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Measuring economic well-being

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  • Chapter 3: Macroeconomics/
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  • Measuring economic well-being

The Economics of happiness

In his book, An Economist’s Lessons on Happiness: Farewell Dismal Science! (2021) Professor Richard Easterlin explains how personal happiness can be measured along with ways of improving people’s happiness and what governments can do to improve happiness in society. Easterlin is a professor of Economics at the University of Southern California and is sometimes described as the ‘father of happiness economics.’ 

There is even an ‘Easterlin paradox’ - a theory of happiness economics which he developed in 1974. The paradox states that at a point in time happiness varies directly with income, but over time happiness does not trend upward as income continues to grow. In other words, once your income reaches a certain level any increase in pay does not make you any happier. A study by Princeton University showed that an income level of $75,000 per household represented a peak in happiness and an increase in income beyond this level did not increase a person’s happiness. That said, the idea that more income does not make people happier is a hotly debated subject and there is plenty of conflicting evidence on the topic.

In recent years there has been a cultural shift towards the view that the state of happiness in a country is a key element of welfare. There has been a noticeable move away from the view that increasing GNI per capita is the key indicator of the quality of life in a country. The world Happiness report produced by the United Nations is an alternative measure of national welfare. It is based on a survey of how people rate their own lives. The survey ranks national happiness asking respondents to think of their happiness as a ‘ladder’, with the highest life rating being a 10 and the lowest life rating being a zero. Individuals who are part of the survey have to consider factors such as citizen engagement, communications, health, and emotional diversity. Finland was ranked the happiest country in the world, according to the World Happiness Report from 2021. The Nordic country scored 7.89 on a scale from 0 to 10.

At a microeconomic level, several industries have grown enormously because of societies increasing desire to be happy or less unhappy. The global market for antidepressants is expected to reach $25 billion and the market for online counselling services is currently valued at $23 billion. A report published by the Global Wellness Institute found that that the global mental wellness economy is worth $120.8 billion, based on consumer spending in markets that produce products for self-improvement and mindfulness.

The apparent growing importance of happiness in Economics (although the focus of this might be on better-off individuals in more developed countries) is perhaps to do with people reaching a standard of living where they have satisfied their basic needs and are no longer so concerned with the pressure of 'getting by' in a material sense and are more concerned with their emotional well-being.  

Possible questions for discussion with a class

Explain how utility theory might explain why a household income of $75,000 might represent peak happiness.

Utility theory explains how individuals gain a quantifiable amount of satisfaction from consuming a good which can be measured in utils. The law of diminishing marginal utility states that an individual consumes more of a good the incremental amount of satisfaction (marginal utility) they receive from each extra unit they consume decreases. From an income perspective, it could be argued that once a household achieves an income of $75,000 they have achieved a level of total utility from the goods they consume at that level of income that will only increase by a relatively small amount as their income rises beyond $75,000. 

Evaluate the effectiveness of the World Happiness Report (WHR) to measure the quality of life (welfare) in a country. 

The strengths of the WHR to measure happiness might include:

  • The broad range of factors that affect the quality of life in a country makes it more effective at measuring welfare than the narrower real GNI per capita.
  • By using a survey to obtain the quality of life views of a sample of a country's population the WHR is a better qualitative measure of welfare than the real GNI per capita. 
  • By using index numbers to measure happiness changes in relative welfare can be measured over time.
  • The weakness of the WHR it is difficult to measure happiness objectively and the factors in the index are very difficult to weight in terms of their relative importance. It is also difficult to assess the accuracy of data that represents the views of people gathered in a survey.