Finland tops happiness rankings in 2022

The World Happiness Report for 2022 was published in March and it is interesting to see what data is used to generate their rankings. The colour-coded sub-bars in each country row represent the extent to which six key variables contribute to explaining life evaluations. These variables (shown in Table 2.1) are:

  • Healthy Life Expectancy: Life expectancy at birth based on data from WHO.
  • Social Support: Someone to help you in times of trouble. National average of binary responses either 0 or 1.
  • Freedom to make life choices: Yes of No to “Are you satisfied or dissatisfied with your freedom to choose what you do with your life?”
  • Generosity: national average of response to the Gallup World Poll (GWP) question “Have you donated money to a charity in the past month?”.
  • Corruption Perception: “Is corruption widespread throughout the government or not” and “Is corruption widespread within businesses or not?” The overall perception is just the average of the two 0-or-1 responses.
  • GDP per capita: purchasing power parity (PPP) at constant 2017 international dollar prices.

You will notice Dystopia as a variable. This is an imaginary country that has the world’s least-happy people. The purpose of it is to have a benchmark against which all countries can be favourably compared (no country performs more poorly than Dystopia) in terms of each of the six key variables. This permits the calculated contributions from the six factors to be zero or positive for every actual country. The happiness rankings are not based on any index of these six factors—the scores are instead based on individuals’ own assessments of their lives, as revealed by their answers to the single-item Cantril ladder life-evaluation question below:

“Please imagine a ladder, with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?”

Finland remains in the top position for the fifth year running, followed by Denmark in 2nd and all five Nordic countries among the top eight countries, joined by Switzerland, the Netherlands and Luxembourg. France reached its highest ranking to date, at 20th, while Canada slipped to its lowest ranking ever, at 15th, just behind Germany at 14th and followed closely by the United States and the United Kingdom at 16th and 17th.

Among the six variables used to explain these levels, there has been general growth in real GDP per capita and healthy life expectancy, generally declining perceptions of corruption and freedom, declining generosity (until 2020), and fairly constant overall levels of social support.

Source: https://worldhappiness.report/

Nordic countries and levels of happiness

I blogged a few days ago on happiness and the old East Germany where pre-transition conditions show that to increase people’s level of happiness, job security and a strong social welfare system were paramount. Would these policies that increased happiness under socialism work in capitalist countries? The Nordic countries – Norway, Finland, Denmark and Sweden – are widely recognised as typical welfare states and were among the leaders in introducing employment and social safety net legislation. Today their spending on a social safety net as a % of GDP is one of the highest in the world. One of the main reasons for the level of happiness in these countries is the quality of public services – health, education, childcare, pensions and elderly care – and the population know that their public services are good.

But doesn’t a higher income mean greater happiness?

In the mid 1970s Richard Easterlin drew attention to studies that showed that, although successive generations are usually more affluent that their parents or grandparents, people seemed to be no happier with their lives. It is an interesting paradox to study when you are writing about measuring economic welfare and the standard of living.

What is the Easterlin Paradox?
1) Within a society, rich people tend to be much happier than poor people.2) But, rich societies tend not to be happier than poor societies (or not by much).
3) As countries get richer, they do not get happier. Easterlin argued that life satisfaction does rise with average incomes but only up to a point. One of Easterlin’s conclusions was that relative income can weigh heavily on people’s minds.

The most comprehensive study in looking at whether higher income leads to higher levels of satisfaction was published in 2012 and looked at countries over time and concluded that more income leads to greater levels of happiness. However it wasn’t clear as to whether money leads to happiness or happiness leads to money.

How do the Nordic countries pay for these public services?

Taxes in Nordic countries are considerably higher than in countries with less extensive and generous social safety net. The OECD puts the ratio of government tax revenue to GDP for Nordic countries as 53% compared to 45% in the EU and the USA 33%. Nordic countries seem to be willing to pay their fair share of taxes although their incomes are higher than your average OECD country. With the rapid development of technology job security is a concern in most countries but a survey of Swedish workers suggested that they are not worried about losing their jobs due to technological advances. 80% of those surveyed expressed positive views about robots and artificial intelligence. A similar survey of saw 72% American workers negative views about robots and artificial intelligence. The Swedish minister for employment and integration quoted in the New York Times:

“The jobs disappear, and then we train people for new jobs. We won’t protect jobs. But we will protect workers.”

Easterlin argued that life satisfaction does rise with average incomes but only up to a point. For Nordic countries it seems that levels of happiness correlate to an effective social welfare system paid for by high taxes.

