Given that this is what we are all supposed to be maximizing, it's amazing to me that more people don't spend time thinking about this subject. Most people I know are (economists prepare to gasp) not very good utility maximizers. Maybe they're maximizing short term rather than long term utility, but there appears to be no correlation (perhaps even a negative one) between income and happiness after passing through the US Poverty Level.

One colleague uses the equation:

happiness = reality - expectations

I like this because it implies that there are two basic ways to improve one's happiness, and, improving reality should really be the more difficult one.

Below is an impressive article by the Economist on depression, a letter to the editor in response, an article by Brad DeLong on why we haven't reached Utopia that this brought to mind, and a related article by Krugman on similar subjects. I hope you'll agree that the connections between these articles are not illusory.

Happiness is a warm vote

The meaning of life, according to economic theory, is maximized utility. Democracy and happiness, it appears, also have something to do with it

ECONOMISTS are often accused of taking a desiccated view of human motivation. According to standard theory people are rational maximizers of "utility" -- which is the name economists give to whatever it is that people maximize. As it stands, this is hard to disagree with, though not especially revealing. In looser formulations, economists tend to assume that people are mainly out to improve their material standard of living. Demeaning as this idea may be to the human spirit, there is a lot of evidence, based on the way people behave when confronted with choices, to support it. The trouble is, there is also evidence to suggest that money doesn't make you happier -- or not much happier, anyway.

Up to now, studies have tended to find that the strongest influence on happiness is employment: people with jobs are very much happier than the unemployed. Low inflation also makes people happier. Income promotes happiness a bit, but the effect tends to be small and statistically insignificant. In many countries incomes have risen sharply in recent years. This has not increased happiness overall: national surveys of "subjective well-being" have stayed flat. Within countries, comparing people across the income distribution, richer does mean happier, but the effect is not large.

Aside from that, married people tend to be happier than single people, couples without children happier than couples with, women happier than men, white people happier than black, well-educated people happier than the uneducated, the self-employed happier than employees, and the retired happier than the economically active. Age-wise, studies find, happiness tends to fall until you are in your 30s, and then starts rising again.

Until recently nobody had conducted a systematic survey of the effect of political institutions on happiness. On the face of it, this was a peculiar oversight. You would expect people in democracies to be happier than people living in authoritarian states. Even among democracies, you might expect different sorts of constitutional arrangements to be more or less conducive to human flourishing: the resources devoted to demanding and implementing constitutional reform certainly seem to assume this is so. You might expect citizens to be happier in systems that gave them a greater sense of control over what their politicians do, for instance, or in systems that gave them a fuller role as participants.

Devil in the data

Econometrically, the problem is that constitutional arrangements are usually fairly stable. This makes it necessary to compare happiness and political institutions across countries. This has been done, but it is unsatisfactory because in a cross-country comparison many other things vary along with political institutions: it is impossible to isolate the effect of political arrangements on happiness.

Which is where Switzerland -- one country with many political systems -- comes in. Switzerland has a federal structure that reserves major powers to the 26 cantons, and the cantons themselves vary in the ease with which citizens participate. Cantons use assorted instruments of "direct democracy", notably "initiatives" to change the canton's constitution, and referendums to stop new laws, change existing ones, or prevent new public spending. The rules controlling these instruments (the number of signatures required to start an initiative, the time allowed to gather signatures, and so on) differ from place to place. It is, in short, an econometrician's dream.

Bruno Frey and Alois Stutzer of the University of Zurich have studied a survey of 6,000 Swiss residents that asked "How satisfied are you with your life as a whole these days?", with answers on a scale of one ("completely dissatisfied") to ten ("completely satisfied"). These answers were then compared, first with conventional economic and demographic information, and then with the "direct democracy" data for the relevant cantons. The results are interesting.

The standard determinants are found to have their usual effects. Of these, unemployment, as expected, has an especially strong influence: being unemployed reduces the probability of a person's being "completely satisfied" by 26 percentage points. The effect of income, as in other studies, is small and statistically weak.

The effects of the new political variables, on the other hand, are both sizeable and statistically robust. The extent of democracy in the cantons is captured on a scale running from one to six. Messrs Frey and Stutzer find that a one-point increase in this democracy index, after stripping out the effects of the other variables, increases the share of people who say they are very happy by 2.7 percentage points. What this means is that the marginal effect of direct democracy on happiness is nearly half as big as the effect of moving from the lowest monthly income band (SFr980-1,285, or $660-865) to the highest (SFr4,501 and above).

