Limited Experienced Happiness or Unlimited Expected Utility, What About the Differences?

0 J. C. Ott (&) Erasmus University Rotterdam , Rotterdam, The Netherlands 1 Review of Happiness Around the World; the Paradox of Happy Peasants and Miserable Millionaires by Carol Graham Oxford University Press , New York , 2009, ISBN 978-0-19-954905-4 Happiness and utility are two types of subjective well-being, but measured in different ways. Happiness is measured by asking people questions about their subjective appreciation of their life as a whole. Utility is measured by an assessment of their subjective priorities, as revealed in their actual behaviour. Both methods have specific pros and cons and additional value. These methodological issues are important in an epistemological way: how to obtain knowledge about subjective well-being. There are, however, also three important ontological differences between happiness and utility in the actual nature of these phenomena in reality. (1) Happiness depends on available market and nonmarket commodities and living-conditions; utility depends only on available marketcommodities. (2) Happiness is about experienced well-being, utility is about expected well-being. (3) Happiness is limited because it is related to the fulfilment of a limited number of needs, utility is unlimited because behaviour always reveals preferences in terms of expected well-being. Economists and happiness-researchers tend to neglect the last two differences. Their analysis, the analysis of Carol Graham included, could gain strength if more attention would be paid to these last two differences. 1 Introduction Carol Graham is an economist and the author of numerous books and articles on poverty, inequality, and novel measures of well-being. Her latest book Happiness around the World is interesting and very informative. She evaluates very accurately the relations between happiness and variables like income, health, marital status and employment and applies sophisticated statistical procedures to assess possible causality in such relations. 2 Grahams Book 2.1 Grahams Inventory of Causes and Consequences of Happiness Graham identifies income, age, health and marital status as important determinants for the level and the distribution of happiness in general. The impact of other variables on happiness, like gender, education and employment, depends on contextual factors like gender rights, returns on education and the position of retired people and the self-employed. Subjective variables, like optimism, adaptation, and the acceptance of inequality, help to explain some irregularities. Graham demonstrates that several factors have a two-way causal relationship with happiness; having an impact on happiness but simultaneously being influenced by it. In a panel-study in Russia she evaluates such relations by using the unexplained or residual individual happiness in 1995 as an independent variable to predict developments after 1995. The residual happiness appears to predict future income and health, but not getting married or divorced, or becoming unemployed. The positive impact of happiness on income and health underlines the social-economic importance of happiness. 2.2 Grahams Inventory of Paradoxes in the Relationship Between Income and Happiness The relation between income and happiness gets a lot of attention in Grahams book. Wealthier people are in general happier than poorer ones, but Graham describes three paradoxes. (a) The paradox of the unhappy economic growth: Countries with higher GDP per capita have higher levels of happiness, but controlling for these levels of GDP per capita individuals have lower levels of happiness in countries with positive growth rates (research by Eduardo Lora and collaborators 2009). The accompanying dislocation of rapid growth apparently undermines the positive effect of higher income levels. (b) The paradox of the happy peasant and the frustrated achiever: This happens for instance in China where urban migrants are materially better off than they were before they migrated, but they report higher levels of frustration. Once they migrate their reference norm quickly becomes other urban residents rather than their previous peers in rural areas. (c) The paradox of the optimistic poor people: Within countries wealthier respondents are happier, but there is clearly an optimism bias in the responses of the poorest respondents. Their expectations are very low and the impact of misery on their happiness is therefore rather modest. Even the substantial income-inequality in Latin America is not matched by a comparable difference in satisfaction with the material and economic quality of life. Relative income within nations seems to matter for happiness. This is one of the explanations for the Easterlin paradox: relative income matters for individual happiness within societies, but average happiness is rather insensitive for economic growth if some minimal GDP-level per capita is reached. An alternative explanation is adaptation of expectations. Expectations rise in good conditions, like high levels of freedom, and go down in bad conditions, like high levels of crime or corruption. Downward adaptation is an important survival mechanism at times of adversity. Rising expectations may have provided impetus to rising ambitions and to the remarkable progress humanity has made in areas such as technology and health. In Grahams view it is difficult to judge whether rising expectations or downward adaptations are good or bad things; they are likely part of human nature. In the last chapter Graham evaluates the policy-implications of happiness-research. What can policymakers take from the findings so far? Graham makes some cautionary remarks but she also presents some positive conclusions. (a) Cautionary remarks: A fundamental problem is whether happiness should be a policy objective in the first place. Are happy people successful or complacent? There is evidence that happy people perform better in the labour market and that they are healthier. But the evidence also suggests that there is a top limit to this. People who score a 10 are successful, but people who score somewhat lower (79) are more successful. A related problem in Grahams view is the importance of happiness as a purpose, relative to alternative purposes like growth, policy reforms, and fiscal stability. There are temporal considerations as well. Many reforms make people unhappy in the short term but produce more happiness in the long run. (b) Positive conclusions: Happiness surveys have great promise in Grahams view for helping to understand a variety of phenomena which cannot be explained by standard optimal choice or revealed preferences approaches. Two sets of questions come to the fore. The first is the welfare effects of macro and institutional arrangements that individuals are powerless to change, such as macroeconomic volatility, inequality, or weak government structures. In such situations people, and in particular the poor, are unable to express their pref (...truncated)