Source: An Economist’s Lessons on Happiness. Farewell Dismal Science by Richard A. Easterlin (2021)

Minimal monetised societies and happiness

For less developed countries economic growth is often assumed to improve the happiness of the population although this relationship has come under a lot of scrutiny in recent times. A new study shows that people in societies where money plays a minimal role can have a level of happiness comparable to those living in Scandinavian countries which typically rate highest in the world. An interview with Eric Galbraith (McGill University, Canada) on Radio New Zealand’s ‘Sunday’ programme caught my attention in which he discusses the research undertaken in the Solomon Islands and Bangladesh. The paper is entitled:

Happy without money: Minimally monetized societies can exhibit high subjective well-being

Public policy that has focused on GDP growth fails to capture other aspects such as income inequality, the depletion of natural resources, environmental concerns etc. However subjective well-being (SWB) is an indicator that is more associated with the variables that matter to people. Galbraith et al question the role of money in determining SWB and reference the Easterlin Paradox (see below) which found that people don’t tend to get happier when their income goes up – see graph below.

What is the Easterlin Paradox?

Easterlin Paradox
  1. Within a society, rich people tend to be much happier than poor people.
  2. But, rich societies tend not to be happier than poor societies (or not by much).
  3. As countries get richer, they do not get happier. Easterlin argued that life satisfaction does rise with average incomes but only up to a point. One of Easterlin’s conclusions was that relative income can weigh heavily on people’s minds.

It is generally believed that people in less developed countries that have minimally-monetised economies have low that SWB. However the fact that happiness has a universal feeling suggest that income may be just a substitute for other sources of happiness, an assumption that is easier to notice in settings where money has little or no use. They used three independent measures to assess complementary but distinct psychological dimensions of SWB.

  1. Cognitive life evaluation – this asks about a person’s satisfaction with life and questions are phrased in a few different forms.
  2. Affect balance – asks what emotions they had experienced throughout the previous day, and calculated as the difference between positive and negative emotions.
  3. Momentary affect – data was obtained by querying subjects by telephone at random times about their emotional state.

Researchers selected four sites in two countries:

Solomon Islands – round 80% of the population live in rural subsistence communities and it has a Human Development Index (HDI) of 0.546 (rank 152 in the world). The sites were Roviana Lagoon (rural site) and Gizo (urban site)

Bangladesh – 35.9% of it being urban, and has an HDI of 0.608 (world rank 136). The sites were Nijhum Dwip (rural) and Chittagong (urban).

Results
The graph below shows that the 4 sites, although are minimally monetised societies,
do experience high levels of SWB which challenge the prevailing view that economic growth is a reliable pathway to increase subjective well-being. While the data presented here were collected only in two countries and four sites this is the first study to that systematically compares standardised SWB measures in minimally monetised, very low-income societies.

New Zealand Household income not enough to be happy.

The recent Parliamentary Economic Review looked at the Household incomes and housing costs for the year ended 30 June 2020. Household income includes income from wages and salaries, self-employment, investments, government benefits, along with superannuation income. Some main points from the article:

  • Annual average household income was $107,731
  • Median annual household income was $88,327
  • Data only covers nine months to March 2020 – Stats NZ unable to collect data during the COVID-19 lockdown.
Stats NZ

Highest/lowest household incomes were:

  • Auckland region had the highest average annual income at $128,747
  • Wellington region $123,533.
  • Manawatū- Whanganui region $85,841.

Housing costs include spending on rents and mortgage repayments (both principal and interest repayments), along with spending on property rates, and building-related insurance. NZ households spent an average of $21 of every $100 on household costs which is similar to 2019. Of those in rental accommodation 26.5% spent more than 40% of their household income on rental payments and other housing costs.

What level of income makes us happy? New Zealand 5th

However a “happiness premium” established by researchers at Purdue University, in the United States suggested that an individual salary of $178,328 (US$128,844) will make New Zealanders happy but as shown above our average household income is $107,731. Money and finance website Expensivity has calculated the salary level in each country that would prevent unhappiness. Researchers looked at data from 1.7 million people and cross-referenced their earnings and life satisfaction. They found that more money boosted happiness – but only to a point. Beyond that, further increases in income could actually lead to more unhappiness. New Zealand ranks as the 5th highest income required to achieve happiness.

Global GDP per person vs Happiness

Some great graphics here from The Economist – The Data Behind Happiness. Each circle represents a country and the size represents its population.

Red circle = countries where happiness has moved in the opposite direction to GDP.

Blue circle = countries where happiness and GDP have moved in the same direction.

On a scale from zero to ten where would you place your life satisfaction right now? That question was asked of thousands of people around the world, and surprisingly the rich in the country the happier it is. That makes Europeans the most gleeful, Africans the most miserable – but there’s a snag.

