How to measure the economics of happiness

Can we measure wellbeing and happiness and apply those measures to public policy, and how much of a change can a wellbeing perspective make to the world?

Measuring economic policies by their effect on total wellbeing might make people's lives better - but a great many politicians will need convincing.

At a glance

  • Over the past two decades, there has been a renewed focus on wellbeing and happiness within policymaking.
  • The focus on wellbeing has given economics useful new tools such as extensions of the established cost-benefit analysis.
  • Economists believe a continuing conversation on how wellbeing should evolve can bring about significant long-term economic gains.
  • One such gain is the broadening of education’s focus on mental health, as well as emotional and relationship skills.

By David Walker

For many years, wellbeing and happiness were considered by most people to be alien to economics. That view was encouraged by economics’ infamous description as “the dismal science” – a phrase coined by historian and writer Thomas Carlyle (1795 – 1881) after economists attacked his pro-slavery views.

In truth, economics since Adam Smith and Jeremy Bentham has concerned itself a great deal with people’s feelings. After World War II, Simon Kuznets’ newly invented GDP (gross domestic product) diverted the profession’s attention towards monetary matters. In the past two decades, though, the interest in wellbeing and happiness has reasserted itself.

Most recently, New Zealand’s “Wellbeing Budget” has invigorated the debate. Prime Minister Jacinda Ardern calls wellbeing “a different approach for government decision-making altogether”. Champions of the policy point to billions of new budget dollars aimed at improving New Zealanders’ mental health, addressing domestic violence and cutting suicide, child poverty and homelessness numbers.

Can we measure wellbeing and happiness and apply those measures to public policy, and how much of a change can a wellbeing perspective make to the world?

New Zealand's Prime Minister Jacinda Ardern with the children of West Spreydon School in Christchurch in September 2019. Arden has announced additional funding of NZ$8.68 million to meet the long-term mental health and wellbeing needs of people affected by the terror attacks of 15 March 2019.

A paradox, challenged

Wellbeing and happiness are, in principle, the aim of a great many governments. Most developed nations have adopted in practice the idea voiced in the US Declaration of Independence: citizens have the right to “life, liberty and the pursuit of happiness”.

It took a couple of centuries, however, for economic tools to be pointed at the concepts of wellbeing and happiness.

In the 1970s, Richard Easterlin made himself the first modern economist to study the issue in a structured way. When he looked at wellbeing and happiness data, Easterlin decided he had found a puzzle.

Within a society, rich people were happier than poor ones. However, his calculations suggested that when you compared different communities, people in rich nations were on average no happier than people in poor ones. Comparing the same communities before and after periods of income growth, Easterlin found no increase in happiness either.

If this “Easterlin paradox” were right, many economists and indeed many governments might be wasting their time trying to raise incomes. Best, then, to forget income altogether – and focus on happiness itself.

Easterlin’s paradox turned out not to be so clearly paradoxical. In 2008, US economists Betsey Stevenson and Australian partner Justin Wolfers re-examined Easterlin’s figures, and they concluded that more income did boost wellbeing after all.

For most economists, Stevenson and Wolfers’ findings came as a relief. It didn’t seem right that if you gave a village running water or electricity for the first time, that village did not feel better off. It also ran against the basic mission of many economists, which was to find ways to raise incomes.

In recent years, the Gallup World Poll of more than 160 countries has given a global picture of life satisfaction that may match Stevenson and Wolfers’ happiness findings more closely than Easterlin’s. The richest countries and regions – Canada, Australia and New Zealand, Scandinavia, north-western Europe – top the scores, while Central Africa dominates the bottom. These numbers suggest that money does, to at least some extent, buy happiness.

Yet for all this, more income does not always seem the best way to buy more happiness. The US, in particular, seems little happier than in 1950, despite much higher incomes.

For a given level of income, then, can governments create more wellbeing?

Beyond GDP

A ceremony at the Mongar Dzong monastery in Bhutan on the International Day of Happiness on 20 March 2013.

The fourth king of Bhutan, Jigme Singye Wangchuck, ran the first big experiment on this question. In 1972, he declared that “Gross national happiness [GNH] is more important than gross domestic product”, and set his little-developed Himalayan nation to making its goal happiness, not money income.

What difference did it make? The surprising answer: not much.

Tiny Bhutan, with just three-quarters of a million people, aimed to judge projects against the country’s GNH framework at the start, and review them against it as they proceeded.

The framework covered nine areas: psychological wellbeing, health, time use, education, culture, good governance, ecological resilience, community vitality, and living standards. Figures on infant and maternal mortality rates, tuberculosis and malaria, absolute poverty rates and school attendance all moved in the right direction.

Yet Bhutan, which once promoted itself as the happiest country in the world, no longer does that. As it tried to raise GNH per person, its measured happiness score barely crept up. According to the World Happiness Report 2018, Bhutan fell from 84th place for happiness in 2013-2015 to 97th out of 156 countries in 2015-2017.