There is an interesting further wrinkle. You might ask, which aspect of direct democracy is it that makes people happier -- the outcome (better government, as one might suppose) or the process? Turning again to their wonderful data, Messrs Frey and Stutzer answer this question as well. Participation in initiatives and referendums is restricted to Swiss nationals. Foreigners living in Switzerland enjoy the better results, if there are any, but only nationals get the benefit of taking part. In fact, it turns out that direct democracy improves the happiness of foreigners and Swiss nationals alike -- but the increase for foreigners is smaller, only about one-third of the increase for nationals. A happy country, it seems, is one where politics is not just a spectator sport.

"Happiness, Economics and Institutions" has not yet been published. A copy can be obtained from Mr. Stutzer, astutzer@iew.unizh.ch. The best published reference is "Happiness and Economic Performance" by Andrew Oswald, Economic Journal (November, 1997).

Dealing with depression

SIR-It was prescient to include an article on depression in the Christmas issue ("Spirit of the age", December 19th); there is some evidence that rates of depression increase after the holiday season. But the central enigma about modern depression is that economic growth does not lower depression; if anything it exacerbates it. For example, India has almost half the suicide rate of America, and rising rates of depression have accompanied generally increasing wealth, comfort and freedom in the West.

Theories compete to explain this paradox, but an old finding from psychological research is pertinent; it seems that the more you give people, the greater their subsequent expectations of life. Yet it is a widening gap between your expectations and what you actually have which predicts unhappiness.

Although it appears ironic, the British National Lottery is reported to offer big winners the opportunity to receive counseling. It seems what is indeed now needed is more psychological education on how to stay content despite increased prosperity. Perhaps it is no coincidence that post-holiday depression after the Christmas period follows a time of abundance and excess.

Maudsley Hospital

The Meaning of Economic Growth: Slouching Toward Utopia

Excerpted from a work in progress by Brad de Long.

Keynes' conclusion was that "a point may soon be reached... when these [absolute] needs are satisfied, in the sense that we prefer to devote our further energies to non-economic purposes." In that case:

"the day is not far off when the Economic Problem will take the back seat where it belongs, and that the arena of the heart and head will be occupied... by our real problems---the problems of life and of human relations, of creation and behavior and religion."

More important, Keynes's predictions have not come to pass. He expected society to undergo a profound change as attention shifted from working hard to keep the wolf from the door to living a good life. But we today do not feel that material acquisition is about to go out of style, we do not appear to be on the threshold of converting en masse from full-time to half-time or quarter-time work, and we have not begun to rank and applaud people by how they spend their leisure as opposed to what they do at work. The dividing line between useful necessity and pointless luxury always comes at roughly twice one's current standard of living. After all, Americans could subsist - healthily - off of wheat flour, evaporated milk, cabbage, spinach, and navy beans for less than fifty cents a day. But, as George Stigler wrote:

"such a diet would not be to the satisfaction of either the population or the students of nutrition.... Man insists upon luxuries such as meat, and should we somehow fully address his desire (despite his penchant for shifting from sow belly to pheasant), he will no doubt insist upon shifting to another and more expensive food.... [T]he economic system has as its purpose forcing people to find new scarcities... the alteration of a host of circumstances and policies that deprive large numbers of people of eminently desirable things that a more efficiently organized society could afford."

So there is no real reason to expect "satiation" at any level of per capita income that I can foresee. The level of luxury at which people imagine satiation is always three times the value of their current consumption.

It is significantly more pleasant to eat broiled sole at Chez Panisse than to munch on a tuna sandwich while sitting on the concrete wall by the North Gate to the Berkeley Campus. It is more fun to write on a powerful laptop PC, while sitting at a tile table in an air-conditioned cafe and drinking cappuccino, than to write on a manual typewriter in a small, hot office while drinking a combination of dishwater and sludge made from instant coffee--or to write with bad ink on parchment by the light of a single candle.

We cannot approach utopia in terms of material welfare because we can always imagine how increased resources could give us a more comfortable and rewarding life. Or perhaps it is better to say that from the standpoint of every previous century we have surpassed utopia, but failed to stop and properly appreciate the accomplishment.