Overall in about a third of countries happiness has moved in the opposite direction to income. Countries don’t always get happier as they get richer. USA people are less happy despite a growing economy and in the UAE happiness has risen despite falling wealth.

China and the Easterlin Paradox

I have blogged before on the Easterlin Paradox and was interested to read about the relationship between economic growth and happiness. In the mid 1970s Richard Easterlin drew attention to studies that showed that, although successive generations are usually more affluent that their parents or grandparents, people seemed to be no happier with their lives. It is an interesting paradox to study when you are writing about measuring economic welfare and the standard of living.

What is the Easterlin Paradox?

  1. Within a society, rich people tend to be much happier than poor people.
  2. But, rich societies tend not to be happier than poor societies (or not by much).
  3. As countries get richer, they do not get happier. Easterlin argued that life satisfaction does rise with average incomes but only up to a point. One of Easterlin’s conclusions was that relative income can weigh heavily on people’s minds.

GDP growth is generally held as the most reliable predictor of a country’s level of happiness but in China GDP has increased 5 fold over the last 20 years but the level of well-being is less that in 1990. The levels of well-being bottomed out in the period of 2000-2005 and although have recovered they are not a level to that of 1990 – levels of happiness were high for then a poor country. This was similar to Russia before its transition where high levels of subjective well-being were reported.

Growth not a reliable indicator of happiness in China

Chinese level of happiness was highest in the 1990’s In the days of the “iron rice bowl system” – Chinese term used to refer to an occupation with guaranteed job security, as well as steady income and benefits. So it transpires that GDP growth in China was highest when happiness levels were falling. In fact, none of the six predictors used in the World Happiness Reports prove to be reliable predictors in China as there was little or no correlation between happiness and the six predictors- see below:

  1. GDP per capita,
  2. healthy years of life expectancy,
  3. social support (defined as having somebody to rely on in times of trouble),
  4. trust (defined as perceived absence of corruption in government and business),
  5. perceived freedom to make life deci-sions,
  6. generosity (defined as giving to charity)

The two main factors explaining China’s trajectory in happiness levels are unemployment and the social safety net. Unemployment rose sharply after 1990, reaching its peak in 2000–2005—the trough of China’s happiness—and has since declined moderately, as happiness levels have risen moderately. The level of unemployment is mirrored by the relative coverage of the social safety net over the same time period.

It seems that the restructuring of state-owned enterprises (SOE) has had the most profound effect on the happiness of Chinese people. This mirrors developments in Eastern European countries. In addition to unemployment rates and the social safety net, education and age are also important factors in determining Chinese people’s happiness over the period. Levels of education and of happiness are indeed linked; not only does a college education provide access to better job opportunities, but it also makes one more adaptable to changing circumstances.

Source:
Chinese Discourses on Happiness (2018) Edited by Gerda Wielander and Derek Hird

OMD – The Punishment of Luxury

I came across this new album by Orchestral Manoeuvres in the Dark (OMD) – The Punishment of Luxury. For those of you are unfamiliar, OMD are a band from Merseyside Liverpool and have been long remembered for their hits “Electricity”, in 1979 and the 1980 anti-war song “Enola Gay”. The band achieved broader recognition via their seminal album Architecture & Morality (1981) and its three singles, all of which were international hits.

The “Punishment of Luxury” album is specifically about the global divide. Today the world is more unequal than at any time in world history which is due largely to the fact that 200 years ago everyone was poor. But the increasing wealth of the higher income group has been alarming – America’s top 10% now average more than nine times as much income as the bottom 90%. The fact that people are much better off materially doesn’t seem to translate into a better mental condition – they seem to be unhappy. If you are in this situation you have undoubtedly got on the hedonic treadmill and the marketing people have got under your skin. It seems that if you don’t have the latest brand of a product you are less worthy of being recognized by your peer group and have less self-respect.

It seems that the very wealthy have the same problems as the rest of us but only on a much larger scale. A research paper from Boston College entitled “Secret fears of the super-Rich found that the top fears of the rich are:

  • The rich need increasing amounts of money to make them feel financially secure.
  • They feel isolated and don’t share their concerns or stress as they will sound ungrateful.
  • Thy worry that their children will become spoilt by inheriting so much wealth or resentful if its too little.
  • You are unsure if your friends genuinely like you or your money
  • There is constant dissatisfaction with consumption as something better / new is always being launched. They can’t get off the hedonic treadmill
  • Parents are concerned that money will rob their children of ambition and getting a job.

The title track is below. It is very OMD for those of you who are familiar with the sound of the band.

