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Friday, June 13, 2008

What makes us happy?

Economists are often accused of considering that money brings happiness, but I think this is mostly done by people who don't understand and haven't studied economics. One reason this is important is because there are a lot of policy choices that are made that a) pretend that the decisions do not relate to happiness and therefore economics has no role to play, b) pretend that the decisions to relate to happiness and therefore economics has no role to play, c) that the happiness of one person is comparable to the happiness of another person [hint: you can't], or d) that the happiness of one person can be intuited by others [hint: it really can't].

Ineed, economists think happiness is being derived from what we consume, which is comprised of things we buy in the market place but also many things that we do not and cannot buy in the market palce. Moreover, every individual derives their happiness in a completely different way, which is clearly self-evident, but non-economists are convinced that economists believe that only money brings happiness.

What economists would say is that money does allow you to purchase goods and services, but also allows you to buy time (away from work), healthier habits, and so forth. On the other hand, money typically has to be earned, whether through physical or mental effort, and as such obtaining money tends to carry a cost. Therefore, gaining money can be thought of lowering our overall happiness, which is why we all seek a job or career which we love to do; work, which is what we have to do to obtain money, becomes less distasteful.

Nevertheless, economists believe that individuals use their income to purchase goods and services which contribute to, and might even constitute, the entire bundle of goods and services that an individual uses to derive their happiness. However, most people derive their happiness from all sorts of non-market obtained goods and services such as spending time with loved ones, watching a sunset, and so forth.

Notice that there is very little happiness derived directly from money. Unless an individual actually derives happiness from holding, looking at, or counting their money, money itself does not bring happiness. As an economist, I would state that "unless money enters into the utility function, money doesn't bring happiness." However, notwithstanding the geeky economics language, the idea is pretty simple: money doesn't provide happiness, but can provide the means to purchase goods and services that do provide a basis for happiness; however, there might be things for which money itself is not direclty useful for procurring.

All of this buildup has a purpose. Because many people (perhaps even economists) misinterpret how economists relate money and happiness, a cottage industry has been created that tries to measure and guage happiness. There is the "happiness index" where the U.S. is absurdly ranked 150 out of 170 countries, surveys of "what makes people happy," case studies of lottery winners and high-salaried professionals concerning whether these people were happier before or after their new found money [Although I bet the case studies avoid this instance].

Most of this is pointless, mainly because the surveys do not indict economics, at least in my opinion, and the findings are incredibly fragile and, ultimately, suspicious.

However, I did come across this very interesting presentation concerning happiness which had a graph of survey responses that might actually be useful in the investigation of what makes people happy.

The graph depicts the percentage of people who chose what the think might make them happiest, which is different than answering "what makes you happiest." Nevertheless, the cohort answers are striking. For the youngest cohort, the most popular item chosen was "money," with family coming in second. I think people are really thinking that more money will help them buy/consume things that will make them happier. Notice how low the "better possessions" is, which I, as an economist, would have thought this cohort would have chosen most often.

The middle cohorts tend to choose "time with family" more often, with "more money" falling off in popularity. This accords with intuition: people in their 30s, 40s, and 50s tend to have jobs, made career advancements, and money is not as dear as it might have been when you are in your teens and twenties. At the same time, folks in the 30s-50s have spouses, children, parents, and extended family with which they would like to spend more time. I can imagine spending more time with aging parents and perhaps grand-parents is, in the minds of many, something that would generate considerable happiness. Notice again that given the list of options provided the survey responders, they indicated a low propensity to choosing better possessions as that which would make them happiest.

The oldest cohorts turn focus away from family and money and choose better health as that which would make them happiest. Again, this jives with intuition because as we get older, money and possessions are less important. At extended ages, previous generations have passed, perhaps even spouses and some children, along with much of the rest of your generation. Nevertheless, the desire to spend time with surviving children, spouses, grandchildren, and extended family is trumped, it seems, by the health option.

The survey itself asks individuals to express their preference amongst the various options and to that extent asks individuals to use their utility function to express their utility function; something that is a bit of a mind bender. However, here is how I interpret these very general results as an economist.

At a very general level, the various cohorts tend to choose most often that which, in general, their cohorts would be expected to have the least of. If money substitutes for possessions amongst the younger cohorts, then having the fewest possessions when you are young would increase the marginal value of possessions, and thus youngsters would pick money qua possessions. The middle age cohorts have money and health but less time with family, hence time with family has the greatest marginal value and folks thus choose that option. The oldest cohorts have money, family, but good health is perhaps the most scarce of the options offered by the survey. Hence, the older cohorts pick better health.

It might seem that time with family or better health overturns or violates economics and how economists consider happiness, but it does not. Moreover, it is not clear that just because these things would make people more happy that government policy should focus on trying to provide them for everyone. The biggest flaw with the survey (indeed every survey of this kind) is that the survey does not include an income constraint. Every one of the options requires money in some sense. Good health can be obtained in the long run by eating right, exercising, moderating the vices, this does not require money per se but having the time to exercise requires an individual to earn more dollars per hour than less. Good health can also be obtained in the short-run, perhaps through surgery or chemistry, but acquire good health in the short-run requires considerably more money. The same pertains to spending time with family. To spend time with family costs time working, which in turn costs the money that could be earned.

Individuals might choose more time with family and in the process sacrifice income, but that should be their choice. Individuals should not be granted time with family by way of a government check, financed through the taxation of someone else.

We witness how people behave in the real world when they face choices, prices, and an income constraint. Although economists tend to discount surveys heavily, I think this particular graph is as good as it might get in the search for happiness and the ax-grinding that passes for science in this area.

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