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Econometrics Of Happiness

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Economics does take growth of income to be desirable, which it can be only if earning more makes people happier. But over the past 40 years, evidence accumulated that people who got richer did not become happier. Richard Layard reviewed it in his Lionel Robbins Lectures in 2002-03. In the 50 years after 1946, Americans’ per capita GDP almost quadrupled. But the proportion of Americans who said they were very happy remained about the same — 1/4-1/5 of the population. The Japanese got six times richer after the War, but were no happier. Europeans came to be asked only from the 1970s onwards. Their answers showed only Danes and Italians to have become happier; the happiness of the rest was impervious to their growing prosperity.
These results were all the more intriguing because every survey showed rich people to be happier than poor people. That applied within countries; it applied between countries as well. The average happiness scores of Indians and Pakistanis were lower than of Britons and Germans. Admittedly, the relationship was not linear; the differences in happiness were not proportional to differences in income. Happiness seemed to increase with income up to a certain level, and then income seemed to stop making people happier. Once a family was making $15,000 a head — Rs 50,000 a month per head — additional income did not add much to happiness. This was consistent with Bentham’s principle of diminishing marginal utility. But Angus Deaton has shown recently that marginal utility does not fall to zero. He regressed satisfaction on log of income, and the relationship came out to be linear. In other words, the same proportional increases of income give the same satisfaction — from Rs 10,000 to Rs 11,000 as much as from Rs 1 million to Rs 1.1 million.

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Why is it, then, that people do not become permanently happier when they get richer? It is because whatever they may think is enough today, tomorrow they will want more. The income people consider satisfactory rises over time, in proportion to their income. Happiness lies only a few thousand beyond their own income. Put another way, high income today makes people happy, but high income yesterday makes them unhappy. It is as if they are jealous of what they were yesterday; the better off they were then, the more miserable they are today. Econometric equations fitted to European data suggest that happiness adjusts itself completely to income in four years; after that, a rise in income has no effect on happiness.
And jealousy applies between people as well. They do not enjoy themselves so much if people around them are better off. And they do enjoy having worse-off people around them. In an experiment, women were shown pictures of models; they felt unhappy. Men were shown the pictures. They felt happy, but they were less happy about their wives.
From these facts, Baron Layard concluded that the greatest addition to the world’s happiness would come if people became more spontaneously generous. He quoted with approval Bentham’s advice to his daughter: “Create all the happiness you are able to create; remove all the misery you are able to remove. Every day will allow you to add something to the pleasure of others, and to diminish something of their pains. And for every grain of enjoyment you sow in the bosom of another, you shall find a harvest in your own bosom; while every sorrow which you pluck out from the thoughts and feelings of a fellow creature shall be replaced by beautiful peace and joy in the sanctuary of your soul.”

The author is Consultant Editor of Businessworld
(Businessworld issue 29 April-05 May 2008)