OMD – The Punishment of Luxury

I came across this new album by Orchestral Manoeuvres in the Dark (OMD) – The Punishment of Luxury. For those of you are unfamiliar, OMD are a band from Merseyside Liverpool and have been long remembered for their hits “Electricity”, in 1979 and the 1980 anti-war song “Enola Gay”. The band achieved broader recognition via their seminal album Architecture & Morality (1981) and its three singles, all of which were international hits.

The “Punishment of Luxury” album is specifically about the global divide. Today the world is more unequal than at any time in world history which is due largely to the fact that 200 years ago everyone was poor. But the increasing wealth of the higher income group has been alarming – America’s top 10% now average more than nine times as much income as the bottom 90%. The fact that people are much better off materially doesn’t seem to translate into a better mental condition – they seem to be unhappy. If you are in this situation you have undoubtedly got on the hedonic treadmill and the marketing people have got under your skin. It seems that if you don’t have the latest brand of a product you are less worthy of being recognized by your peer group and have less self-respect.

It seems that the very wealthy have the same problems as the rest of us but only on a much larger scale. A research paper from Boston College entitled “Secret fears of the super-Rich found that the top fears of the rich are:

  • The rich need increasing amounts of money to make them feel financially secure.
  • They feel isolated and don’t share their concerns or stress as they will sound ungrateful.
  • Thy worry that their children will become spoilt by inheriting so much wealth or resentful if its too little.
  • You are unsure if your friends genuinely like you or your money
  • There is constant dissatisfaction with consumption as something better / new is always being launched. They can’t get off the hedonic treadmill
  • Parents are concerned that money will rob their children of ambition and getting a job.

The title track is below. It is very OMD for those of you who are familiar with the sound of the band.

Money, happiness and hedonic adaptation.

The Economist ‘Free Exchange’ column had a piece on money and happiness in which they looked at research into how peoples level of happiness is relative to reference groups. In the mid 1970s Richard Easterlin drew attention to studies that showed that, although successive generations are usually more affluent that their parents or grandparents, people seemed to be no happier with their lives. It is an interesting paradox to study when you are writing about measuring economic welfare and the standard of living.

Easterlin ParadoxWhat is the Easterlin Paradox?
1) Within a society, rich people tend to be much happier than poor people.
2) But, rich societies tend not to be happier than poor societies (or not by much).
3) As countries get richer, they do not get happier. Easterlin argued that life satisfaction does rise with average incomes but only up to a point. One of Easterlin’s conclusions was that relative income can weigh heavily on people’s minds.

Recent studies that looked at countries over time concluded that more income leads to greater levels of happiness. However it wasn’t clear as to whether money leads to happiness or happiness leads to money.

The Busara Centre for Behavioral Economics in Nairobi, Kenya, runs experiments with people from the depressed and rural areas of the country. Their researchers looked at the results of a lottery-like scheme in rural Kenya, in which a random sample of 503 households spread over 120 villages was chosen to receive cash transfers of up to $1,525. The average transfer, $357, was almost enough to double the wealth of a typical villager. After this had taken place researchers measured the well-being of villagers before and after the transfer of money. As expected those that received money reported an increase in happiness but those that did not receive any money fell sharply when they saw their neighbors livelihood improve. It transpired that the reduction in satisfaction by seeing your neighbour getting richer was greater than the increase in satisfaction from receiving the cash transfer. So therefore:

The bigger the handouts to others in their village, the greater the dissatisfaction of non-recipients

Hedonic Adaptation
Over a period of time the effects of the increase in a person’s income wears off over time as the recipient gets used to the norm. Economists refer to this as ‘Hedonic Adaptation’. There were big differences in the levels of satisfaction but after a year the level of happiness of both the recipient and non-recipients returned close to its original level prior to the windfall gain.

One interesting result was that villagers were not so concerned about inequality but the decline in their own wealth relative to the mean. Therefore a village could have great inequality as one group has got richer and another group poorer but the actual mean income remains unchanged.

A study by Ada Ferrer-i-Carbonell entitled ‘Income and Well-Being: an empirical analysis of the comparison income effect’ shows that there is an asymmetry in the way people compare themselves with others. There is a tendency for people to compare themselves to those who are better off so we shift our reference group as our income goes up. Because of this we are never satisfied, since we quickly become accustomed to our own achievements.

