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Tuesday, March 8, 2011

Economics of Happiness! - Part I

The gauging of a nation’s well-being has become a hot topic for discussion among the policy makers across the globe, the trendsetter being the Himalayan mountain kingdom, Bhutan, which desires to measure “gross national happiness”. The latest to join the bandwagon is Cameron when he said that Briton needs alternative measures that would express national progress “not just by how our economy is growing, but by how our lives are improving; not just by our standard of living, but by our quality of life.”

Of course, all along GDP has been recognized as the best measure of economic performance because of the implicit link between economic growth and elements of well-being such as employment levels, level of consumption, etc.  However, as Robert Kennedy argued in the 1960s, GDP also measures a nation’s evils in terms of pollution, tobacco advertising, production of napalm and nuclear warheads, but not the wit, the strength of marriage, courage, wisdom, or learning of the people. He said, GDP “measures everything, in short, except that which makes life worthwhile.”

All these arguments, besides reminding us of what Simon Smith Kuznets, the Jewish Nobel Laureate in economics, who standardized the measurement of GNP, said way back in 1934, “The welfare of a nation can … scarcely be inferred from a measure of national income”, have set in motion a kind of momentum for “Happiness Economics”. Now the moot question is: How to measure national well-being/happiness?

Nevertheless, researchers like Norbert Schwarz, Alan Krueger, and Daniel Kahneman have come up with “day reconstruction method” which asks people to recall, episode by episode, the previous day’s events and the most prevalent accompanying feelings—stress, peace, exhaustion and elation. Of course, economists like Andrew Oswald argue that the data pertaining to well-being does already exist and hence demand more of such collection of data than adapt an altogether different model, while professors like Kahneman and Krueger plan for a radical departure by proposing the publication of “time accounting measures”—how a nation spends its time—alongside regular national accounts.

The central idea behind this measure is that by asking the survey respondents to rank the emotions they felt while spending time in various activities such as cooking, commuting, working in office, and watching television, a measure can be produced that indicates how long people spend in a predominantly unpleasant state of mind because of engaging in tedious works like commuting or working vis-à-vis a pleasant state of mind by engaging in acts like having dinner or watching TV. Such an approach to measure the well-being of people would also enable the government evaluate public policy interventions such as investing in roads, overtime laws, creation of leisure facilities, etc.

Yet, as the UK’s National Statistics Office felt, the question of how to summarize the overall well-being of a nation using a set of indicators such as health, education, governance, and social connections, and subjective measures of quality of life, remains a challenge. Nonetheless, all these arguments lead to the need for clarifying what indices are most appropriate to measure progress and how this can best be integrated in the national decision-making process.

Economists like Joseph Stiglitz, Amartya Sen , Jean-Paul Fitoussi desire that more emphasis be given to: one, net national income; two, household perspective rather than economy-wide measures; three,   distribution of consumption and income. They made another important observation: nations should be cautious in consumption of wealth, for it leaves little for tomorrow’s generation. 
They also feel that the well-being of people must be measured by focusing more on non-market activity, such as leisure, for consuming the same bundle of goods by working for 10 hours a day gives more pleasure than working for 16 hours a day.   So, in a nut-shell, the well-being of a nation is defined more by the leisure and quality of life its people enjoy rather than the total value of goods produced by a nation. 

The next obvious question is: how about the happiness of an individual, which we shall look into some other time. 

GRK Murty


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