Empirical laws in happiness economics

First insertion on Heterodox Gazette Sam de Wolff: 14 september 2014

E.A. Bakkum is a blogger for the Sociaal Consultatiekantoor. He loves to reflect on the labour movement.

A merit of the new discipline of happiness economics is that various new empirical laws have been discovered, that describe human behaviour. The present column gives a summary of some laws, by means of four recent books: Happiness and economics by Bruno Frey et al., Happiness quantified by Bernard van Praag et al., Happiness by Richard Layard, and Economics, ethics and the market by Johan Graafland1. Notably it is studied how happiness, utility and satisfaction relate to welfare, work and income, politics, ethics, and the neoliberal dogma.

Economics is sometimes defined as the study of human behaviour in relation to the goals and the scarce means, that are available for realizing those goals. It is generally assumed, that each individual i chooses his goals in such a way, that the total realized utility ui of that individual is maximized. In other words, his needs must be optimally satisfied, so that the highest welfare is reached. For society as a whole the people together try to maximize the total realized social welfare W. The social welfrare function W depends on the individual needs, and therefore in a society with N individuals has the utilities ui (i=1, ..., N) as her parameters.

The individual utility functions ui are very complex. Moreover, the individuals are mutually very different, and even to such an extent, that indeed each individual is unique. Therefore it is unthinkable, that once the social welfare function W(u1, ..., uN) wil become exactly known. But in spite of the uniqueness of each individual the human species turns out to have a collective human nature or disposition, so that al least for large numbers the human behaviour is still predictable. Already in 1835 the Belgian A. Quetelet stated, that an "average" man exists. That is to say, that the human qualities are spread around a universal average value according to a normal distribution.

The study of the collective human behaviour really took off during the second half of the twentieth century, notably thanks to the progress of the psychological and sociological sciences. For many decades economics was unwilling to follow this development, and even belittled it. It fears, that her authority will be undermined by the subjective and sometimes speculative character of the study of human behaviour. Yet among the economists the notion grows, that the economic processes can not be really understood, as long as the human element in it is ignored. Therefore also economists increasingly enter this discipline, that has been called the theory of social well-being, or the happiness economics. The granting of the Nobel price award for the work of Daniel Kahneman is an extra stimulus for the interest in the new discipline.

The present column aims to present several important insights, which since have been obtained from recent research. The most important scientific instrument is the interview. Large groups of people are questioned with regard to their satisfaction about various subjects, and about life in general. At the same time the backgrounds of the individuals are registered. Thanks to such sets of data statistical correlations and laws can subsequently be derived.

The analysis of human happiness

The essential question in happiness economics is: considering everything, how satisfied are you with your life in general? The questioned individual i is requested to express his answer Y in a whole number on a scale between 0 and 10. Thus the researchers can register the relation Yi = ui(x1, ..., xM, ε), where xj (j=1, ..., M) are the various qualities of the individual i. The variable ε is a remainder, which represents the omitted qualities, and therefore depicts the uniqueness of the individual. This model makes clear, that the opinion poll is determined by the perspective of the researcher. For, the researcher selects the M qualities, that might probably be relevant. In other words, both the answers of the individuals and the study itself are subjective. However, thanks to the application of scientific criteria and standards the perspective of the researcher can be controlled to a large extent.

The presented question about satisfaction does not reveal the motives, that are relevant for the satisfaction with life as a whole of the individual. This detailed information can be obtained by posing more direct questions about the satisfaction in the various aspects of life, sometimes called the domains of life. For instance, on p.92 Van Praag distinguishes between the following domains: job, finance, housing, health, leisure time, and family and friends. Unfortunately the theory has not yet advanced to the point, where agreement is reached on the essential domains. A standard is lacking, so that each researcher invents his own domains.

The domains can be divided further into so-called subdomains. The subdomains are not a quality xj (such as age), but a source of (dis)satisfaction. For instance, on p.97 Van Praag divides the domain of the job into the chance of promotion, income, management, job security, personal development, job contents, and labour time. The domain satisfactions can correlate mutually, through both the individual qualities and the subdomains2. Furthermore, an increasing degree of detail in the study will increase the effect of the subjectivity of the researcher on the results. This makes it difficult to compare the results of the various scientific studies. A quantitative comparison is usually impossible, so that the conclusions must focus on merely the observed trends.

