happiness-economics

What Is Happiness Economics? Happiness Economics In A Nutshell

Business / By / October 28, 2023

Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

AspectExplanation
DefinitionHappiness Economics, also known as the Economics of Happiness or Well-being Economics, is an interdisciplinary field that studies the relationship between economic factors and people’s well-being, life satisfaction, and happiness. It goes beyond traditional economic indicators like GDP (Gross Domestic Product) and examines how various economic and social factors influence individuals’ subjective well-being. Researchers in this field use surveys, behavioral economics, and other methods to measure and analyze happiness and its determinants. The goal is to inform policymakers and improve the overall quality of life by considering well-being as a key component of economic progress. Happiness Economics challenges the conventional notion that economic growth alone is a sufficient indicator of societal progress and advocates for a more holistic approach to policy-making.
Key Concepts– Subjective Well-being: The central focus of Happiness Economics is individuals’ self-reported well-being and happiness. – Happiness Factors: It examines factors that contribute to happiness, including income, employment, health, social relationships, and environmental quality. – Quality of Life: Happiness Economics considers overall quality of life, encompassing physical, mental, and emotional well-being. – Policy Implications: The field explores how policies can be designed to enhance people’s well-being and happiness. – Measuring Happiness: Researchers use surveys and assessments to measure and analyze happiness and well-being.
Characteristics– Multi-Dimensional: Happiness Economics recognizes that well-being is influenced by various dimensions of life, not just economic factors. – Policy-Relevant: It provides insights that can inform policy decisions related to education, healthcare, income distribution, and more. – Interdisciplinary: Happiness Economics draws from economics, psychology, sociology, and other fields. – Global Perspective: Researchers analyze happiness across countries and cultures to identify common determinants and variations. – Sustainability: The field considers the sustainability of well-being over time and its impact on future generations.
Implications– Policy Guidance: Happiness Economics can guide policymakers in designing policies that prioritize well-being and happiness. – Reevaluation of Success: It challenges the sole reliance on economic growth as a measure of societal success. – Healthcare and Education: Insights from this field can lead to improvements in healthcare and education systems. – Income Inequality: Addressing income inequality is a key focus, as it can impact happiness levels. – Environmental Concerns: Environmental sustainability is important to ensure long-term well-being.
Advantages– Holistic Policy Approach: Happiness Economics advocates for a more holistic approach to policymaking that considers the well-being of citizens. – Improved Quality of Life: Policies informed by this field can lead to improved quality of life for individuals and communities. – Balancing Economic Goals: It helps balance economic goals with the well-being of citizens. – Evidence-Based Policy: Policymakers can make informed decisions based on empirical evidence about what contributes to happiness. – Greater Life Satisfaction: A focus on well-being can lead to greater life satisfaction and happiness among citizens.
Drawbacks– Subjectivity: Measuring happiness is subjective and can be influenced by cultural and individual factors. – Data Limitations: Gathering reliable data on well-being can be challenging. – Policy Complexity: Implementing policies based on happiness economics can be complex and may require trade-offs. – Economic Growth: Critics argue that too much emphasis on well-being could hinder economic growth. – Interdisciplinary Challenges: Collaboration between different disciplines can be challenging.
Applications– Government Policy: Governments can use insights from happiness economics to shape policies related to education, healthcare, social welfare, and taxation. – Corporate Practices: Businesses can adopt practices that prioritize employee well-being and job satisfaction. – Urban Planning: City planners can design cities and communities that promote happiness and well-being. – International Comparisons: Researchers compare happiness levels and determinants across countries to inform global policies. – Mental Health: Insights from this field contribute to mental health initiatives and interventions.
Use Cases– Bhutan’s Gross National Happiness: Bhutan is known for its adoption of Gross National Happiness (GNH) as a measure of progress instead of GDP. Policies in Bhutan prioritize well-being, environmental conservation, and cultural preservation. – Happiness Indexes: Various countries and organizations have developed happiness indexes to measure and track well-being. For example, the World Happiness Report ranks countries based on happiness indicators. – Well-being at Work: Companies like Google have implemented practices that prioritize employee well-being and job satisfaction, which can improve productivity and retention. – Mental Health Initiatives: Governments and organizations worldwide are investing in mental health programs based on well-being research. – Urban Planning: Cities like Copenhagen and Amsterdam focus on urban design that promotes cycling, green spaces, and community engagement to enhance residents’ well-being.

Understanding happiness economics

The study of happiness economics involves surveys that ask participants to evaluate their level of happiness according to various quality-of-life traits, including economic security, leisure time, literacy level, relationships, income level, and freedom and control.

Study organizers then collate results and arrive at a score that measures the overall happiness of a demographic, region, or country.

While happiness economics measures more subjective aspects of an economy, supporters of the strategy suggest these factors make happiness economies more representative of real life. 

Why should this be the case? 

Neo-classical economic theory assumes higher income levels correlate with higher levels of utility and economic welfare.

This is certainly true for poorer individuals because increasing their income gives them access to food, shelter, and healthcare.

After a certain income is reached, however, there are diminishing returns on happiness as each dollar is added.

The precise point where this occurs is open to debate, but a Princeton University study found that the happiness of participants increased until they earned $75,000 per year.

Perhaps the most eloquent argument for happiness as an economic measure over metrics such as gross domestic product (GDP) came from Robert F. Kennedy, who once noted that GDP:

Does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither wit nor courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.

Countries that incorporate happiness economics

To reflect this new paradigm in economic theory, happiness economics metrics such as Gross Domestic Happiness (GDH) have emerged in the past few decades.

