The Economics of Happiness

Context

India is among the world’s least happy nations, and became even less happy in the last year, India ranked at 122 out of 155 countries in the World Happiness Report 2017, four notches below its previous rank of 118.

World Happiness Report Criteria

• The happiness rankings are based on six factors:
• GDP per capita,
• healthy years of life expectancy,
• social support (as measured by having someone to count on in times of trouble),
• trust (as measured by a perceived absence of corruption in government and business),
• perceived freedom to make life decisions, and
• generosity (as measured by recent donations)

Growing Importance of Happiness as Measure

• The happiness is increasingly considered the proper measure of social progress and the goal of public policy. So much so that one now reads headlines such as “Happiness is the new GDP”.
• In the US, for instance, the state of Maryland (officially reports a measure called Genuine Progress Indicator which accounts for inequality, environmental degradation, health, and leisure.
• Since the 1970s, Bhutan has been using an index of Gross National Happiness instead of GDP to measure success
• In 2016, Madhya Pradesh became the first Indian state to set up a “department of happiness”

Will we truly be better off with a happiness index replacing the GDP?

Short Answer: The answer suggested by a wide body of research is a big no. And the reason is simple: if finding happiness is difficult, measuring it is even more so.

Long Answer: Reasons

1. A seminal 1964 paper published by the American economist Richard Easterlin showed that happiness and GDP did not move in the same direction although happiness and incomes within countries were correlated. The so-called ‘Easterlin paradox’.
2. A recently published report by the London School of Economics suggests that mental health has greater impact on reported life satisfaction than Income. The income gaps explain only 1% of the variation in happiness in the community whereas differences in emotional well-being explain over 4%, the report found.
3. The study also finds that spending on diagnosing depression and anxiety is likely to reduce misery by 20% which equals the effect of measures that are aimed at eradicating poverty, unemployment, and serious illnesses.
4. Economists and economic policy-makers believe that it is inextricably linked to the pursuit of money and material well-being. To put it rather crudely, many economists think that money does buy happiness, at least till a certain level of income. The problem with such methodologies is that the data, or the answers to the questions, are not independent of space and time. In some countries, people might shy away from responding positively even when they are actually “happy”. On the other hand, some people may be compelled to respond that they are satisfied with their lives because of the prevalent norms in the society or community they live in. This makes the cross-country comparison of happiness deeply problematic.

This is not to suggest that the data on happiness is entirely useless.

But, it is hard to understand what people really mean when they respond to a question such as: “Are you satisfied or dissatisfied with your freedom to choose what you do with your life?”

To aggregate these responses and to come up with a measure that is consistent across time and space appears to be a nearly impossible task.

Conclusion

The variation in well-being as measured by happiness indices is very well explained by a number of economic variables including GDP. The pursuit of happiness, at least for the developing world, lies in the pursuit of wealth and material well-being, irrespective of what the monarchy in Bhutan may say

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Questions

1. What is Gross National Happiness? Explain (150 Words)
2. Despite its fair share of problems, the GDP is a fairly robust exercise and can give policy directions. Comment.

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