Some examples can illustrate the sketched state of affairs. Suppose that there are K domains. Then the average general satisfaction AT can be divided into the domain satisfactions DTk by means of the formula AT = Σk=1K αk × DTk. On p.93 Van Praag has applied this method on data sets from Germany and England. The results are summarized in the table 1. It turns out, that the Germans mainly attach importance to the financial situation with regard to their general satisfaction. The health and job are also important. The British data set uses slightly different domains. Now it turns out, that the friends, job, health and leisure are all roughly equally important.

Table 1: contributions of domains to the satisfaction3
 Van PraagFreyLayardGraafland
leisure time 0.036   
friends0.0350.116 xxxxxxxxxx
family 0.0710.171xxxxxxxxxx
political rights  0.081xxxxx 
meaning   xxxxxxxxxx

Layard states on p.62 and further, that there are five essential domains for happiness: the family, finance, job, friends, and health. Besides, the political and economical institutions are relevant, as well as meaning. Layard cites several results from other studies. Happiness is undermined mainly by a divorce, dismissal, or a failing health. At first sight this confirms the findings of Van Prag. However, the nuance is different, because Layard gives the highest priority to family life. And Layard believes that a dismissal has a disastrous effect, whereas on the other hand according to Van Praag people are not very attached to their job security. The explanation of these differences would require a study in itself.

Frey considers the following factors of influence: age, gender, nationality, health, education, family, socio-economic conditions, and institutional conditions. Note, that factors such as age, gender etcetera are not a domain, but a personal quality. On p.60 and further Frey analyzes a Swiss data set. Thus he discovers, that individuals at the age of sixty or more are clearly more satisfied than young ones. A divorce has an appreciable negative effect on happiness, as well as health problems. This agrees with the findings of Layard. Several weighing factors from the study of Frey have been included in the table 1.

Frey distinguishes between three subdomains of the socio-economic conditions, namely the income, employment, and inflation. Unemployment definitely affects happiness, as well as inflation. Incidentally, the latter factor has not been studied by Frey himself. It is remarkable that the author supposes, that economic growth hardly affects happiness. Furthermore, he studies the institutional conditions, notably the peculiarities of the Swiss political system. He concludes that this system contributes positively to the happiness of the people.

Graafland obtains his knowledge from the research of others, just like Layard. On p.123 he cites results, that attach happiness mainly to the daily life: marriage, meaning, job, family and friends. It is somewhat surprising, that health is missing in his list. Perhaps Graafland identifies meaning with a healthy mind. For, especially the mentally ill lead a life of suffering. The view of Graafland is also included in the table 1.

Happiness and welfare

Economics is interested in the correlation between happiness and welfare. In the past this correlation could not be measured in a quantitative manner, so that for the sake of convenience economists tend to identify welfare with happiness. However, their hypothesis is a mistake. And even when the study is restricted to job satisfaction, then there are still numerous other motives than the income motive. Nevertheless, due to the traditional focus on income it is understandable, that the happiness economists have studied especially the income satisfaction. Since a long time it is known, that the supply of labour (that is to say, the demand for jobs) reacts in a rather capricious manner on the wage level. When the wage is very low, then the income is vital for acquiring the basic existential goods. As soon as these are obtained, then the individual has some latitude in his choice of working hours.

In this respect it is convenient to distinguish between absolute and relative poverty. Absolute poverty emerges directly from the human needs, and affects the lowest incomes. Relative poverty is determined mainly by the social view on individual welfare. Then poverty is caused by the lack of the so-called status goods. In the modern western societies poverty is mainly relative. On p.111 Graafland states, that then the needs originate more from the social competition than from absolute standards. On p.41 Layard states it slightly differently: people feel more unhappy according as they are poorer than their environment. This statement makes clear, that the individuals have a reference group for the comparison with their own welfare. See for instance chapter 8 in Happiness quantified. This phenomenon can naturally be belittled by calling it envy. But nevertheless the fact remains, that it truly causes misery.

