The economics of happiness

I went out for dinner last weekend with a few bods and somebody turned the conversation towards the economics of happiness, which was strange because I had just been leafing through a dog-eared version of Schumacher’s ‘Small is Beautiful’ that I had just unpacked. Published almost 40 years ago, this was among the first books to propose that concept. Green, Humanist or Buddhist economics call them what you will, rest on several fairly self-evident propositions.

1. Much economic growth is based upon converting ecological capital (oil, fish stocks, whatever) - into economic capital (jobs and profits). In this sense we are spending the (planetary) family silver and often damaging free environmental services (water regulation, or more topically, the existence of honey bees). This has been widely recognised for more than twenty years and lay at basis of the Brundtland Report on Sustainable Development and the pledges made at the Earth Summit in Rio twenty years ago. Early attempts to map this relationship (e.g. the Club of Rome’s Limits to Growth) were simplistic but they helped to highlight the problems of resource depletion and environmental degradation. These issues haven’t gone away in forty years and, while there is some scope for a green/gold win-win situation (growth without resource environmental depletion by doing things smarter, lighter and adopting cyclical patterns of resource use), I think proponents of this tend to overstate the possibilities. Peak-oil, peak water and peak phosphorus are all real possibilities that threaten to undermine the productive and distribution systems that we all rely upon.
2. Much economic activity doesn’t increase welfare (or ‘utility’ in economese). A large proportion involves correcting or preventing damage created by economic actors. A fatal car accident may generate several hundreds of thousands of Euros of economic activity – but does not contribute one iota to human welfare.
3. There doesn’t seem to be much of a relationship between a country’s GDP and the happiness of its citizens. Intriguingly this seems to be a hot topic these days. Both the French and UK governments have picked up on this theme and are commissioning surveys and reports (see this week's Guardian for example). Interest in this can probably be traced back to the King of Bhutan, who some years ago talked about ‘Gross National Happiness’ (when rejecting an offer of a World Bank loan to deforest a large area of Bhutan and turn it into wood pulp) . Oliver James’ ‘Affluenza’ also probably played a key role in the debate. He argued that “keeping up with the Joneses” makes people unhappy and that flagrant inequalities in society is a major cause of unhappiness. Here there is a key link to Fred Hirsch’s ‘Social Limits to Growth’ where he argues (if I remember correctly) the important role that positional goods such as top level cars, lakeside villas play in people's lives providing status, rather than fulfilling material needs. These goods are determined by their scarcity value. This somewhat undermines the humanism expressed in Maslow’s Hierarchy of Human Needs here, where he claims that people move up a pyramid of needs (roughly speaking from survival needs, through social ones to a desire for self-actualisation – which of course chimes with ideas of Buddhist economics). But of course there are huge industries – selling cars, holidays, clothes, perfumes – dedicated to keeping us focused on status and jealousy. It’s a hard call to stay immune to their lure.

I spent a good part of fifteen years exploring these arguments, actively involved in the Green Party Economics Working Group, getting a secondment at what would become the New Economics Foundation. More recently I have tried to apply that knowledge to more specific situations – rural development, organic farming, etc.

But where are we at with the big questions? As Laurie Anderson asked: 'are things getting better or are they getting worse?' The damage that economic growth can do to ecosystems and natural resources is now widely accepted. Many schemes have been established to try to change this. Some, such like agro-environmental payments to farmers to encourage them to incorporate ecologically beneficial practices into their farming routines, really do pay dividends. Others, such as the REDD+ schemes, intended to support communities protecting and maintaining carbon stocks (forests , peat bogs etc.) have run into lots of difficulties. In many cases property rights are too poorly defined or the transaction costs involved mean that little ends up with the intended beneficiaries. Others, such as transferable pollution rights, just seem downright perverse.

But how do we put policies in place that weaken the relationship between accumulating wealth and happiness? This is not just a case of encouraging people to go out and ‘self-actualise’. There are real structural problems that are not related to increasing one’s consumption here. First, politicians ‘need’ economic growth – it allows them to expand (or even maintain) public services without raising taxes. Second, the public enjoys growth – apart from more consumption – it opens doors – in growth periods there are more companies recruiting. This has been highlighted by the current recession- for many, the effects are not so much felt through having to cut back on what they consume but a loss of opportunity: they have less options for changing (or finding) a job or selling their house to move to where their new work or relationship or whatever might be. This is where a ‘depression’ can kick in. While environmental economics has made great strides in addressing the problems that unconstrained growth can bring I haven’t yet seen them adequately address these issues.