Running Head: Happiness

Economics of Happiness

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Student Number
Happiness

Because economy of a nation is a complex phenomenon, it is required to make meaningful sense

while assessing a country. Gross Domestic Product (GDP) is one of the most comprehensive
indices used by economists, business analysts and political leaders to assess the economic
performance of a country. Many governments prepare their budgets, business houses forecasts
their sales growth, and stock exchanges predict share markets based on the GDP information.
The classical economists say that production, employment and investments depend on the rate of
GDP. Before we answer questions such as which is the best country in the world? Which
country provides the most conducive environment for human living? etc., we need to understand
the concept of GDP and beyond.

The GDP of a country is one of the primary indicators to understand its economic health. It
represents the total (currency) value of all goods and services produced within a specific period
of time (usually one financial year). GDP is also considered as the size of the economy. In
simple terms, GDP is the aggregate of everyones (individuals income, profit earned by business
houses and taxes earned by governments) gains. In order to increase GDP, classical economists
suggests people to increase number of working hours, reduce consumption and invest more,
produce items and export more to other countries.

When using GDP as a measure of economic progress, economists differentiate GDP in two ways
i.e. the real GDP versus the nominal GDP. These concepts are useful when comparing GDPs of
two different time periods. When GDP of period is calculated based on the current prices of total
goods and service produced, it is nominal GDP. When the influence of inflation is removed from
the nominal GDP, we have real GDP. In assessing the status of individual citizens, real GDP
indicates the standard of living of a person. The GDP of a country indicates whether it will be
able to provide better schools, cleaner neighborhood, adequate health care and comfortable
infrastructure. Many indicators of quality of living are associated with GDP.

However, GDP is not a measure well being of citizens of a country, because it does not value the
importance of leisure of a person, exploits natural environment, do not value child and parent
care, and many other non-market activities. The macro-economic measures such as GDP omits
many important human related aspects such as leisure time, span of life, health, happiness, etc.
which are the critical components for the well being of humans.
Happiness

Tim Dean (2014) argues that an overemphasis on GDP is not only unsustainable, but fails to
make people happier. GDP is simply a reflection of the transactional economic activities of a
nation in terms of production and consumption. In the process of increasing GDP, many nations
and business organizations are depleting the natural resources allows damage to the environment.
The urge to maximize returns among rich corporations creates huge income disparities and
inequalities in the countries. Many categories of hard work such as house chores, caring for the
parents, community volunteering, etc, though it is value creating. do not have place in the GDP
accounts. Relying on GDP alone is not sustainable.

Classical economists and the new generation thinkers have agreed that GDP has four major
limitations in accepting I as an indicator of well being. First argument against GDP is that, it
includes the depreciated capital in its calculation. Depreciation does not improve welfare and
reinvestment in depreciated assets pulls the economy down. In developed countries, the rise in
GDP did not result in benefits to the consumers but only replaced the older public assets.

The second limitation of the GDP is that it is too much macro oriented and loses the sight of
micro aspects of economy. GDP is concerned about the total income produced in a country but
disregard the income of the people. Some income in the country may go to foreigners, hence, a
significant part of the rise in GDP may benefit foreigners. Some countries such as Netherlands,
Denmark, Japan, Germany, etc. have significant income from abroad in terms of overseas
investments, services export, etc. In such situations the income residents will increase
disproportionately to rise in GDP.

The third limitation is already described in the earlier part of the essay that GDP fails to record
chores at home, time spent with family and friends, clean environment, etc. which are important
for well being of the citizens. Finally, GDP includes some economic paradoxes. For example, a
flood may destroy assets of a region, and the reconstruction efforts to rebuild the assets are
included in the GDP, but it only replaces the older assets. Similarly, expenditure on military
buildup, crime prevention, and security services are included in the GDP, but it does not add
direct value to the citizens.

Wellbeing and Happiness Alternate measures to GDP

The inability of the GDP to completely cover the gamut of human existentialism pushes for an
alternate way of assessing the economic aspects. In this context, the need for considering the
Happiness

wellbeing and happiness of the citizens has emerged. Economic well-being is a complex and
elusive concept and it allows only material aspects to be included in it. Absence of disease
(health), longer life, access to education and healthy state of environment is considered as
primary components of economic well-being. Unemployment and income disparities are still
linked to well being as much as to GDP. It raises certain basic questions such as cant an
unemployed person be happy? Do we need to have enormous wealth and assets to feel happy?
(Layard 2005)

In the recent past the behavioral economists have begun to accept happiness as the ultimate goal
of economics. From the psychological research it is observed that happiness depends primarily
on family relationships, friendship networks, job satisfaction and leisure activities. And, financial
income has little role play in determining the extent of happiness. Many developed countries
such as Switzerland, Norway, etc. have begun to focus on the well being and happiness of the
citizens as measure of economic progress. The current researchers are attempting to understand
different dimensions and layers of well-being.

Behavioral scientists have observed three main reasons about stagnation of happiness and life
satisfaction based on income. First, people get habituated fast i.e. simply get adjusted to the
higher income, consumption or circumstances. For example, driving a new car (for the first time)
may make one person truly happy but the car will not be a source of happiness soon
(Kahneman 2000). In other words, after meeting basic needs, the income has less to do with
happiness. Second reason is that humans have a underlying greed, i.e. they tend to seek higher,
better, faster, etc. For example, once a new house is completed, the desire for bigger house gets
stronger ( Kahneman, Diener and Schwarz 1999).