On p.43 and further, and again on p.135, Layard presents a surprising conclusion: as soon as the income of a single individual improves, whereas all else remains equal, then this causes external effects in society. For, the individuals in his direct environment will be less satisfied with their own income. The statement undermines the Pareto principle. This is: an economic system is Pareto optimal, when the production and the distribution with the social resources and technical possibilitis are organized in such a manner, that no individual can improve his situation without hurting another individual. However, according to Layard each individual improvement automatically leads to a deterioration for many others! Inequality is a curse. Yet the Pareto principle is often applied, notably to criticize measures of redistribution, such as taxes.

Graphs of happiness versus income
Figure 1: Happiness as a function of the yearly income:
     (1a) various states; (1b) within a state

The figure 1 illustrates the phenomenon of the reference group. The figure 1a shows how in various states the average happiness of the citizens varies with the yearly national income per citizen (see for instance p.32 in Happiness). When the national income per citizen is less than $20.000, then there is an absolute poverty. The happiness is rising. But above that income the average happiness appears to be constant, although there is a large spread. Apparently other states are not used as a reference group. In the figure 1b the variation of the individual happiness versus the individual income is depicted for Germany (see p.19 in Happiness quantified). Now a permanent raise of happiness does occur. Apparently the fellow-countrymen do enter the reference group.

It is obviously not simple to determine precisely the composition of the reference group. According to Layard on p.45 the family and the colleagues are certainly included. According to Frey on p.88 reference groups could be based on gender, age, and profession. Further on he states, that the gender is not very relevant. On p.161 Van Praag shows by means of statistics, that individuals compare their incomes mainly with acquaintances, that earn more. A poor individual has more of those acquaintances, and feels less happy. Furthermore Van Praag investigates by means of statistics, whether age, education, profession and income are relevant for the reference group. On p.174 he states, that individuals include in their reference group mainly others with a comparable income. The other qualities, such as age, are hardly relevant. This is in conflict with the statement of Frey. The reader sees that it is difficult to arrive at a scientific consensus.

The work of Van Praag excels in originality and depth, in comparison with the other consulted sources. On p.161 he proves by means of statistics, that the increasing happiness is not just caused by a higher (relative) social status, but also by the (absolute) luxury in itself. And in the chapters 13, 14, 15 and 16 Van Praag extensively discusses the inequality of incomes in the various states. He states that actually there is no satisfying objective measure for expressing poverty. Therefore he proposes a subjective measure, where the individuals themselves are asked about their degree of poverty. Since this theme has been treated before in the column about the social character of individual preferences, it will not be repeated here. However, in the future your columnist hopes to return to this theme of income inequality on a regular basis. The present column merely outlines the framework.

Changing happiness

Graphs of indifference curves
Figure 2: Indifference map u[xa, xb]: (2a) map at the start;
     (2b) map after changes and habituation

All authors mention the curious phenomenon of the preference drift. This implies the people expect too much happiness or utility from the possession of a certain good. As soon as they truly obtain the good, for instance a raise of their wage, they start to get accustomed. After some time the possession of the good is experienced as self-evident. So the euphoria peaks in the period immediately after the acquisition. That is to say, people are bad at seeing beyond their present-day utility field4.

This phenomenon is depicted graphically in the figure 2, which shows a hypothetical iso-utility field at two times. In the figure 2a the individual owns quantities [xa, xb] of the products a and b. See the green dot. His experienced utility is u=0. Some time later the quantities have increased in the way, that is depicted in the figure 2b. However, the utility is not increased to u=3, which was expected, but to u=1. The individual also discovers new iso-utility curves, as is shown in the figure 2b. Van Praag has studied the preference drift notably for changing incomes. The figure 3 is based on p.42 of his book and shows the income satisfaction u(y) in the short and long run. The individual starts with an income y0, which is raised by Δy. The short run curve matches the expected utility u(y). The long run curve shows the utility after habituation and adaptation to the new situation. The difference at y+Δy is striking.

Graph of income satisfaction
Figure 3: Income staisfaction
   (short and long run)

On p.78 and further Frey introduces the concept of the ambition level. The basic idea is similar to the idea of the preference drift. The difference is that the ambition level can vary vehemently, when the income increases. For, the concerned individual will henceforth choose a new reference group. Then it is conceivable, that he dislikes his new situation in comparison with the new reference group. Thus his happiness could even diminish after the raise in income. Frey represents the change of the ambition level graphically by means of a downward (or right-shifting) curve of the expected utility.

