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More Money, Less Mirth
September 3, 2010  |  by Dale Keiger

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The biggest contributors to happiness everywhere, Graham has found, are a stable marriage, good health, and sufficient income. Divorce, instability, and unemployment are bad factors everywhere, especially the last item. “Long-term unemployment seems to be one of the few things that people don’t seem able to adapt back from,” Graham says, adding that this holds true even if they return to their previous income levels. Everywhere Graham has looked, there’s a U-shaped relationship between age and happiness. Personal happiness declines until we reach our 40s, stays steady for a few years, then begins a continual rise as we age. As exemplified by the aforementioned Afghans, people show striking adaptability to bad situations, almost as if humans possess an imperative to find a reason to smile. Graham studied recent changes in American mood as the U.S. economy fell apart. From the onset of the recession in early 2008 to November of that year, average happiness among her respondents fell 11 percent as the Dow Jones average plunged. But once the market stopped falling in March 2009 and uncertainty began to dissipate, Americans started to get happy all over again, even though the economy was no better. By June 2009, they reported being happier than they’d been before the crash.

Context matters. Good health makes people happy, but more so if people around them are healthy, too. Crime leads to unhappiness, but less so if crime is prevalent. The effect of  inequality on happiness varies according to other contextual factors, such as politics and net worth. For example, Graham says, “Democrats, philosophically, believe the system is stacked against some people, that it’s unfair, and that it needs to be changed. Republicans are more likely to believe that the system is fair and people who work hard merit their just rewards. In the U.S., the only group made unhappy by inequality is left-leaning rich people, because they worry about it. Everybody else still thinks they can be Bill Gates, although our mobility data do not bear that out.”

Graham, now a senior fellow holding the Charles Robinson Chair at Brookings (she also teaches at the University of Maryland, College Park), has published two books since data from Peru changed the course of her research. Brookings Institution Press brought out Happiness and Hardship: Opportunity and Insecurity in New Market Economies in 2002, and Oxford University Press published Happiness Around the World: The Paradox of Happy Peasants and Miserable Millionaires last year. When Graham gave the manuscript of that first book to the then director of economic studies at Brookings, she recalls him saying, “Carol, this is great, but you’ve got to take ‘happiness’ out of the title because nobody is going to take you seriously.” She didn’t do it, and adds, “I didn’t sell too many copies, either.” Now, 10 years later, she routinely fields invitations from economics journals to join their editorial boards just to handle the influx of papers from economists jumping on the happy wagon. A search of the literature using Google Scholar produces the following sampler: “Happiness and Economic Performance” from The Economic Journal; “Crossnational Differences in Happiness” from Social Indicators Research; “Maximizing Happiness?” from German Economic Review; “Climate and Happiness” from Ecological Economics. By way of the National Bureau of Economic Research, there is “Do Cigarette Taxes Make Smokers Happier?” Graham sifts a stack of papers on her desk and pulls out one titled “The Happiness of Economists: Estimating the Causal Effects of Studying Economics on Subjective Well-being”—that is, a study of whether studying economics makes economists happy.

Happiness as a subject for economic thinkers has a longer history than the recent flurry of interest suggests. Adam Smith pondered it in 1759 in The Theory of Moral Sentiments. Early in the next century, Jeremy Bentham advocated measuring social action by its ability to provide “the greatest happiness of the greatest number.” But over ensuing decades, economists adopted methodology that made economics more quantitative and more invested in a central idea: that humans are Homo economicus, beings who dependably behave as rational actors and make decisions intended to enhance their individual welfare, or in econospeak, to achieve greater utility. To study utility in a rigorous, scientific way, economists developed means of analyzing what they regarded as the most reliable objective data: the statistical record of what people consume, their savings habits, and their participation in the labor market.

The objective data were what economists refer to as “revealed preferences”: the daily, rational economic decisions made in the pursuit of happiness. Buy this, don’t buy that, save money, spend money, invest money, all rational choices measurable by analyzing economic statistics. In his book Deep Economy, Bill McKibben describes it this way: “An orthodox economist can tell what makes someone happy by what they do. If they buy a Ford Expedition, then ipso facto a Ford Expedition is what makes them happy. That’s all you need to know.” (An old joke about revealed preferences has two economists watching a hot Porsche roadster go by. “I’d really like one of those,” says the first. “Apparently not,” says his colleague.) Revealed preferences could be trusted, economists believed, because people might lie in response to a survey, but their actions—what they actually do with their paychecks—inevitably revealed the objective truth. And the truth was that rising gross domestic product, rising employment, and rising personal income produce rising happiness.

But in the 1960s there were changes afoot as psychology and economics began to ply common turf. Daniel Kahneman, who would win the Nobel Prize in economics in 2002, was a psychologist who crossed over by comparing cognitive decision-making models to economic models. Another Nobel laureate, Gary Becker, wrote a book in 1967 titled Theory of Crime that examined, among other things, the psychological elements of economic decisions. Yet another Nobel laureate, Herbert Simon, produced the theory of bounded rationality, which argued that the rational actors who were central to the conventional economics model often encountered limits to their ability to make rational choices, and so sometimes made irrational choices. By paying more attention to “expressed preferences”—what people say when asked about their decisions—Kahneman et al. began to cast doubt on the conventional wisdom about Homo economicus.


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