Happiness and Economics: How the Economy and Institutions Affect Human Well-Being. - Softcover

Frey, Bruno S.

Softcover

ISBN 10: 0691069980 ISBN 13: 9780691069982

Publisher: Princeton University Press, 2001

Synopsis

Curiously, economists, whose discipline has much to do with human well-being, have shied away from factoring the study of happiness into their work. Happiness, they might say, is an ''unscientific'' concept. This is the first book to establish empirically the link between happiness and economics--and between happiness and democracy. Two respected economists, Bruno S. Frey and Alois Stutzer, integrate insights and findings from psychology, where attempts to measure quality of life are well-documented, as well as from sociology and political science. They demonstrate how micro- and macro-economic conditions in the form of income, unemployment, and inflation affect happiness. The research is centered on Switzerland, whose varying degrees of direct democracy from one canton to another, all within a single economy, allow for political effects to be isolated from economic effects.


Not surprisingly, the authors confirm that unemployment and inflation nurture unhappiness. Their most striking revelation, however, is that the more developed the democratic institutions and the degree of local autonomy, the more satisfied people are with their lives. While such factors as rising income increase personal happiness only minimally, institutions that facilitate more individual involvement in politics (such as referendums) have a substantial effect. For countries such as the United States, where disillusionment with politics seems to be on the rise, such findings are especially significant. By applying econometrics to a real-world issue of general concern and yielding surprising results, Happiness and Economics promises to spark healthy debate over a wide range of the social sciences.

About this title

About the Author

Bruno S. Frey is Professor of Economics at the Institute for Empirical Research in Economics in Zurich. He is the author of Economics as a Science of Human Behavior, Not Just for the Money: An Economic Theory of Personal Motivation, The New Democratic Federalism for Europe and Inspiring Economics. Alois Stutzer is a lecturer on the theory of economic policy at the University of Zurich. He has authored several papers in the fields of public choice, labor economics, and economics and psychology.

From the Back Cover

"This is a first-class book. It is a great read whether you are a social scientist or just someone who wants to understand what makes human beings tick. It will even make you happy. Frey and Stutzer's timing is perfect. They have written a marvelous book just as the field is about to take off. Their scholarship is excellent; they write beautifully; the topic is important. Terrific work."--Andrew J. Oswald, Warwick University

"This is a timely, excellent, insightful, and highly readable book by two authors who have an obvious command of their subject. It should become the standard reference text on the rapidly expanding academic study of happiness. It will appeal not only to a wide range of social scientists but also to a wide public audience outside academia. Bruno Frey and Alois Stutzer offer a comprehensive historical account that also reaches to the limits of our current understanding."--Robert MacCulloch, London School of Economics

Excerpt. © Reprinted by permission. All rights reserved.

Happiness and Economics

HOW THE ECONOMY AND INSTITUTIONS AFFECT WELL-BEINGBy Bruno S. Frey Alois Stutzer

PRINCETON UNIVERSITY PRESS

Copyright © 2002 Princeton University Press
All right reserved.
ISBN: 978-0-691-06998-2

Contents

Preface..................................................................................viiChapter 1 Happiness.....................................................................3Chapter 2 Well-Being and Economics......................................................19Chapter 3 Personality and Socio-Demographic Influences on Happiness.....................49Chapter 4 Income........................................................................73Chapter 5 Employment....................................................................95Chapter 6 Inflation.....................................................................111Chapter 7 The Current Politico-Economic Process.........................................121Chapter 8 Constitution: Popular Referenda and Federalism................................133Chapter 9 Outcome and Process...........................................................153Chapter 10 Happiness Inspires Economics.................................................171Appendix A...............................................................................185Appendix B...............................................................................191References...............................................................................195Data Sources.............................................................................215Index....................................................................................217

Chapter One

HAPPINESS

1.1 The Ultimate Goal?

"What is happiness?" This question is probably as old as mankind itself. The greatest human minds have struggled with this issue. A large part of philosophy has been concerned with defining what a good and happy life is. Similar efforts have been made by psychologists, who have dealt with what particular ingredients and circumstances make people happy or unhappy.

