Table of Contents
List of Abbreviations
List of Symbols
List of Formulas
1.1. Problem Description
1.3. Scope of Work
2. Theoretical Approach: Economics of Happiness
2.1. Economic Growth and Welfare
2.2. Happiness Economics
2.2.1. Definition and Concept of Happiness
2.2.2. Happiness Research and Measurement
3. Practical Analysis: Relevance of Economic Performance on Happiness..
3.1. Economic Determinants on Happiness
3.2. Critical Review
4.3. Future Outlook
List of Abbreviations
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Regarding the topic of this assignment, this first introductory chapter will provide the situational context through the problem description, present the central objectives and outline the general scope of work of the assignment.
1.1 Problem Description
Everybody wants to be happy. There is probably no other goal in life that commands such a high degree of consensus, because to most people, happiness is all they want and try to achieve. Thus, happiness has long been considered the ultimate human goal in life. Even Aristotle considered happiness the ultimate motive for all human action. In today’s consumer culture, this happiness is often pursued in the marketplace. Yet, economists have refused to deal with individuals’ happiness a long time but considered it to be an “unscientific” concept.1
However, in the past few years the situation has changed and economic science has experienced the introduction or reintroduction of individuals’ happiness into econom- ics. While traditionally economics has almost exclusively focused on consumption, wealth and other monetary indicators to measure individuals’ well-being, it now more and more adopts the subjective notion of well-being to analyze how economic deter- minants such as income, wealth and employment as well as non-economic determi- nants such as personality traits and socio-demographic factors affect individuals’ util- ity and life satisfaction. Although Easterlin already examined correlations between economic growth and welfare and individual happiness, it still took about twenty years for the idea to take off. In the meantime, happiness research and economics has provided many interesting findings and insights. Today, there is a wide range of literature on the so-called happiness economics that analyses individuals’ well-being and its determinants.2
The objective of this assignment is to find out if economic growth and welfare affect happiness and if yes, to what extent major economic indicators such as income, em- ployment and inflation are able to measure and contribute to individuals’ level of happiness.
Thus, the assignment establishes the link between economics and happiness and does not present just another theoretical work on the mere theoretical base but provides empirical results from the current state of happiness research as well as a critical review of the measurement results and outlines the limitations of the mentioned economic determinants regarding their scope and validity.
1.3 Scope of Work
In order to provide the mentioned transfer from the theoretical base to the empirical findings and their critical review, the assignment follows a specific methodological and deductive approach. The logical line of thoughts implicates the formal structure of the assignment, which in detail is composed of the following four main chapters:
Chapter 1 “Introduction“ is essentially a formal chapter which serves as a guideline to present the basic concept of the assignment through the problem description, objectives and scope of work.
Chapter 2 “Theoretical Approach: Economics of Happiness” presents the theoretical foundation of the assignment by outlining the economic context of growth and wel- fare. In addition, this chapter bridges the gap and establishes the connection be- tween economics and happiness by outlining the concept of happiness economics through a broader definition of happiness and its elusive concept as well as the scope of current happiness research and measurement.
Chapter 3 “Practical Analysis: Relevance of Economic Performance on Happiness” provides the transfer of the theoretical approach into practice through analyzing the influence of the major economic determinants income, employment and inflation on happiness by presenting the empirical results from the current state of happiness research. Moreover, this chapter provides a critical review of the measurement results by outlining the limitations regarding their scope and validity.
Eventually, the assignment is completed by chapter 4 “Closing“, which again is a formal chapter to respond to the initial problem statement and objectives of the intro- ductory chapter 1 by providing a summary and conclusion of the essential findings of the assignment as well as a future outlook on the developments in the area of happiness economics.
This composition is based on a wide range of internationally recognized standard works and references as well as latest discussions found in high-quality economic journals and online papers that provide information on the current state of happiness research and measurement.
