happiness-economics

What Is Happiness Economics? Happiness Economics In A Nutshell

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.

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.

Connected Business Concepts

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.

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. 

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.

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.

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.

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