Increases in family income accompanied by identical increases in the income of the reference group do not lead to significant changes in well-being; the larger an individual’s own income is in comparison with the income of the reference group, the happier the individual is. Ada Ferrer-i-Carbonell

Consumption and Short-Termism

The New Philosopher dedicated a recent issue to The Property Wars in which there were articles by bestselling author Thomas Piketty in which he states that the current structure of property rights is a major cause of inequality. There was also a piece on consumerism and happiness

Many have argued that money doesn’t buy happiness and the most prominent economist to write about this was Richard Layard in his 2005 book ‘Happiness’. Rich countries are no happier than poor ones – real US incomes more than doubled after 1950 while happiness flatlined – and across the chequerboard of nations happiness goes up barely a jot beyond a per capita income of $20,000. Why to we buy stuff? The Gilded Age in the 19th century was a time of industrialisation and consumerism with property being “anything that the individual may acquire which sustains and prolongs life…and gives an advantage over opposing forces” – The Psychology of Ownership by Linus Kline and CJ France. In Australia, the lion’s share of household debt goes to mortgages on the family home, and world-wide the two best selling items are soft drink and potato chips. In the name of property and calories we slay the credit card and kill our domestic bottom line.

In reality, evolution may let us indulge our intellect, but feelings were there first and quickly remind us of this when we forget to do the basics like eating and sleeping. Theorists have argued that feeling good about products / services is central to our belief that they are good for us. As we find it hard to make decisions without feelings the advertising industry have entered the scene. John Kenneth Galbraith, in his book The Affluent Society, blamed the vast increase in consumption in the post-war period on companies that were now producing items which consumers would desired but not necessarily needed. Today brand building has become dominant in our society and the goal of each brand is to make you feel good about the product. For example:

  • A certain Mexican beer takes you to a part of the world where you want to be – a beach with a beautiful sunset.
  • A car company takes you to a ski resort amongst a picturesque Alpine environment.

Products become substitutes for experience as you get delivered the feelings by association – virtual reality with consuming a product. With a brand meaning more pleasure for consumers it is no wonder that there is greater consumption which leads to overspending. The 5th edition of the American Psychiatric Association’s Diagnostic and Statistical Manual of Mental Disorders includes ‘excessive acquisition’ as a feature of ‘hoarding disorder’. And the brain scan data are in too: compulsive buyers light up the same reward centre that rats trigger with a lever, getting rewards until they drop.

In getting used to the short-term feel good factor of material possessions, we shall over invest in acquiring them at the expense of our leisure. Consumers do underestimate the hedonic treadmill and as a result our life can be too focused on working and making money, and away from other pursuits.

Sources:

The New Philosopher – Issue #9 ‘Property Wars’ – 2015

Happiness –  Richard Layard – 2005

Dosage and Happiness

Is poverty about money or friends?

Social Interaction solutionIn the World Bank survey one stated that “I like money and nice things, but it’s not money that makes me happy. It’s people”. Research has suggested that social integration is more important for well-being than income and it also decreases poverty. By contrast loneliness can be deadly – one study found that it did more damage to health than smoking.

Income can be a misleading measure of need as:
1. Lower income groups end up living in different degrees of hardship depending on their intangible resources.
2. Having strong social integration reduce money hardship.
3. Friends and relatives can lend money, pool risk, mind children and bring news of job openings.

However a lot depends on having the right friends as if this does not eventuate hardship prevails. The more concentrated the poverty, the less helpful social networks tend to be.
A global survey conducted in 2014 by Gallup, a polling firm, found that 30% of people in the poorest fifth of their country’s population had nobody to rely on in times of need, compared to 16% of the richest fifth.

Several countries have experimented with schemes that connect lonely old people and deprived youth. Germany, for instance, has built “multi-generational” community centres where older visitors get computer coaching from teenagers.

Source: The Economist

Behavioural Economics iTunesU course for Schools

Behavioural EconomicsBack in February I blogged on a Behavioral Economics course that I have been teaching for the last three years at King’s College. I have now put all the resources onto an iTunesU course so that you can access the multi-media material that accompanies the course booklet. The iTunesU course includes the following:

Interviews with:
– Richard Thaler – co-author of ‘Nudge’
– Geoffrey Miller – author of ‘Spent: Sex, Evolution, and Consumer Behaviour’
– Dan Ariely – author of ‘Predictably Irrational’
– Daniel Kahneman – author of ‘Thinking Fast and Slow’

Scenes from:
– Black Gold
– The Corporation
– Inside Job
– Seinfeld
– Kevin Slavin – TED Talk “How algorithms shape our world”

The course booklet has been edited so that answers to questions can be typed – this can be downloaded also from the iTunesU course. Click on the link below to enroll on the course.

https://itunesu.itunes.apple.com/enroll/FXY-XEH-MDJ

Behavioural Economics course for school students

BE Cover PageFor the past three years I have been teaching a Behavioural Economics course to all Yr 11 students (5th Form in UK). It is a 12 period course that is part of the Positive Education module. The course booklet consists of lesson plans on various topics and resources that are required to supplement the course. Click below to download the course notes and workbook. If you would like the PowerPoints that complement the course please email me – m.johnston@kingscollege.school.nz – and I will forward them on. Ideal for those post AS exam lessons.