Your columist believes that the concept of the ambition level is less useful than that of the preference drift. For some persons a rising income can naturally turn into a frustration. But from a statistical perspective it is obvious, that in general a rising income will turn out positive. And happiness economics searches for the universal, and not for the exception.

An obvious question concerns the degree, in which the preference drift occurs in other domains than the income. Layard on p.69, and Frey on p.56 mention, that it strongly affects the health. Namely, individuals with a chronical disease or handicap commonly succeed in leading a normal and happy life. They adapt. Unfortunately, there is also a group of sick or handicapped people, that does not succeed in surmounting their physical mishap. Therefore on average health is still essential for happiness. Besides, on p.49 Layard states, that happiness due to family and friends hardly drifts. Your columnist explains this durability by the love, that according to Frijters is the hallmark of emotional ties. The accessibility of family and friends never gets self-evident, like possession, but she remains dependent on the good will of the others5.

The satisfaction of a job and income

The job satisfaction has been discussed previously, in the column about the motivation to work. The pleasure of work has been the subject of studies for at least a century, where Herman de Man may be called one of the pioneers. The name-giver of this portal, Sam de Wolff, has also studied the (dis)pleasure, resulting from work. The theme is important to such a degree, that in future it will regularly return here. In any case, it has become clear, that besides the income motive there are other motives for the job satisfaction. In particular the performance motive and the contact motive have been mentioned. People are even willing to give up a part of their wage, as long as they are compensated by better working conditions. This is called the compensating wage theory.

Although people feel that their job is a duty, the dismissal can affect them emotionally to the same degree as the divorce from their spouse. See Layard on p.15 and p.67, and Frey on p.95 and further. The dismissal restricts the social environment of the worker, and affects his self-respect. According to Frey on p.97, in Swiss the average happiness is 8.21 for workers (on a scale of 1 to 10) and merely 6.56 for unemployed. This can not be explained by just the lost income. Apparently a job does have an instrinsic value, and unemployment is a social disaster.

Layard shows on p.158 and further, that too much attention for a reward can even undermine the intrinsic motivation. Graafland concludes the same on p.244 and further. Sometimes the utility is incommensurable, that is to say, the offered reward decreases the value, that the worker previously attached to his activity. This is called crowding out. Here the operation of the market, which labels everything by its price, and relies on the income motive, collides with the professional pride.

Thanks to the economic growth the national income increases continuously. Yet this contributes little to the individual happiness, as long as the inequality of incomes is conserved. The sociologist Stollberg even states, that in East-Germany between 1967 and 1977 the job satisfaction has fallen. He believes that the workers make higher demands to the quality of labour, and demand a better balance of work and leisure time. Since happiness correlates strongly with changes, Graafland stresses on p.66, that the raises of the wage are more important for happiness than the absolute wage level.

Finally, a striking observation of Frey must be mentioned, namely that happiness is negatively affected by inflation. See their chapter 6. According as the inflation behaves more capriciously, the people must make more efforts to soften the consequences. This leads to a growing dissatisfaction. Apparently the policy of price stability contributes to happiness. However, here a balance must be found, because under normal conditions a falling inflation is commonly accompanied by a rising unemployment.

Politics and well-being

The research instruments of happiness economics originate mainly from the sociology and psychology. Therefore they can be applied simply to study the satisfaction in various domains, including politics. Actually such studies border on the field of political science. Nevertheless, both Van Praag (in chapter 5) and Frey (in chapters 7, 8 and 9) have engaged in them. The study of Van Praag is too general for a presentation in an introductory column. However, Frey focuses on two institutions, which characterize Swiss, namely the local autonomy (federalism) and the referenda (direct democracy). Both institutions turn out to contribute statistically to the happiness of the people.

This find is naturally encouraging for all persons, that support the democracy. But yet these results also shown, that the interpretation of these statistical date must be done in a careful manner. Both the federalism and the direct democracy have various hurtful side effects. In the Swiss situation: the people have rejected and blocked both the Swiss membership of the United Nations and of the European Union. More generally, politics affects all social domains. Even when politics itself leads to discontent, then its actions can still increase satisfaction in a quasi unobserved manner.