Bhutan’s GDP per person, meanwhile, has risen sixfold since 1980. It targeted happiness, yet income is what rose.

CPA Australia podcast: How investing in mental health is good for business. Listen now.

New Zealand's 'Wellbeing Budget'

That hasn’t stopped other countries targeting wellbeing – most recently, New Zealand. Paul Helm FCPA, New Zealand’s first chief government accountant, explains the New Zealand Treasury’s living standards framework, which is underpinned by four classes of capital – environmental, social, human, and financial.

Health spending, for instance, can improve the country’s social and human capital. New Zealand has also selected about 100 wellbeing indicators that it monitors in an attempt to measure impact.

Helm acknowledges this approach needs to evolve. Measuring the impact of government actions on stocks such as environmental capital is a huge challenge, and he describes the initiative as “a pathway that will continue over a number of years”, adapting and changing.

However, he says it is already pushing agencies to think differently. “GDP only takes us so far,” he says.

"Engagement with wellbeing changes what you think the questions are, and how you look at the world." Professor Paul Frijters

Professor Arthur Grimes, wellbeing and public policy chair at Wellington’s Victoria University and a former chairman of the Reserve Bank of New Zealand, warns against expecting this approach to transform New Zealand’s economy. Governments have always tried to do far more than increase income, he says; on many occasions, they have knowingly sacrificed income for goals such as better health or environmental protection.

What about wellbeing’s influence on New Zealand outcomes? “At the macro level, I don’t think it has been that useful,” he says.

“The New Zealand ‘Wellbeing Budget’ didn’t look any different, really, to what a budget would have looked like in past years, apart from some of the rhetoric.” The welfare economics framework sketched out by pioneering economist A.C. Pigou a century ago, he notes, differs little from today’s “wellbeing”.

Former Queenslander Professor Paul Frijters teaches the London School of Economics’ course on wellbeing in policy. Like Grimes, he’s sceptical about New Zealand’s current approach, saying bluntly: “There’s no way that’ll last”.

The country’s long experiment with the capital approach has never provided any good way to measure how those stocks change, he notes, and making such measurements would require “a far greater statistical effort” than any nation is putting in.

A coming change?

Musican Pharrell Williams at a United Nations event on the International Day of Happiness in New York on 20 March 2015.

Despite his doubts about wellbeing budgets, Grimes believes the wellbeing perspective has given economics some useful new tools – particularly some extensions of the established economic tool of cost-benefit analysis.

The UK, Grimes notes, has adopted new ways to measure subjective wellbeing since the day in 2006 when then prime minister David Cameron declared: “It’s time we admitted that there’s more to life than money”.

Cameron’s Conservative government made the gathering of wellbeing data part of its “Green Book”, the official UK manual on how to weigh up potential government spending. (Frijters calls wellbeing a “natural” approach for conservative governments.)

UK policymakers can now often compare the cost of improving someone’s subjective wellbeing by one point on a standard scale through income and through non-monetary means, such as better housing, and see which is cheaper, Grimes says. The result will be at least as accurate as the other means we use.

“I’m a believer in using multiple ways of measuring things.”

Frijters sees even greater potential for the wellbeing approach, believing that its adoption “can change the policy priorities quite a bit”.

“Engagement with wellbeing changes what you think the questions are, and how you look at the world,” Frijters says.

He sees a future where the focus of primary and secondary education, for instance, broadens from today’s focus on PISA (Programme for International Student Assessment) results, first to improved mental health and then to a broader bundle of emotional and relationship skills.

“Down the line, you’re looking at a slow change within our cultures towards a more relationship-oriented, quality-of-life-oriented society, and away from one that is mainly focused on material wealth.”

Even more than Grimes, Frijters hails the UK’s work on wellbeing as a window to the future. It has particularly changed mental health, he says. One wellbeing-based UK initiative, IAPT (Improving Access to Psychological Therapies) – “a whole service oriented towards Cognitive Behavioural Therapy [CBT] for anxiety and depression” – has helped about one million people in the UK, and has now been implemented in at least seven countries.

Beyond scepticism

Australian policymakers have also looked at a wellbeing approach, Frijters says, “but as soon as you say to them, ‘Look, this now means we should be less interested in economic growth’, that’s that, the conversation stops ... They just say, no, there’s no way they can sell that to their political masters.

“And so then they sort of go back to orthodoxy.” 

Frijters would like both policy experts and politicians to keep the conversation going.

“It’s fine to be sceptical,” he says, “but actually, the evidence is that this stuff does have real content."

Like what you're reading? Enter your email to receive the INTHEBLACK e-newsletter.
February 2020
February 2020

Read the February 2020 issue of INTHEBLACK magazine.

Each month we select the must-reads from the current issue of INTHEBLACK. Read more now.