But there has certainly not been any consensus as to what happiness is. It means different things to different people. It is open for everyone to define for themselves what happiness is. Some people are prepared to argue that it is the ultimate goal in life. All other influences on life (and even afterlife) are taken to be reflected in the notion of happiness. Therefore all that we do is pursue happiness. One author even proclaims, "How to gain, how to keep, how to recover happiness is in fact for most men at all times the secret motive for all they do" (James 1902, p. 76).

Some people disagree about happiness being the ultimate goal of human life; they see it as just one ingredient in the recipe for a good life. Thus, for example, three ultimate goals have been distinguished, none of which can be merged with, or be made subordinate to, another. They are subjective well-being (another term for happiness), human development (which is taken to include virtue), and justice (Lane 2000). Other authors mention companionship and freedom as ultimate goals on a par with happiness. Yet others consider an even larger set of factors to be important in addition to happiness. Examples of these factors are trust, self-esteem, absence of pain, satisfaction with one's work, and satisfaction with one's family life and marriage. In addition to these states or outcomes, procedural aspects may play a significant role. Most persons derive great pleasure from engaging, challenging activities. The emphasis on process rather than outcomes has been called the flow aspect of life.

Because happiness is such an elusive concept, it makes little sense to proceed by trying to define what happiness is. Fortunately, there is a useful way out. Instead of trying to determine what happiness is from outside, one can ask the individuals how happy they feel themselves to be. In general, it can be assumed that they are the best judges of when they are happy and when they are unhappy. While there are limits to how well people are able to evaluate their future state of well-being, it corresponds to a sensible tradition in economics to rely on the judgment of the persons directly involved, so that will be the procedure followed in this book.

1.2 Concepts of Happiness

In this book, we follow a subjective notion of happiness. Even if we are restricted to such a notion of happiness, there are a number of concepts on how to capture it. It is useful to look at two polar concepts of happiness: subjective happiness and objective happiness. (See Figure 1.1.) At one extreme, we have the concept of subjective happiness, which can be captured by surveys, and is indicated on the right-hand side of Figure 1.1. With the help of a single question (single-item) or several questions (multi-item) of global self-reports, it is possible to get indications of individuals' evaluations of their life satisfaction or happiness. Behind the score indicated by a person is a cognitive process by which he or she evaluates happiness compared to other persons, past experience, and expectations of the future.

Figure 1.2. Satisfaction with life in the United States in 1995. The number of observations is 1534. Data from World Values Survey 1995–1997, ICPSR 2790. Figure 1.2 presents an example of the measurement of subjective happiness via global self-reports. The example refers to the distribution of life satisfaction scores for 1,534 persons living in the United States in 1995. They were asked, "All things considered, how satisfied are you with your life as a whole these days?" Respondents had to indicate on a scale ranging from 1—corresponding to dissatisfied—to 10—corresponding to satisfied.

Most people in the United States indicate that they are reasonably happy; 20 percent of the respondents even consider themselves to be very happy (satisfaction score of 10); and no less than 62 percent report a satisfaction score above 7. In contrast, very few persons report themselves to be dissatisfied. Only about 5 percent of all respondents place themselves in the lowest three categories. On average, Americans have a life satisfaction score of 7.67.

At the other extreme, we have the concept of objective happiness, which is indicated on the left-hand side of Figure 1.1. It refers to physiological approaches, which endeavor to capture subjective well-being, especially by measuring brain waves. This approach comes close to the idea of a hedonometer, which directly measures cardinal utility. Objective happiness measures relate to a particular individual, but they are technical procedures that identify the extent of happiness. They are objective in the sense that the judgment of happiness is made according to external rules.

Figure 1.1 also indicates another concept of happiness in between the polar extremes of subjective and objective happiness: experience sampling measures, typically carried out several times a day for many days, ascertain moods, emotions, and other feelings at random moments in individuals' everyday lives.