According to the 2021 World Happiness Report compiled by a group of independent experts, the ten happiest countries in the world are Finland, Denmark, Switzerland, Iceland, Netherlands, Norway, Sweden, Luxembourg, New Zealand, and Austria.

The fact that European countries occupy nine of the top ten spots is due to the region’s engagement in happiness economies.

The Organisation for Economic Cooperation and Development (OECD) gathers data from 35 member nations by assessing such indicators as housing, income, civic engagement, environment, and health.

Outside of the top ten, the countries most associated with happiness economics include:

Bhutan

The Bhutanese were the first to consider happiness as an economic measure, with the Gross National Happiness (GNH) Index first mentioned by King Jigme Singye Wangchuck in 1972.

The country measures nine quality-of-life factors, including health, education, use of time, psychological well-being, good governance, cultural diversity and resilience, ecological diversity and resilience, community vitality, and living standards.

France

In recent years, French economic happiness has been outpacing traditional GDP growth.

French organizations regularly hold masterclasses on positive business, the science of wellbeing, “happy culture” dinners, and “positive lobbying” to encourage political leaders to prioritize citizen well-being.

There are also groups within France looking to spread the message of happiness economics and campaign for related criteria to be included in governmental policy.

Key takeaways

  • Happiness economics is the formal study of the relationship between individual satisfaction, employment, and wealth. The study of happiness economics involves surveys that ask participants to evaluate their level of happiness according to various quality-of-life traits.
  • Happiness economics contradicts neo-classical economic theory, which suggests higher income levels correlate with higher levels of utility and economic welfare. This is only true to a certain extent and has less relevance in advanced countries with higher average incomes.
  • Happiness economics is a mainstay of European nations, with many of them scoring well in the recent World Happiness Report. Countries placing outside the top ten but with a strong happiness culture include Bhutan and France.

Key Highlights

  • Definition and Scope: Happiness economics seeks to go beyond traditional economic measures like income and wealth and focuses on broader indicators of individual welfare, such as happiness and well-being. It formally studies the relationship between individual satisfaction, employment, and wealth.
  • Measurement of Happiness: Happiness economics involves surveys that ask participants to evaluate their happiness levels based on various quality-of-life factors, including economic security, leisure time, literacy level, relationships, income, and freedom. The collected data is used to calculate an overall happiness score for demographics, regions, or countries.
  • Subjective vs. Objective Measures: Supporters of happiness economics argue that it provides a more holistic view of an economy by considering subjective well-being. This approach challenges the traditional economic theory that assumes higher income directly translates to higher utility and well-being.
  • Diminishing Returns on Income: The theory suggests that while increasing income is crucial for individuals in poverty to access necessities, there are diminishing returns on happiness beyond a certain income level. Research, like the Princeton University study, indicates that increased happiness plateaus after reaching a certain income threshold (around $75,000 per year).
  • Critique of GDP: Happiness economics challenges the sole reliance on Gross Domestic Product (GDP) as a measure of a country’s success. Critics argue that GDP fails to capture essential elements of well-being, such as health, education, relationships, and overall life satisfaction.
  • Robert F. Kennedy’s Perspective: Robert F. Kennedy eloquently criticized the limitations of GDP, stating that it fails to measure the aspects of life that truly matter, including health, education, beauty, and compassion.
  • Happiness Metrics: Countries like Bhutan and several European nations have adopted happiness economics metrics as part of their approach to measuring societal well-being. Bhutan introduced the Gross National Happiness (GNH) Index in 1972, evaluating factors like health, education, cultural diversity, and living standards.
  • Happiest Countries: The World Happiness Report, compiled by independent experts, ranks the happiest countries. European nations, like Finland, Denmark, and Switzerland, often dominate the top rankings due to their focus on happiness economics and well-being.
  • Case Studies: Bhutan is known for pioneering the concept of Gross National Happiness, assessing various factors contributing to citizens’ well-being. France has also embraced happiness economics, with organizations promoting positive business practices and advocating for citizen well-being in governmental policies.

Connected Economic Concepts

Market Economy

market-economy
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.

Positive and Normative Economics

positive-and-normative-economics
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.

Inflation

how-does-inflation-affect-the-economy
When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation. 

Asymmetric Information

asymmetric-information
Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.

Autarky

autarky
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.

Demand-Side Economics

demand-side-economics
Demand side economics refers to a belief that economic growth and full employment are driven by the demand for products and services.

Supply-Side Economics

supply-side-economics
Supply side economics is a macroeconomic theory that posits that production or supply is the main driver of economic growth.

Creative Destruction

creative-destruction
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

happiness-economics
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

Oligopsony

oligopsony
An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.

Animal Spirits

animal-spirits
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

state-capitalism
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

boom-and-bust-cycle
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

Paradox of Thrift

paradox-of-thrift
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.

Circular Flow Model

circular-flow-model
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.

Trade Deficit

trade-deficit
Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.

Market Types

market-types
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Rational Choice Theory

rational-choice-theory
Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.

Conflict Theory

conflict-theory
Conflict theory argues that due to competition for limited resources, society is in a perpetual state of conflict.

Peer-to-Peer Economy

peer-to-peer-economy
The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.

Knowledge-Economy

knowledge-economy
The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.

Command Economy

command-economy
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.

Labor Unions

labor-unions
How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.

Bottom of The Pyramid

bottom-of-the-pyramid
The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”

Glocalization

glocalization
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.

Market Fragmentation

market-fragmentation
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.

L-Shaped Recovery

l-shaped-recovery
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth.  The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.

Comparative Advantage

comparative-advantage
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846.  Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.

Easterlin Paradox

easterlin-paradox
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Economies of Scope

economies-of-scope
An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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