An equally important answer, of course, is that Utopia does not require merely command over nature. It requires command over self, and command over society as well. Command over self is a matter of psychology. [W]e have not achieved utopia--in spite of immense material wealth--because we have approached it as a problem of engineering, and it is in fact a problem of psychology.

The CPI and the Rat Race

New evidence on the old question of whether money buys happiness.

By Paul Krugman in Slate
(1,422 words; posted Saturday, Dec. 21; to be composted Saturday, Jan. 4)

Let's talk about inflation indexing and the meaning of life.

Early this month a panel of economists, led by Stanford's Michael Boskin, made semiofficial what most experts have been saying for some time: The Consumer Price Index overstates inflation. Nobody really knows by how much, but Boskin and company made a guesstimate of 1.1 percent annually. Compounded over decades, this is a huge error.

This conclusion is controversial. Some people are upset because any reduction of inflation estimates will reduce Social Security benefits, which are indexed to the CPI. Others are upset because a revision of recent price history would mean abandoning a worldview on which they have staked their reputations. Quite a few people have committed themselves to the story line that productivity is up but real wages are down. If inflation has been lower than was previously assumed, that means the real value of wages may have gone up after all. And some economists with no particular ax to grind simply have doubts about the methodology.

Boskin may be right or wrong, but one argument by his critics is clearly wrong. They say: Suppose it's true that inflation has been less than the official increase in the CPI over the past few decades. If you assume a lower inflation rate and recalculate real incomes back to--say, 1950--you reach what seems to be a crazy conclusion: that in the early 1950s, the era of postwar affluence, most Americans were living below what we now regard as the poverty line. Some critics of the Boskin report regard this as a decisive blow to its credibility.

The idea that most Americans were poor in 1950 is indeed absurd, but not because of Boskin's numbers. After all, even if you use an unadjusted CPI, the standard of living of the median family (50th percentile) in 1950 America appears startlingly low by current standards. In that year, median-family income in 1994 dollars was only about $18,000. That's about the 20th percentile today. Families at the 20th percentile--that is, poorer than 80 percent of the population--may not be legally poor (only about 12 percent of families are officially below the poverty line), but they are likely to regard themselves as very disadvantaged and unsuccessful. So even using the old numbers, most families in 1950 had a material standard of living no better than that of today's poor or near-poor.

We can confirm this with more direct measures of the way people lived. In 1950 some 35 percent of dwellings lacked full indoor plumbing. Many families still did not have telephones or cars. And of course very few people had televisions. A modern American family at the 12th percentile (that is, right at the poverty line) surely has a flushing toilet, a working shower, and a telephone with direct-dial long-distance service; probably has a color television; and may well even have a car. Take into account improvements in the quality of many other products, and it does not seem at all absurd to say that the material standard of living of that poverty-level family in 1996 is as good as or better than that of the median family in 1950.

What do we mean by this? We mean that if you could choose between the two material standards of living, other things being the same, you might well prefer the 12th percentile standard of 1996 to the 50th percentile standard of 1950. But does that mean that most people were poor in 1950? No--because man does not live by bread, cars, televisions, or even plumbing alone.

Imagine that a mad scientist went back to 1950 and offered to transport the median family to the wondrous world of the 1990s, and to place them at, say, the 25th percentile level. The 25th percentile of 1996 is a clear material improvement over the median of 1950. Would they accept his offer? Almost surely not--because in 1950 they were middle class, while in 1996 they would be poor, even if they lived better in material terms. People don't just care about their absolute material level--they care about their level compared with others'.

I know quite a few academics who have nice houses, two cars, and enviable working conditions, yet are disappointed and bitter men--because they have never received an offer from Harvard and will probably not get a Nobel Prize. They live very well in material terms, but they judge themselves relative to their reference group, and so they feel deprived. And on the other hand, it is an open secret that the chief payoff from being really rich is, as Tom Wolfe once put it, the pleasure of "seeing 'em jump." Privilege is not merely a means to other ends, it is an end in itself.

My fellow SLATE columnist Robert Wright would undoubtedly emphasize that our concern over status exists for good evolutionary reasons. In the ancestral environment a man would be likely to have more offspring if he got his pick of the most fertile-seeming women. That, in turn, would depend on his status, not his absolute standard of living. So males with a predisposition to status-seeking left more offspring than those without, and the end result is Bill G-g-g---I mean, Ronald Perelman.