Which concept of happiness should be applied depends on the issue in question. The hedonic, objectively oriented concepts are useful for many of the intricate questions posed by some psychologists. The more objective methods reduce the memory biases that affect retrospective reports of experience in global self-reports. Moreover, these approaches have the advantage of being precise in terms of intensities measured. To a large extent, these measures assess an individual's level of affect. The subjectively oriented concepts are necessarily less precise because cognitive processes—which may differ among individuals and over time—play a major role. But precisely because cognitive factors enter into subjective happiness, these concepts are useful for issues connected with happiness, which have a bearing on social aspects. Moreover, physiological and moment-based measures rely on strongly normative judgments in the sense that happiness is assessed according to fixed rules, although our attitude toward particular pleasures and pains is not a priori given. 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 importance and have to be taken into account. Similarly, individuals do not have a fixed, once and for all given grid for measurement; they adjust to changing circumstances. A case in point is the effect of higher income on happiness. At first, individuals indicate a higher degree of happiness, but after some months, this increase tends to evaporate, and the level of happiness is not much higher than it was before the increase in income. These and related aspects of subjective happiness will be extensively discussed in later chapters of this book.

1.3 Why Is Happiness Important?

Studying happiness, and empirically measuring its distribution among persons and countries, and assessing its development over time is interesting for several reasons.

1.3.1 Getting to Know How Happy People Are

How happy are, for example, low-income people compared to the rich? How happy are the young compared to the old? Women compared to men? Nationals compared to foreigners?

In order to reach some intuitive understanding of these and similar questions, Box 1.1 presents the average happiness scores of "typical" persons in society, using the case of Switzerland.

We distinguish three "typical" persons who differ greatly with respect to their characteristics. The purpose is to show how certain life circumstances such as losing one's job (Peter), suffering from an illness (Anna), and getting married (Tony) affect self-reported satisfaction with life.

• Peter is happy (a score of 8.54 out of 10), although he has a relatively low income (SFr. 3,100 per month). The loss of his job as an electrician and the concomitant income loss reduce his happiness score substantially, by almost two points, to 6.67. • Anna is even happier than Peter (9.38 out of 10). She is well educated and earns a reasonable salary (SFr. 4,000 per month). When she retires (without income loss) and becomes seriously ill, her happiness score falls by roughly one point to 8.35. • Tony has little education, earns a relatively low income (SFr. 3,600 per month), and is the least happy of the three (7.83 out of 10). He finds a marriage partner, which raises his happiness score by more than half a point to 8.46.

The three "typical" people identified here are, of course, only examples. In principle, once the determinants of happiness have been measured, it is feasible to construct such happiness schedules for every conceivable type of person. However, such constructions of happiness psychograms are of little general use. In the following, we will therefore concentrate on single partial effects on happiness induced by various factors of subjective well-being.

It is also interesting to know how happiness has changed over time. Is it true—as cultural pessimists like to argue—that people get more and more unhappy? Or do people get happier all the time, as the optimists claim? Are economists right when they take it as a matter of course that the strong increase in per capita real income over the past decades (and centuries) has made people happier? Figure 1.3 presents the development of life satisfaction and real gross domestic product per capita for Japan from 1958 to 1991.

Japan is probably the country with the most spectacular growth in income since World War II. Between 1958 and 1991, its per capita income rose sixfold. Nevertheless, the Japanese people report a satisfaction with life that remains largely unchanged over this period. This surprising result needs explanation.

Finally, it is interesting to know how rich and poor countries compare with respect to subjective well-being. Is it really true that people in underdeveloped countries are quite happy despite their low real per capita income? Or is this view just a romantic notion that does not take into consideration the hardship imposed by low income? Figure 1.4 exhibits a cross-country comparison of subjective happiness of over 80,000 people in 51 countries worldwide in the 1990s.