Third psychological reason for diminished happiness is that an individuals satisfaction or

happiness is influenced by awareness of how well others are doing. For example, driving a big
car can make one happy, but satisfaction with that car reduces when others in the community
rides similar car. Hence, raising happiness or life satisfaction of an individual is not easy.
Philosophers, Psychologists, sociologists, , economists and many others have pondered over the
question, what makes somebody happy?. Lyubomirsky et al. (2005) have identified that
happiness is genetically determined and its contribution to happiness is almost 50 percent.
Happiness

Relevant and meaningful activities are another major source of happiness. All other sources such
as income, race, city, etc. have lesser influence on the happiness.

The solution

Many economists and thinkers have suggested that GDP is no more a central figure for assessing
the economy of a nation. We must move forward to identify more effective index of assessing
the economy. We need to identify those variables that authentically increase our well being and
happiness. For example, Dr Robert Costanza, chair in Public Policy at ANU, and his colleagues
argue that GDP should be replaced. Instead GDP, they propose Genuine Progress indicator
(GPI). It not only assesses the classical economic activity, it observes the aspects that affect the
well beings of the citizens. Their solution of adopting GPI not only uses the features of GDP,
but also incorporates the positive activities by the citizens (Costanza 1992). The GPI is intended
to reduce the gaps of GDP by including income disparity factors. For example, for including
income disparity in the system, deductions are made to compensate the income inequalities.

Another feature of GPI is that it accommodates factors associated with environment such as cost
of pollution, the loss of forest, depletion in natural resources, reduction in farmlands, emission of
carbon dioxide, etc. Social liabilities such as impacts of crime and drug abuse, cost of policing,
etc. are also included in calculating the economic index.

As it deducts the value from the GDP due to negatively impacting variables, on the other hand, it
recognizes the value additions due to house works, care services and volunteering. The value of
services rendered by the durable assets and the value of education and learning are also included
in system. When these measures are applied to the GDP, sometimes a country may have
negative growth irrespective of higher GDP. GPI is not sole alternative to GDP, but it is well
acknowledged by economists. But it has not yet adopted by the political process in many
countries. Costanza suggests a lot of evangelical activity is needed to make the government
discard GDP alone as the indicator development and adopt well being measures into the system.

The thinkers have accepted that well-being measures provide better view of the state of a society
than the GDP. Because of the intangibility of the concept, there is no system that can tell us the
extent of happiness of the individuals. Measuring happiness demands different approach (The
Economist 2006). There must be an annual survey to collect the subjective feeling of the citizens
with respect to happiness (McDonald 2005). One research in Denmark suggests life satisfaction
Happiness

as an indicator of happiness. About 66% of Danish people are satisfied with their life and 14 %
of Germans only are satisfied with their lives. One important observation made in this context
shows that life satisfaction has not increased in proportion to the increase in income (Clark,
Frijters & Shields 2008). Winning international title such as world cup, Olympic gold, etc. by a
country affect the scores of life satisfaction of its citizens positively. These two observations
indicate that happiness and life satisfaction do not depend on the income generation but on
something else.

The researchers are also predicting that changes in life satisfaction can lead changes in political
arena. This brief history of happiness in Europe illustrates that satisfaction of life may be
influenced by factors other than income, which it is very difficult to boost satisfaction on a
sustainable basis, and that changes in satisfaction may contribute to political changes.

Conclusion

It is converging to a point that peoples psyche is an important factor in determining their

happiness, wellbeing, etc. Income and financial assets alone are not the determinants of well
being. In order to develop a new system to assess the economic worth of a country based on the
well being of its citizens, the national accounting methods needs to be changed. Shifting from
GDP to well being based accounting will have influence on the national priorities, public policies
and the work system. Peter Druckers words that What gets measured, improves has relevance
to the economic assessment.

References
Clark, A.E., Frijters, P. and Shields, M.A., 2008. Relative income, happiness, and utility: An
explanation for the Easterlin paradox and other puzzles. Journal of Economic literature, 46(1),
pp.95-144.
Happiness

Costanza, R., 1992. Ecological economics: the science and management of sustainability.
Columbia University Press.
Dean, T. 2014. Dethroning GDP as our measure of progress, NEWS. Available at
http://www.abc.net.au/news/2014-01-16/dean-dethroning-gdp-as-our-measure-of-
progress/5201564, Accessed on 18th April 2017.
Kahneman, Daniel. 2000. "Experienced Utility and Objective Happiness: A Moment-Based
Approach." In Choices, Values and Frames, ed. D. Kahneman and A. Tversky, 673692. New
York: Cambridge University Press.
Kahneman, D., Diener, E. and Schwarz, N., 1999. Well-being: The Foundations of Hedonic
Psychology, New York: Russell Sage Foundation.
Layard, R. 2005. Happiness Lessons from a New Science, London and New York, Penguin
Lyubomirsky, S., Sheldon, K.M. and Schkade, D., 2005. Pursuing happiness: The architecture of
sustainable change. Review of general psychology, 9(2), p.111.
McDonald, R. (2005). Towards a new conceptualization of gross national happiness and its
foundations. Journal of Bhutan Studies, 12, 2346.
The Economist, 2006. Happiness (and How to Measure it). Available at
http://www.economist.com/node/8450035, Accessed on 17th April, 2017.
Toynbee, P. 2003. Money and Happiness, The Guardian, Available at
https://www.theguardian.com/politics/2003/mar/07/society.politicalcolumnists, Accessed on 18th
April, 2017.