Is my license as a practicing economist about to be revoked? Aren't we supposed to believe in Economic Man? And doesn't admitting that people care about fuzzy things like status undermine the whole economic method? Not really: Homo economicus is not a central pillar of my faith--he is merely a working assumption, albeit one that is extremely useful in many circumstances.

But admitting that people's happiness depends on their relative economic level as well as their absolute economic resources has some subversive implications. For example: Many conservatives have seized on the Boskin report as a club with which to beat all those liberals who have been whining about declining incomes and increasing poverty in America. It was all, they insist, a statistical hoax. But you could very well make the opposite argument. America in the 1950s was a middle-class society in a way that America in the 1990s is not. That is, it had a much flatter income distribution, so that people had much more sense of sharing a common national lifestyle. And people in that relatively equal America felt good about their lives, even though by modern standards, they were poor--poorer, if Boskin is correct, than we previously thought. Doesn't this mean, then, that having a more or less equal distribution of income makes for a happier society, even if it does not raise anyone's material standard of living? That is, you can use the fact that people did not feel poor in the 1950s as an argument for a more radical egalitarianism than even most leftists would be willing to espouse.

You could even argue that American society in the 1990s is an engine that maximizes consumption yet minimizes satisfaction. In a society with a very flat distribution of income and status, nobody feels left out. In a society with rigid ranks, people do not expect to rise above their station and therefore do not feel that they have failed if they do not rise. (Aristocrats are not part of the peasants' reference group.) Modern America, however, is a hugely unequal society in which anyone can achieve awesome success, but not many actually do. The result is that many--perhaps even most--people feel that they have failed to make the cut, no matter how comfortable their lives. (In a land where anyone can become president, anyone who doesn't become president is a failure.) My European friends always marvel at how hard Americans work, even those who already have plenty of money. Why don't we take more time to enjoy what we have? The answer, of course, is that we work so hard because we are determined to get ahead--an effort that (for Americans as a society) is doomed to failure, because competition for status is a zero-sum game. We can't all "get ahead." No matter how fast we all run, someone must be behind.

If one follows this line of thought one might well be led to some extremely radical ideas about economic policy, ideas that are completely at odds with all current orthodoxies. But I won't try to come to grips with such ideas in this column. Frankly, I don't have the time. I have to get back to my research--otherwise, somebody else might get that Nobel.


At the center of the controversy that may turn American assumptions about the economy on their heads is the Boskin Commission Report. The PoliticsNow Web site has the full text, and the Bureau of Labor Statistics has a whole page devoted to the Consumer Price Index and how it is calculated. The Urban Institute revisits the question of economic inequality in several reports: "Are Justice and Inequality Compatible?" "How Much Do Americans Move Up and Down the Economic Ladder?" and "American Dreams and Discontents: Beyond the Level Playing Field." If it is not standard of living but inequality that causes dissatisfaction in America, then the responsibility for much unhappiness falls on the shoulders of the Forbes 400. This list is designed in a way that can cause even multibillionaire Warren Buffet financial angst: He is only the second-richest man in America.

Paul Krugman is a professor of economics at MIT whose books include The Age of Diminished Expectations and Peddling Prosperity.

Illustrations by Robert Neubecker


Actually, I haven't figured out this stuff yet. My newest thoughts are in the direction of pop psychology: that the two things everyone craves are prestige and security. (I also think there are very good evolutionary psychology reasons for this.)

In general, men crave prestige more and women security, but we all need a mix of both. The question is, how can we reach some level of contentment in these two areas, while still feeling challenged enough to find life fascinating, but without spending large amounts of our time at activities we don't really enjoy?

For additional thoughts on this subject, I would recommend reading The Hungry Spirit : Beyond Capitalism : A Quest for Purpose in the Modern World by Charles Handy. Your Money or Your Life : Transforming Your Relationship With Money and Achieving Financial Independence also has some useful insights, but I think it ultimately misses that most people don't really know what they like to do, and the final chapter has some of the worst financial advice ever put on paper (they don't realize that being too conservative in your investments is just as dangerous as being too risky plus there's significant inflation risks with bonds). Here is an online version of Barry Schwartz's excellent book, The Costs of Living: How Market Freedom Erodes the Best Things in Life, which covers a similar topic.

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