Reported satisfaction with life across countries shows a moderate positive correlation with average real income per capita in purchasing power parities. In general, people in rich countries are clearly happier than are those in poor countries. This positive relationship is especially strong with countries below a GNP per capita of U.S. $10,000 (in 1995). There are no rich countries where people's happiness, on average, is low. But, for the rich countries, it does not seem that higher per capita income has any marked effect on happiness. At the lower end of the scale, there are many poor developing and transition countries where residents experience low satisfaction with life. But there are also some exceptional countries with low per capita income that report reasonably high average satisfaction scores. The relationship between happiness and per capita income across countries is thus complex.

1.3.2 Identifying the Determinants of Happiness

What are the factors that make people happier or unhappier than others? This is a crucial question because it helps us to understand how—and to what extent—the situation can be improved.

It is useful to distinguish five types of determinants:

(a) Personality factors, such as self-esteem, personal control, optimism, extraversion, and neuroticism.

(b) Socio-demographic factors, such as age, gender, marital status, and education.

(c) Economic factors, such as individual and aggregate income, unemployment, and inflation.

(d) Contextual and situational factors, such as particular employment and working conditions, the stress involved at the workplace, interpersonal relations with work colleagues, relatives and friends, and—most importantly—the marriage partner as well as living conditions and health.

(e) Institutional factors, such as the extent of political decentralization and citizens' direct political participation rights.

For years, personality, socio-demographic, and contextual factors have been extensively analyzed by psychologists. They have, moreover, studied some economic factors. In recent years, however, economists have also contributed significant research on the effect of economic factors on subjective well-being. In this book, we want to critically survey and interpret the results of past research from an economic point of view. Moreover, we seek to empirically identify as many of the determinants of happiness as possible in a concrete microeconometric happiness function for Switzerland. Being economists, we emphasize the economic determinants, which indeed turn out to be crucial. It is impossible to account for differences in happiness between people without taking into account income, employment, and inflation. Happiness is dependent on material factors and economic prospects.

But we are political economists too. We therefore also direct our attention to how different institutions influence happiness. The kind of society people live in has so far been severely neglected as a source of happiness. This book focuses exactly on that topic. Does a decentralized system, in which many political decisions are taken at the communal or district level, raise citizens' well-being? Do people experience more satisfaction when they have more extended possibilities of directly influencing political decisions via popular initiatives and referenda? We will show empirical evidence in favor of both of these propositions in chapter 8.

1.3.3 Explaining the Psychological Mechanisms Producing Happiness

Subjective well-being is an attitude consisting of the two basic aspects of cognition and affect. "Affect" is the label attached to moods and emotions. Affect represents people's instant evaluation of the events that occur in their lives. The cognitive component refers to the rational or intellectual aspects of subjective well-being. It is usually assessed with measures of satisfaction. It has been shown that pleasant affect, unpleasant affect, and life satisfaction are separable constructs.

The cognitive aspect involves a component of judgment and comparison. Happiness is thus not given and immutable, but is constructed within the person concerned and largely depends on the social environment within which each person has been socialized and within which he or she lives. There are, in particular, four psychological processes that have to be taken into account:

(a) Adaptation. People get used to new circumstances and accordingly adjust their subjective level of well-being. Hedonic adaptation thus reduces individuals' responsiveness to repeated or continued stimulus. Adaptation refers to a lot of different mechanisms; in the case of habituation, it is an automatic passive biological process. It has already been pointed out that people get used to a higher level of income, so subjective happiness tends to converge over time to its initial level. People winning the lottery, thereby experiencing a large increase in wealth, not surprisingly feel happy, but get adjusted and, after some time, on average indicate an only moderately higher level of well-being than before they won the lottery.

(b) Aspiration. People evaluate their situation with regard to an aspiration level that is formed by their hopes and expectations. If people attain their aspiration levels they are satisfied with their lives. Usually, aspiration levels are closely correlated with current or past attainments as, for example, current income, which is mostly considered satisfactory for one's household.

(Continues...)

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Edition details

• Publisher: Princeton University Press
• Publication date: 2001
• Language: English
• ISBN 10: 0691069980
• ISBN 13: 9780691069982
• Binding: Paperback
• Number of pages: 200