2. Theoretical Approach: Economics of Happiness
In the context of the presented situational setting, the following chapter will present the theoretical base to the concepts of economic growth and welfare, their traditional measurement and the new development of happiness research and measurement in economics.
2.1 Economic Growth and Welfare
The term economy derives from the Greek word oikonomos, which means “someone who manages a household”. In fact, households and economies have much in common. A household faces many decisions and must allocate its limited resources among its various members, just like a society. The study of how society manages and allocates these limited resources through a system of markets is called economics. Once a society has allocated its resources, it must also allocate the output of goods and services produced. “The percentage increase in the number of goods and services produced in an economy over a period of time, usually expressed over a quarter and annually”3 is known as economic growth.4
In this context, welfare economics is defined as “the study of how the allocation of resources affects economic well-being”5. There are two main distinctions of eco- nomic well-being, subjective and objective well-being. While objective well-being re- fers to measures of the quality of life and uses economic determinants and measures, SWB (subjective well-being) is defined as “the way in which people eval- uate their own happiness”6 that can be determined by both economic and non-eco- nomic factors.7
Economic well-being of a society is often measured by the GDP (gross domestic product) which is defined as “the market value of all goods and services produced within a country in a given period of time”8. In fact, the GDP measures two things at once: on the one hand, the economy’s total income and on the other hand, the total expenditure on the economy’s output of goods and services.9
Thus, the GDP per person presents individuals’ average income and expenditure in the economy and therefore seems a natural measure of economic well-being. How- ever, the GDP does not consider the distribution of an economy’s income but the GDP per person only gives information on the situation of the average individual although there is a wide range of individual situations and circumstances behind. In addition, the GDP only considers paid work as a monetary value while unpaid work such as household and care work remain largely unmeasured although they lead to the production of goods and services as well, e.g. food for own consumption, collec- tion of water and firewood, housecleaning, laundry and care of children.10
Thus, the validity of the GDP as the ultimate measure of well-being has become a controversial issue. Sure, it measures the ability to obtain the necessary input factors for a worthwhile life and thus a large GDP may present an indicator for a high stand- ard of living of a society but not necessarily for individuals’ happiness. In addition, there are other economic as well as non-economic determinants contributing to indi- viduals’ quality of life and SWB that the GDP and other economic measures do not consider.11
2.2 Happiness Economics
Despite the significant increase of the GDP in many industrialized countries over the last 50 years, multiple studies prove that regardless of the increase in income and access to material goods and services the perception of individuals’ happiness has not really changed that much. Increased wealth has not brought a similar increase in happiness but surveys have shown relatively stable rates of happiness in those coun- tries. A group of economists have studied this apparent paradox and stated that “on average, people are no happier than they were fifty years ago”12 in relation to West- ern societies.13
In 2006, someone called Cliff Arnall had developed a formula for calculating and quantifying the state of happiness. Although the scientific basis of this formula was disputed, it provided the necessary trigger for a discussion and debate on what is understood by the term happiness and the effects of individuals’ way of life on SWB.14
2.2.1 Definition and Concept of Happiness
Any discussion of the theory first requires a definition of the term. What is happiness? This simple question is probably one of the oldest in the history of mankind and probably also as difficult to answer.15
The greatest human minds have struggeled with this issue and many efforts have been made in defining what a happy life is and which circumstances make people happy. Ruut Veenhoven for example defines happiness as “the degree to which an individual judges the overall quality of his life favorably”16, in other words meaning how well an individual likes his or her life. However, there has not been any clear understanding and consensus of what happiness is. There is a wide variety of differ- ent concepts involved in the everyday use of this term. It means different things to different people and is open for everyone to define for themselves what happiness is.17
