The Wild West ... the outback ... The new world of the 1800s was a time of true liberty. People stood on their own merits. They won or they lost and they reaped the rewards or swallowed the consequences. There were no cubicle dwelling civil servants hell bent on saving you from yourself. No planning permits no licenses no permissions no heritage overlay no bylaw no regulators no inspectors. And guess what ... it worked

This site is set up to provide a forum for a number of like minded professional economists to post and comment on contemporary issues. There are a number of regular contributors whose bios are made available on the site. Most if not all of these contributors use a pseudonym for the simple reason that they are practicing economists who must take into consideration the commercial implications of posting their opinions.

While some may feel that this is a bit of a gutless approach it is the only way we can ensure free and open discussion without jeopardising our paycheques.

Thursday, July 16, 2009

Buffalo Bill on wealth and happiness

Roy Rogers has rightly pointed out the absurdity of measuring happiness according to the method used by the New Economics Foundation. The tragedy is that our own Fairfax journalists could be so uncritical as to accept the report - complete with the conclusion that Australia is a less happy place than various impoverished, war-torn and corruption-ravaged corners of the earth.

A simple look at the study's methodology reveals that the index does not actually measure happiness at all. Since it arrives at its rankings by dividing measures of happiness and life expectancy by a measure of ecological footprint, the best that could be said of the index is that it seeks to arrive at some measure of the average ecological efficiency with which different nations achieve a given level of happiness. If we assumes that there are diminishing marginal returns in this space - i.e. that the effect on happiness of a rise in national income gets smaller the richer a nation becomes - then it would come as no surprise that some of the poorest nations, using low levels of ecological resource to generate low levels of mateiral wealth, would score well on this measure.

That doesn't make them happier. In fact it makes them considerably less happy than their more developed counterparts.

Economists might point to a simpler measure of the relative happiness between nations - revealed preference. Where do people wish to live? If Costa Ricans are the happiest people on earth (as the survey suggests) then we would expect to see a steady flow of (say) Americans getting the first available flight. We might expect illiegal immigration by Americans to become a big political issue in Costa Rica. I am not aware that this is the case.

But it is worth asking what the bigger issue is here. The study so breathlessly reported by the SMH is part of an increasingly cliched attack on policies which seek to improve national incomes. At times, the attack is directed at the economics profession itself. The basic claim is that money doesn't make you happy. That richer nations aren't really any happier than poor ones (once you adjust for ecological footprints etc.).

One of the key findings relied on by attacks of this type is that measures of happiness do not appear to have changed much in the last 60 years, despite considerable gains in global wealth over that period. The conclusion drawn by anti-growth activists is that money doesn't make you happy and that the best approach would be to give up on the goal of boosting growth and incomes.

Money does not guarantee happiness, but poverty is a fairly reliable route to misery. Cross-sectional surveys generally indicate that richer people are happier than poor, and that richer nations are happier than impoverished ones.

But the the claim concerning the lack of increased happiness in the last 60 years can also be clarified through another fundamental economic principle - the distinction between marginal and average effects. It might be true that average happiness is no higher today than it was 60 years ago. But what if the issue was assessed at the margin? That is, what if the choice confronting society was whether to maintain existing levels of income and lifestyle or whether to revert to the levels prevailing 60 years ago?

Given the choice, virtually no one would prefer the levels of income and wealth of 60 years ago - in other words, over this range, there is an increase in marginal happiness associated with increased income and wealth. The same is true in relation to the small-scale actions and decisions made by individuals every day: people take a number of decisions - to go to work, or do some overtime - not because they believe money will buy perfect utopian happiness, but because they have worked out that having a few additional dollars is better than not having them. Of course, this is not to exclude the reality that the quest for material goods also comes up against limits. Few would always pursue monetary gain at the expense of other human needs like social interaction or emotional intimacy.

The fact that measured happiness has not increased over the last 60 years does not show the worthlessness of material gains, but rather points to another eternal human behaviour pattern - the tendency to take things for granted. We all do it from time to time, whether it be our health, friends, family or good fortune in general, we are notorious for forgetting or ignoring how lucky we are. For all our advantages, we still conjure up problems, challenges, complaints. But this is not actually the same as saying that we are indifferent to all our blessings - that they bestow no happiness or that we would just as soon not have them.

It is one thing to say I take my friends for granted. Another entirely to say I wouldn't miss them if they were gone.


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