Ethics as a source of happiness

Photo of pin Natuurvrienden
Figure 4: pin IvAO

Happiness economics is obviously based on utilitarism. But there is more. Layard explains in his chapter 7, that shared morals lead to a happier society. Trust, justice and harmony are achievements, that reduce the transaction costs in the economy. Rules prevent that individuals yield to short-term temptations, and guide citizens to a more durable happiness. Rules are naturally also paternalistic and constraining freedom, so that a just balance must be found. A personal ethics makes individuals more steady and able to resist. Layard indeed dedicates a chapter to spiritual formation, by means of mysticism, Buddhism, and cognitive therapy. A separate chapter is dedicated to the positive effects of psychical medication. Especially individual with a mental disturbance suffer extremely.

It has been stated previously, that stable communities further the individual happiness. Also Frey cites on p.59 several studies, that prove the correlation between religion and happiness. However, he points out, that perhaps the causal relation is reverse, so that happy individuals tend to join churches. Graafland even discusses the correlation between morals and well-being as his core theme, so that this column can not present all his findings. He argues on p.85, and actually everywhere in his book, that imperfect markets destroy themselves, when the ruling morals are absent. On p.245 and further he shows that the market stifles the morals, that are its foundation. On p.133 he states, that the society and the institutions can not be reduced to individual activities. And on p.105 he states that social norms and mutual trust are a social capital.

Neoliberal threats for happiness

The preceding discussion shows, that a neoliberal economic policy negatively affects the general welfare. The neoliberal emphasis on reward tends to increase the inequality of incomes, which causes discontent among those with lower incomes6. Moreover it has been explained, that the neoliberal emphasis on remuneration can reduce the intrinsic motivation, and thus is a faulty allocation of means. Furthermore the neoliberal ideologists apply a rigid version of the neoclassical theory, which presents unemployment as a conscious choice of the concerned group. They would simply give up wage in exchange for more leisure time. However, it has just been shown, that this group truly becomes less happy due to their unemployment.

The effort to make the production factors more mobile is a hallmark of the neoliberal ideology. They must be utilized in those places, where their productivity is highest. In particular this means, that neoliberal economists expect, that the workers are willing to migrate, if necessary. They ignore the fact that migration imposes high emotional costs on the concerned. On p.138 Layard states, that their family life is disrupted, and that of their community. On p.179-180 he states that in communities with much mobility the coherence weakens and crime increases. All these extra costs are not taken into account in the liberal plea for more labour mobility7. On p.160 and further, Frey shows that the foreigners living in Swiss are structurally less happy than the native population. Here a correction is made for the difference in incomes and the like.

On p.120 and further Graafland also states that the pressure to increase mobility affects the social coherence. Besides, he points out, that the pursuit of more status goods requires more intermediate products, such as travelling time. A part of the consumption is explicitely directed at the saving of time. It has just been explained that according to Graafland the morals are indispensable for the durability of the market. But the neoliberalism wants to deregulate markets and leave them to themselves. Finally, on p.196 and p.217 Graafland makes the interesting remark, that de distributive justice must be based on interpersonal comparisons. The neoliberal ideology wants to avoid these.