Because happiness is such an elusive concept, the terms happiness, well-being, SWB, satisfaction and welfare are employed interchangeably throughout this assign- ment.18
As mentioned before, there are generally two opposite concepts of happiness: sub- jective happiness and objective happiness. At one extreme, there is subjective hap- piness that refers to individual’s life satisfaction from the internal perspective and at the other extreme, there is the concept of objective happiness which comes close to the idea of utility for identifying the extent of happiness from the external.19
Individual well-being is not an isolated feeling but strongly depends on the conditions in which the persons concerned live. Thus, social comparisons are of great im- portance and have to be taken into account. In addition, individuals do not have a fixed once and for all grid for measurement but they adjust to changing circum- stances.20
2.2.2 Happiness Research and Measurement
Happiness research and measurement has been one of the new developments in economics in recent years and has already provided a substantial amount of new insights and findings. Current research is guided by the question about which factors affect individuals’ happiness and how, supposing that measuring the state of happi- ness requires a set of determining criteria. In this context, economists and psycholo- gists have found a strong correlation between individuals’s perception of their own happiness and certain factors that are contributing such as socializing, relaxing, pray- ing, meditating, eating, watching TV and shopping as well as health and the level of education and income. Other influencing factors refer to the question whether indi- viduals are single, married or divorced, working, unemployed or retired.21
Out of these criteria it is possible to formulate equations for deriving a measure of happiness. These have been tested by both economists and psychologists and proven to be surprisingly reliable from a statistical point of view. One of the leading thinkers in the area of happiness economics is Professor Andrew Oswald from the University of Warwick in Great Britain who developed the following formula:22
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In the context of this formula, Wit denotes the self-reported level of happiness or SWB of an individual i at a specific date or period of time t and X a set of determinants assuming that they affect this well-being at a specific period of time. These could be economic determinants, such as income, but also demographic, such as gender, for example. The final term in the formula represents an error term, which serves to capture the possible influence of other unobserved factors on the final outcome. Thus, an individual’s happiness has a cognitive aspect and is affected unexpectedly strong by his personal aspirations and expectations in life referring to the extent that they have been met.23
Knowing something about the factors that contribute to individuals’ happiness allows for developing a measure that is better at reflecting this well-being than the GDP does, because monitoring and assessing human well-being in a changed world has to go beyond what was developed years ago and demands for exploring new and alternative measures and tools. One such measure is called the MDP (Measure of Domestic Progress) which counts on many of the factors connected to economic growth but also takes into consideration the relative effects and other factors that the GDP calculation leaves unconsidered.
1 Cf. Frey, B. S., Stutzer, A., Testing Theories of Happiness, 2005, p.116-146; Frey, B. S., Stutzer, A., What Can Economists Learn from Happiness Research?, 2002, p.402ff.; Frey, B., Stutzer, A., Happiness and Economics, 2002, p.vii; Ahuvia, A. C., Friedman, D. C., Income, Consumption, and Subjective Well-Being, 1998, p.153; Dixon, H. D., Controversy, 1997, p.1812.
2 Cf. Jahan, S., Human Development Report, 2015, p.iv, 24; Haucap, J., Heimeshoff, U., The Happiness of Economists, 2014, p.2; Lis, J., Nutzen oder Gluck, 2014, p.11-14; Frey, B. S., Stutzer, A., Recent Developments in the Economics of Happiness, 2013, p.ix; Selin, H., Davey, G., Happiness Across Cultures, 2012, p.1; Peil, J., van Staveren, I., Handbook of Economics and Ethics, 2009, p.202; Clark, A. E., Frijters, P., Shields, M. A., Relative Income, Happiness, and Utility, 2008, p.95; Frey, B. S., Stutzer, A., Testing Theories of Happiness, 2005, p.116-146; Van Praag, B., Baarsma, B., Using happiness surveys to value intangibles, 2005, p.225; Dixon, H. D., Controversy, 1997, p.1812f.
3 Mankiw, G., Taylor, M., Economics, 2014, p.9.
4 Cf. Mankiw, G., Taylor, M., Grundzuge der Volkswirtschaftslehre, 2016, p.1-2; Wessels, W. J., Economics, 2012, p.2; Heilbroner, R. L., Milberg, W., The Making of Economic Society, 2011, p.47; Samuelson, R A., Nordhaus, W. D., Economics, 2010, p.4.
