolute income. However there are long-term determinants of people’s well-being such as access to education and health care as well as political participation and civil liberties that will not only help to improve individual happiness but also living standard and well-being. Moreover objectively seen even workers in poor countries today are better off than workers in rich countries 150 years ago. indicators such as happiness can be useful to understand not only economic development but also its effect on people’s individual wellbeing. 1814) its use can conduct pure economic measures and help to see the results of those in a different context. Thus the interpretation of happiness as an indicator is of great importance.g. rising income over a life circle and negative shocks. crime and corruption equally. As aspirations and habits shape individual feelings. People do not act rationally and therefore individual states cannot be considered helpful to improve a society as a whole.g. IV.

pp. pp. Insights on globalization through a novel approach. pp. Journal of Economic Perspective. Blackwell Publishers.1814 Easterlin. Economy and Institutions. Health. The Economic Journal 107 (November). Carol (2005): The Economics of happiness. 111 (July).1812 .3. Alois (2000): Happiness.. Richard (2001): Income and Happiness. V. Blackwell Publishers. Stutzer. Vol. pp. 53-72 Dixon. Economics and Happiness. No. Huw D.6. The Economic Journal. (1997): Controversy. Blackwell Publishers. Oxford. 465-484 Frey. Bruno S. World Economics. Angus (2008): Income.938 Graham. The Economic Journal 110 (October). Vol. Towards a unified theory. and Well-Being around the World: Evidence from the Gallup World Poll. 918 . Oxford. Oxford. Number 2. Spring 2008. July-September 2005   . 22. Bibliography Deaton.

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