Behavioural Economics – Yr 11 2015

Behavioural economics is about bringing reality into economic analysis. It borrows from psychology, sociology, politics, and institutional economics (which focuses on the rules of the economic game) to describe and explain human behaviour and economic phenomena. Behavioural economics builds upon conventional economics, offering more tools for understanding why people behave the way they do when it comes to income, wealth, ethics, and fairness. It uses prospect theory to describe the choices that the typical person makes. The course is split up into 4 topics and is designed for approximately 12 periods in length.

1. Understanding Choice

Free choice in Economic Decision Making
Nudging
Anchoring and Framing
Free
Placebo Effect
Paradox of Choice
Loss Aversion and Endowment Effect
Conventional v Behavioural Economics

2. Ethics and Economic Growth

Ethical Behaviour – definition
Milton Friedman and ethical behavior
The Conventional Perspective on Ethical Behaviour and the Economy
A Good Company – Ethics / Happiness
Examples of Companies with socially responsible norms
Ethics and Profits
Ethical consumers

3. Behavioural Finance

Definition – what is it?
Efficient Market Hypothesis
Random Walk Hypothesis
Irrational Exuberance
Bubbles and Busts – Tulip – Great Crash – Dot.com – 2008 Global Financial Crisis

Causes of Bubbles
– Following the herd
– Relative positioning in investor behavior
– Overconfidence and under-confidence
– Institutional failure
– Conflict of interest

4. Game Theory

Introduction to Game Theory
Football – Penalty Shoot outs
Golden Balls Game Show

5. Money and Happiness

Conventional Theory – Money = Happiness
Measuring Happiness – Gross Domestic Product v Gross National Happiness
Diminishing Returns for Income and Wealth
Easterlin Paradox: Money doesn’t buy happiness
The Hedonic Treadmill – Money leads to more happiness but not for too long
Differences in happiness between countries
Government Policy and Happiness
Smarter Spending

Sources:

Behavioural Economics for Dummies – Morris Altman
Thinking, Fast and Slow – Daniel Kahneman
Economic Naturalist – Robert Frank
Nudge – Richard Thaler & Cass Sunstein
Inside Job – DVD
Black Gold – DVD
The Corporation – DVD
How Algorithms Shape our World – TED Talk

New Zealand Well-Being

Although a few years old, this graph from The Economist does highlight New Zealand as a country which has one of the highest levels of well-being but a low level of GDP per person to go with. The trend line shows that the higher the GDP per person the better the level of well-being. Ultimately the challenge for politicians is to try and get their country to the top left of the graph – i.e. higher well being for less GDP per person.

NZ Well-being

Does Income cause Happiness?

Easterlin ParadoxThere has been a lot of research regarding how higher income = higher levels of happiness. Increasing your income increases your utility (satisfaction). But the more you have, your utility increases, but at a diminishing rate. At low levels of income increasing your income has a big effect on your utility. However when you have a high income more money does increase your utility, but not as much as when you started off with low levels of income.

Introducing this diminishing returns framework into an analysis of happiness also suggests that increasing the income to the poorer members of society increases society’s total happiness by more than if the income of the wealthy increases by the same amount – see graph. Research has shown that a lack of money brings both emotional misery and low life evaluation; similar results were found for anger. Beyond $75,000 in the contemporary United States, however, higher income is neither the road to experienced happiness nor the road to the relief of unhappiness or stress, although higher income continues to improve individuals’ life evaluations.”  The research does not imply that a financial increase will not improve the quality of life, but suggests that above a certain income level, people’s emotional wellbeing is constrained by other factors, such as temperament and life circumstances. The take home message of the research is that high incomes don’t bring you happiness, but they do bring you a life that you think is better.  The Easterlin Paradox concerns whether we are happier and more contented as our living standards improve. In the mid 1970s Richard Easterlin drew attention to studies that showed that, although successive generations are usually more affluent that their parents or grandparents, people seemed to be no happier with their lives? It is an interesting paradox to study when you are writing about measuring economic welfare and the standard of living.

What is it?

1) Within a society, rich people tend to be much happier than poor people.

2) But, rich societies tend not to be happier than poor societies (or not by much).

3) As countries get richer, they do not get happier.