  1. See Happiness and economics (2002, Princeton University Press) by B.S. Frey and A. Stutzer, Happiness quantified (2004, Oxford University Press) by B.M.S. van Praag and A. Ferrer-i-Carbonell, Happiness (2005, The Penguin Press) vby R. Layard, and Economics, ethics and the market (2007, Routledge) by J.J. Graafland. (back)
  2. Incidentally, sometimes an individual quality coincides with a subdomain. Thus Van Praag uses the wage as an individual quality, and the satisfaction with the wage as a subdomain. Once again, the domain satisfactions are mutually dependent due to the individual qualities and the subdomains. However, the individual qualities and the subdomains do not explain the total domain satisfaction. On p.88 in Happiness quantified the hidden correlation between the domain satisfactions are also analyzed in detail. This is done by first computing the satisfaction of domain k as DTk = Σs=1S βks × xks + εk. Here the xks are the individual qualities s, that correspond to the domain k. The variable εk is the remainder of DTk, which can not be explained by the individual qualities xks. Next, the correlation between two domains k1 and k2 is computed from the covariance of the two remainders εk1 and εk2. An example can illustrate this: suppose that the individual is allowed to use various equipments of his employer for free (car, tools, office stationery). Van Praag has ignored this in his choice of individual qualities, that are included for the explanation of the domain satisfactions of the job and of finance. Therefore both domains have absorbed the effect of the free equipment in the corresponding remainders ε(job) and ε(finance). Thus the two remainders become correlated. As a test Van Praag applies his analysis to the statistical data set of the British workers, that are married. Indeed it turns out, that according to his computations the remainder of the satisfaction with finance correlates more with the remainder of the job satisfaction than with the remainders of the satisfaction in the other domains (where the cause of the correlation is naturally unknown). In the same way Van Praag finds the largest values of mutual correlations for the satisfaction with the domains recreation, leisure time, and acquaintances. Apparently Van Praag did not succeed completely in coupling these domains to the relevant individual qualities, resulting in the absorption of these unknown individual qualities in the remainders. It is not surprising, that the unknown factors are connected precisely in these three domains. Van Praag could also have performed this analysis of the mutual correlation by a decomposition in the satisfaction in the subdomains instead of the decomposition in the individual qualities. (back)
  3. In the table the relative proportions of the numbers within a column must be compared. The absolute values of the numbers are chosen arbitrary, and thus the states can not mutually be compared. See p.90 in Happiness quantified for the statistical data of West-German workers, and p.91 for the statistical data of British workers. The Swiss data are on p.187-189 of Happiness and economics, and are slightly changed in table 1. Namely, in his analysis Frey always uses a reference group. Thus in the table 1 for Swiss the job satisfaction is actually the discontent of an unemployed individual. According to Frey the unemployment is experienced as a disaster. On the other hand, house-wives and students are as satisfied as paid workers. Similarly, here the satisfaction with health is actually the discontent of sick people. And the family satisfaction is actually the discontent of unmarried singles. Divorced individuals are even more unhappy. The financial satisfaction in Swiss is here the income satisfaction of the middle class with respect to the groups with lowest pay. Layard gives on p.63 in Happiness his list of priorities. See for the priorities according to Graafland on p.123 in Economics, ethics and the market. Here the satisfaction with health is apparently replaced by the mental stability, which is designated as a good psychological disposition by Graafland. According to Graafland for instance an own house is less important. He concludes that apparently the happiness increases more with leisure time than with income. This contradicts the British data set, which shows that people are satisfied with the amount of leisure time. It also contradicts the find, that Germans attach much value to their financial circumstances. (back)
  4. The Flemish singer Wannes van de Velde understood this, and therefore writes in his song Ik zing van de dagen: Today I am here in the agricultural nature, / that is better than mortar and stone, / but where I will be three days later, / that is only known by the gods. / Perhaps I will be rich and honoured by all / and live in a fortress or castle. / It is more likely that I will die in misery, / isolared on my last journey. / But I sing of the days / and I sing of chagrin, / the sun and the rain / they bring no pain. / I do not want to complain, / then I feel tiny. / There are so many days / to be happy. (back)
  5. See An economic theory of greed, love, groups and networks (2013, Cambridge University Press) by P. Frijters and G. Foster. The singer Jaap Fischer (alias of Joop Visser) criticizes in his song Dank u the insignificance of the unconditional favour: Thank you for the good life, / that was simply given to me. / Thank you for the life in luxury, / without illness, without worries. / Thanks you for all marks of honour, / for the palm trees and the prices. / Thank you for the abundance, / and the safe existence. / But considering all, / and summing up, / this is not a world, / where I would like to return. / Thank you, thank you. / Thank you for the friends. Thank you for the women, / the warmth and love, / as if it were one large feast. / Thank you for the happy lust / of all those intimacies / and most of all the unwanted ones. (back)
  6. Dick Pels advocates in his book De economie van de eer (2007, Veen Bosch & Keuning uitgevers N.V.) the development towards an aristo-democracy, where the social elite is content with symbolic marks of honour. Sixty years before, Ed. van Cleeff made the same proposal in his book Sociale economische ordening (1947, Van Loghum Slaterus Uitgeversmaatschappij N.V.). The suggestion looks rather unrealistic. Moreover, Van Cleeff wants to combine the aristo-democracy with a rigid economic plan, which since has been discredited. (back)
  7. Recently the Dutch government decided to force the recipients of relief to move house, when this allows them to get a job. The reader may consider, that the recipients of relief are in a vulnerable situation, and more than others need support from their environment. The argment in this column shows, that the obligation to move is apparently mainly a punishment. (back)