Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Saturday, April 25, 2009

Happiness & Striving for Money

Posted by Simon Halliday | Saturday, April 25, 2009 | Category: , , | I comment on a chapter by Stefano Bartolini in the Handbook of the Economics of Happiness.  He discusses the role of economic growth in our understanding of subjective well-being and particularly the role that money plays for happiness. He considers trends in expectations about leisure and money, trends in saving and in labour markets. He explains some of the reasons behind these trends.

Historic Trends
During the 70s economists were debating the coming 'leisure society' with predictions that work hours would decrease to 15 hours per week in the UK because of how society and production were flourishing.

This society has obviously not been realised.  Furthermore, economists thought growth would release workers from the need to save to insure against economic shocks.  Interest in 'money' was expected to decline.  Though mass poverty in the US, UK and EU has been eradicated, we still obsess over money.

The industrial transition - the move from agriculture to manufacturing - saw savings rise to a stable and high level.  In post-industrial countries the labour supply went through dramatic changes: from a working day of less than 8 hours to work days of 10, 12, and 14 during and after the industrial revolution.  The reversion to 8 hour working days (though many still work more than that) took some time.  Industrialisation also saw increases in urbanization.  Post-industrial societies also seem geared towards producing goods, rather than leisure. Finally, work hours in post-industrial countries seem to be increasing once more. 
The question thus becomes, with these patterns, what is making people unhappy? If people are unhappy, why do they not realise it and change their behaviour? Consider t following explanations: 
  1. Set point theory: With this theory, individual propensity to happiness is a personal trait of largely genetic origin and influeced by personality.  Happiness is thus a randomly distributed trait in the population and unaffected by external factors.  But, if this is the case, then why do we see increases (EU) or decreases (US, UK) in 'happiness' keeping the gene pool relatively constant?
  2. Decreasing marginal utility of money: Basic idea: a progressive saturation of needs by material goods - as you get more money it is worth relatively less to you.  Consistent with relatively affluent societies having sated basic needs.
  3. Adaptation (Hedonic Treadmill): Main idea here is that people adapt to a consumption level and then require more consumption to feel satisfied.  Aspirations play a role in this (consider yesterday's post).  The argument is that humans evolved adaptability to deal with poor circumstances, but this same adaptability makes us dissatisfied with high levels of absolute wealth and consumption.
  4. Relative Position: Relative position in society, or in a community, is relevant to individual happiness and satisfaction.  If relative position counts, then an increase in income for all people in society will not improve subjective well-being because each person's position remains the same.
1-3 fall into the 'Money Can't Buy Happiness' class of explanations.  However, a problem arises.  I quote extensively from the text:
If people realize that their happiness depends on, say, personal traits, or that adapataion will sooner or later annul the advantages of an increase in income, or that money cannot satisfy needs that are essential, [then] they will react by reducing their efforts aimed at making money. In short, if money cannot buy happines, the labor supply and the saving rate will be highly responsive to variations in labor productivity and wealth. (Bartolini, 2007, 343)
But, as Bartolini notes, this does not occur.  The opposite occurs.  Thus, to predict the patterns of consumption that we see in reality, theories 1-3 need an additional theory about the failure of rationality, i.e. an explanation for why people don't realise that they are unhappy and adjust their behaviour accordingly. 

4 means money can buy happiness, but only relative to other the position of other people. It does not require additional assumptions about failures of rationality.  Moreover, with the increases in inequality concurrent with the increases in GDP growth that occurred in much of the Anglo-Saxon world this theory offers strong predictions that are verified by reality.

Endogenous Growth
Growth theory should explain the trends in labour supply, productivity and leisure.  But, many growth models take the labour supply as given (they assume a working population 'N' and put it into a mathematical model).  This therefore assumes that all increases in labour will be dedicated to production.  But what about increasing leisure? What makes leisure so bad that we don't include it in our growth models? Well, it turns out that if you include labour-leisure decisions as endogenous variables - variables to be determined within the model, rather than taken as given - then the conclusion that economies can perpetually grow disappears.  Including leisure decisions results in decreases in accumulation (people save less), and increases in leisure time (people work less).  People do indeed seem to have saved less in Anglo-Saxon capitalist societies of late, but they have increased their work hours, not decreased them.  This leaves much to explain.

However, if we incorporate a 'micro assumption' about relative position as a motivating factor, then the incessant need to compete and accumulate could drive perpetual growth while also maintaining a population that, on average, reports levels of happiness that do not seem commensurate with its levels of absolute wealth.

Policy Solutions
Let us assume that the subjective well-being of its populace is important to the state. What should it do to deal with the problem of low levels of happiness?  Bartolini proposes three classes of solutions.
  1. Fiscal Solutions: Income taxes and wealth taxes close the gaps.
  2. Redistributive Solutions: Inequality increases positional competition - trampling on your neighbours to get to the top. Reducing inequality would reduce this competition.
  3. Social Solutions: Reduce opportunities for positional competition for 'intrinsically zero sum games'., I am not certain about all of these solutions.  For fiscal solutions I think consumption should be taxed, not necessarily income or wealth.  Why? People try to 'signal' wealth, either proper signaling or false signaling, by conspicuous consumption.  The problem, however, is that at the high end of the income scale no (feasible) amount of consumption taxes would result in certain people choosing not to purchase that Maserati, or that ostentatious mansion, nor do they refuse to have their wealth published in magazines and newspapers. I think that there are viable redistributive and social solutions, but I reserve those discussions for later.

None of this, in my view, requires that we get rid of capitalism, as some people argue.  Capitalism has allowed the contexts in which people compete positionally to proliferate and diversify: when once you would have to fit a fairly strict 'norm' to be happy, capitalist democracies sustain a plethora of new areas in which people can become important to grow and flourish.  There are lots more castles of which you can become the king or queen (or intergender ruler if you prefer).  Think about games from chess, to poker, to MMORPGs; about music, from hip-hoppers, rappers, goths, punks and emos; about sports from football, to rugby, running, cycling, field athletics.  All of these allow people a place in which to exploit positional joy. 

But, at the same time, other resources that sustain happiness and satisfaction have begun to die out and these other things - social capital and the environment - will be the focus of later posts. 

Post Script
Bartolini also comments extensively on negative endogenous growth in the chapter, I am reserving that for another post as I think it warrants its own discussion (and me reading one of the papers on the topic, rather than just a few paragraphs). 

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