Easterlin argued that life satisfaction does rise with average incomes but only up to a point. One of Easterlin’s conclusions was that relative income can weigh heavily on people’s minds.

What about the other way around – Happiness causes Income?

An article by Scott Sumner (Library of Economics and Liberty) looked at this area and suggested that culture has an impact on happiness. According to Sumner peole who care about the welfare of others tend to be happier – this leads to more efficient policies, less corruption, acquiring governments handouts when they are not entitled e.g. the informal economy.

Denmark

1) They have one of the highest levels of public integrity in the world
2) If you exclude the the two “size of government’ categories from the 10 categories used by the Hertitage foundation. Denmark has the most free economy in the world. Therefore it is a free market with a strong welfare state. As Sumner points out “not much (selfish) rent seeking” behaviour. Happy people aren’t selfish?
3) Denmark ranks leads the world in many happiness rankings

Euphoria v Income

China currently ranks extremely high in level of satisfaction but doesn’t exhibit an extremely high level of “euphoria” for everyday life. Can researchers distinguish between peoples incomes and euphoria? Think of the euphoria in the east of the collapse of the Berlin Wall or Spain winning the Football World Cup when they had over 25% unemployment. Ultimately a lot is dependent on when the research is carried out and culture of the people. You might not have much but newly regained freedom or being the best football team in the world gives immense pleasure.

NZ General Social Survey 2012 – Wellbeing

The New Zealand General Social Survey of 2012 showed some interesting facts regarding wellbeing:

An estimated 87 percent of people were ‘satisfied’ or ‘very satisfied’ with their lives overall.

Four aspects of life were important in determining people’s overall life satisfaction: health, money, relationships, and housing.
In 2012 an estimated:

* 60 percent of New Zealanders rated their health as ‘excellent’ or ‘very good’
* 52 percent had ‘more than enough’ or ‘enough’ money to meet their everyday needs
* 69 percent had not felt lonely in the last four weeks
* 67 percent had no major problems with the house or flat they lived in.

– 21 percent of New Zealanders had good outcomes in all four of these (ie excellent or very good health, more than enough or enough money, never felt lonely, and no major housing problems). 

– 98 percent of those with four good outcomes were satisfied or very satisfied with their lives overall.

– 5.4 percent of New Zealanders did not have a good outcome in any of the four aspects of life. Of these people, 56 percent were satisfied or very satisfied with their lives overall.

NZ General Survey

A happier world since GFC?

HappinessSince the GFC in 2008 the world seems a happier place to be than it was before the event. This is according to a Ipsos a research company which completed a poll of 19,000 adults in 24 countries. However the term happiness is self-reported and the term means different things to different people. According to The Economist two conclusions have emerged from the data:

1. Large, fast-growing emerging markets do not share share rich industrialised pessimism. The happy countries got even happier – Turkey, Mexico, and India. Incidently even considering the tsunami and the nuclear accidents Japan’s ‘very happy’ category increased.

2. Happiness levels tend to rise with wealth and then plateau – The Easterlin Paradox. This usually happens when a country’s national income per head reaches around $25,000 per annum. But the highest levels of reported happiness are in the poor and middle income countries – Indonesia, India, and Mexico. In rich countries the levels range from 28% in Australia to 13% in Italy and 11% in Spain. Most Europeans are gloomier than the world average.

Levels of income seem to be inversely related to happiness and one can see that happiness depends on a lot more than material welfare. One just has to look at the Bangladeshi cricket supporters in the recent test with the Black Caps. Plenty of happy faces with an average income of $1,883 per annum and ranked 151 by the World Bank.

In Search of Happiness – UN World Happiness Report.

Recently came across the The United Nations General Assembly second annual World Happiness Report, measuring happiness and well-being in countries around the world to help guide public policy. Denmark topped the list of the happiest nations, ousting last year’s winner, Iceland. Denmark was followed by Norway, Switzerland, the Netherlands, and Sweden – New Zealand comes in at 13th place. Below is an extract and a graph showing the happiness ranking.

In an impoverished society, the focused quest for material gain as conventionally measured typically makes a lot of sense. Higher household income (or higher Gross National Product per capita) generally signifies an improvement in the life conditions of the poor. The poor suffer from dire deprivations of various kinds: lack of adequate food supplies, remunerative jobs, access to health care, safe homes, safe water and sanitation, and educational opportunities. As incomes rise from very low levels, human well-being improves. Not surprisingly, the poor report a rising satisfaction with their lives as their meager incomes increase. Even small gains in a household’s income can result in a child’s survival, the end of hunger pangs, improved nutrition, better learning opportunities, safe childbirth, and prospects for ongoing improvements and opportunities in schooling, job training, and gainful employment.