5 Mankiw, G., Taylor, M., Economics, 2014, p.169.
6 Mankiw, G., Taylor, M., Economics, 2014, p.169.
7 Cf. Mankiw, G., Taylor, M., Economics, 2014, p.169.
8 Mankiw, G., Taylor, M., Economics, 2014, p.439.
8 Cf. Mankiw, G., Taylor, M., Grundzuge der Volkswirtschaftslehre, 2016, p.628; Jahan, S., Human Development Report, 2015, p. 13, 206, 249; Frey, B. S., Stutzer, A., Recent Developments in the Economics of Happiness, 2013, p.xii; Heilbroner, R. L., Milberg, W., The Making of Economic Society, 2011, p.89; Samuelson, P. A., Nordhaus, W. D., Economics, 2010, p.650.
10 Cf. eds. Helliwell, J., Layard, R., Sachs, J., World Happiness Report, 2016, p.4, 7; Mankiw, G., Taylor, M., Grundzuge der Volkswirtschaftslehre, 2016, p.643-645; Jahan, S., Human Development Report, 2015, p.117, 249; Frey, B., Stutzer, A., Happiness and Economics, 2002, p.36f.
11 Cf. eds. Helliwell, J., Layard, R., Sachs, J., W'orld Happiness Report, 2016, p.4; Mankiw, G., Taylor, M., Grundzuge der Volkswirtschaftslehre, 2016, p.643; Dixon, H. D., Controversy, 1997, p.1814.
12 Mankiw, G., Taylor, M., Economics, 2014, p.450.
13 Cf. Mankiw, G., Taylor, M., Grundzuge der Volkswirtschaftslehre, 2016, p.644; Clark, A. E., Frijters, P., Shields, M. A., Relative Income, Happiness, and Utility, 2008, p.95f.; Easterlin, R. A., Income and happiness, 2001, p.465; Frey, B. S., Stutzer, A., Happiness, Economy and Institutions, 2000, p.919f.
14 Cf. Mankiw, G., Taylor, M., Grundzüge der Volkswirtschaftslehre, 2016, p.644.
15 Cf. Frey. B., Stutzer, A., Happiness and Economics, 2002, p.3; Veenhoven. R., Is happiness relative?, 1991, p.2.
16 Veenhoven, R., Is happiness relative?, 1991, p.2.
17 Cf. Lis, J., Nutzen oder Gluck, 2014, p.14-19; Peil, J., van Staveren, I., Handbook of Economics and Ethics, 2009, p.204f.; Frey, B., Stutzer, A., Happiness and Economics, 2002, p.3.
18 Cf. eds. Helliwell, J., Layard, R.: Sachs, J., World Happiness Report, 2016, p.12; Jahan, S., Human Development Report, 2015, p.71; Easterlin, R. A., Income and happiness, 2001, p.465.
19 Cf. eds. Helliwell, J., Layard, R., Sachs, J., World Happiness Report, 2016, p.11; Frey, B., Stutzer, A., Happiness and Economics, 2002, p.4-6.
20 Cf. Frey, B., Stutzer, A., Happiness and Economics, 2002, p.6.
21 Cf. Mankiw, G., Taylor, M., Grundzuge der Volkswirtschaftslehre, 2016, p.644; Frey, B. S., Stutzer, A., Testing Theories of Happiness, 2005, p. 116-146.
22 Cf. Mankiw, G., Taylor, M.: Grundzuge der Volkswirtschaftslehre, 2016, p.644; Frey, B., Stutzer, A., Happiness and Economics, 2002, p.30f.; Dixon, H. D., Controversy, 1997, p.1813.
23 Cf. Mankiw, G., Taylor, M., Grundzuge der Volkswirtschaftslehre, 2016, p.644; Frey, B., Stutzer, A., Happiness and Economics, 2002, p.30f.