The paradox that Easterlin noted in the U.S. was that at any particular time richer individuals are happier than poorer ones, but over time the society did not become happier as it became richer. One reason is that individuals compare themselves to others. They are happier when they are higher on the social (or income) ladder. Yet when everybody rises together, relative status remains unchanged. A second obvious reason is that the gains have not been evenly shared, but have gone disproportionately to those at the top of the income and education distribution. A third is that other societal factors – insecurity, loss of social trust, a declining confidence in government – have counteracted any benefits felt from the higher incomes. A fourth reason is adaptation: individuals may experience an initial jump in happiness when their income rises but then at least partly return to earlier levels as they adapt to their new higher income.

These phenomena put a clear limit on the extent to which rich countries can become happier through the simple device of economic growth. In fact, there are still other general reasons to doubt the formula of ever- rising GNP per person as the route to happiness. While higher income may raise happiness to some extent, the quest for higher income may actually reduce one’s happiness. In other words, it may be nice to have more money but not so nice to crave it. Psychologists have found repeatedly that individuals who put a high premium on higher incomes generally are less happy and more vulnerable to other psychological ills than individuals who do not crave higher incomes. Aristotle and the Buddha advised humanity to follow a middle path between asceticism on the one side and craving material goods on the other.

A further huge problem is the persistent creation of new material “wants” through the incessant advertising of products using powerful imagery and other means of persuasion. Since the imagery is ubiquitous on all of our digital devices, the stream of advertising is more relentless than ever before. Advertising is now a business of around $500 billion per year. Its goal is to overcome satiety by creating wants and longings where none previously existed. Advertisers and marketers do this in part by preying on psychological weaknesses and unconscious urges. Cigarettes, caffeine, sugar, and trans-fats all cause cravings if not outright addictions. Fashions are sold through increasingly explicit sexual imagery. Product lines are generally sold by associating the products with high social status rather than with real needs.

Global Happiness
Happiness Key

Can money buy happiness?

Although U.S. GDP has grown over the last 35 years, average happiness has not. According to researchers at the University of California at Berkeley, the reason may lie in growing economic inequality. Paul Solman of PBS reports as part of his Making Sense of Financial News. Some good references to the book ‘The Spirit Level’ and an interview with Robert Frank of Economic Naturalist fame and the Darwin Economy.

Measuring Wellbeing

This has become popular with a lot of governments worldwide especially in the UK and USA. Late last year I attended a conference at the University of Waikato and Professor Les Oxley took a session entitled

“Is GDP an appropriate measure of wellbeing?
….. and is anything else better?”

Traditionally we have used Gross Domestic Product as it measures:
– The total value of final goods and services produced in the economy
– The total of incomes earned in producing that output
The final purchases by households, business, and government by summing consumption, investment, government spending, and net exports

Historically origins of GDP

In the 1930’s, in response to the information gap revealed by the Great Depression, Simon Kuznets developed a set of national income accounts.

In the 1940’s, World War II planning needs were the impetus for the development of product or expenditure estimates (gross national product); by the mid-1940’s, the accounts had evolved into a consolidated set of income and product accounts, providing an integrated birds-eye view of the economy.

In the late 1950’s and early 1960’s, interest in stimulating economic growth and in the sources of growth led to the development of official input-output tables· In the late 1960’s and 1970’s, accelerating inflation prompted the development of improved measures of prices and inflation- adjusted output.

However there are negatives to GDP as a measurement which was outlined by President Kennedy in 1968.

“The Gross National Product counts special locks for our doors and the jails for those who break them … the destruction of the redwood and the loss of our natural wonder in chaotic sprawl … Yet (it) does not allow for the health of our children, the quality of their education, or the joy of their play … the beauty of our poetry or the strength of our marriages … it measures everything, in short, except that which makes life worthwhile.” President Kennedy 1968

Les Oxley produced a comparison of wellbeing between the USA and France – Are GDP and other measures highly correlated?

France USA wellbeing

Conclusions:

* GDP was not designed to measure wellbeing, especially at the individual level
* We continue to use it because we can measure it quite easily and use it for comparisons over time and space
* BUT it can mislead and potentially lead to mismanagement
* There are alternatives to complement GDP
* The complements are not freaky or the realm of weirdos in and out of economics – they are becoming more mainstream and the problems of using GDP for purposes for which it was not intended are becoming public
* Some of the best minds are trying to shift us away from SOLE use of GDP as an INDIRECT measure of wellbeing

I am off to the beach again for a few days – back again on 19th January.