Oh dear

This is going to be one of those economics papers which will be waved in our faces:

Complex economic formulas developed by two professors of economics, Curtis Eaton and Mukesh Eswaran, and published in the current edition of the Economic Journal, suggest that greater affluence can seriously damage a nation\’s health. Based on their mathematical modelling, the economists advance the theory that once a country reaches a reasonable standard of living there is little further benefit to be had from increasing the wealth of its population. Indeed, it could make people feel worse off.

Veblen Goods….conspicuous consumption. Once we get to a certain level of wealth most extra spending goes on positional goods. So extra wealth doesn\’t make us happier.

Thus, and you can see the thus arriving, we shouldn\’t be trying for economic growth. We should do the equality bit, whatever the hit to growth, for that does make us happier.

Politically, this is the point (no, not the reason the research was done, rather, the use to which it will be put). The grand argument against some (most, all, to taste) redistribution effoprts is that there is an economic cost in the form of growth and wealth foregone. Deadweight costs of taxes and so on.

However, if we can say that a) that growth doesn\’t make us happier and b) that happier is the aim, then we can now ignore that lost growth and go for the equality….whatever the cost in lost wealth.

So you can see the political impact of such a paper.

However, there\’s two major problems with this view.

The first is that the Easterlin Paradox itself (the idea that happiness does not increase with wealth, once past a certain point) has been recently refuted. Richer people in richer countries are indeed happier.

The second is that few (I don\’t claim this as an original thought of my own but it is few who even consider it) consider the following point.

It\’s not the level of wealth that endows happiness…it\’s the increase in it that does. Growth of, say, 2% or 3% in average living standards (about right for capitalist economies over the past couple of hundred years) doesn\’t mean that tomorrow will be better than today. Variance around the trend is too high for that. But it does mean that next decade is going to be better than this, that the lives of our children will be better than ours, that our grandchildren will live in what would seem from our own childhoods to be the very lap of luxury. For growth of that sort of level means a doubling of living standards each generation or so.

This is something which causes happiness….and the absence of this \”things can only get better\” will, I submit, cause unhappiness.

All of which brings back into the argument the point that we cannot, whatever this new paper says, go for the equality at whatever cost to growth. For it\’s the existence of the growth itself which causes the happiness, not the level of wealth.

15 thoughts on “Oh dear”

  1. What’s wrong with these responses: 1. okay, let’s think about what makes us happier and perhaps spend some money (or do things in a more costly way than we might otherwise) trying to raise happiness and 2. let’s keep trying to improve productivity (i.e. keep economic growth) so we can afford to do things that don’t make us any happier, but are useful for other reasons. Like investing in sustainable energy, environmental recovery and protection, better education and social services. (And are people going to argue that better schools, better care for the elderly, better care for children from messed up families etc. don’t contribute to happieness?).

    Even if it is true that beyond a certain level of income, at the aggregate level, more income doesn’t seem to lead to more happiness, I just don’t see how that leads to the conclusion that increasing productivity is worthless.

    Tim adds: That second is certainly true. But you and I know, absolutely, that that isn’t the way the research is going to be interpreted.

  2. It is quite true that beyond a certain level, proper capitalism kicks in, i.e. “Spending money you don’t have on things you don’t need to impress people you don’t like” and that the net impact on overall ‘happiness’ is minimal (and I can see arguments to say that overall ‘happiness’ might even be diminished) but ….

    … that will happen however equal or unequal people are overall, as mainly you compare your ‘positional goods’ with friends and neighbours and colleagues and so on. At Eton you boast about your Dad having a Ferrari, at a normal comprehensive or grammar school you boast about your Dad having a new car, and at an inner city sink school you boast about having a Dad.

  3. Firstly, any mathematical model rests on fundamental axioms which are assumed, and cannot be proved. Mathematicians endeavor to reduce the number of axioms to a minimum, but they are always there. Consequently the value of a mathematical model (like that of a computer model which is simply a particular type of mathematical model) can be no greater than the accuracy of those initial assumptions- and can easily be far less.
    Secondly, what is the level of wealth proposed as optimum? If it is that enjoyed by, say a Guardian columnist or a professor then we have an awful lot of wealth to create before we get there. If it less than that then the aforesaid people can much increase both their own health and happiness, and that of people less affluent than themselves by simply giving their money to those poorer than themselves- I would like to take this opportunity to offer them my help in this regard.

  4. The major flaw in this stuff from the “positive social sciences” school is that it depends on self-reported levels of happiness. The problem being that we as individuals are very poor at judging our own future happiness because we don’t take into account hedonic adaption. For example, I believe there is a study that lottery winners and tetraplegics crippled in an accident both claim they felt the same well-being one year after their life changing experience they did before.

    Consequently there is an equation of pleasure with happiness; if I had this, that or the other then I’d be happy. But this is almost never true.

  5. Of course, the other point is that when you give people freedom in the economic sphere, they choose to keep on increasing their wealth. It would be perfectly possible for them to emigrate to a middle-income, low growth country or go to the deepest countryside to live ye olde farmer’s life, etc. etc., yet almost no-one chooses to do this. Instead, people all over the world try their hardest to improve their wealth within the capitalist system.

    Thus any attempt to stop the free market and growth will inevitably require coercion. And I’m certain that too much coercion makes people unhappy.

  6. Sorry chaps… Economics, Sociology, Climatology are all pseudo-science at best and pure unadulterated bollocks at worst.

    All three are proven to have no predictive ability and therefore cannot be taken seriously by anyone with a decent scientific education.

  7. Pogo:

    Economics, at least that of the Austrian School, is as “scientific” as can be imagined; not like physical science, to be sure, but as precise within its limitations as mathematics. Though its theorems are aprioristic (and, therefore, dismissed by positivists as “truistic” or teloelogic), within its sphere of application it is accurately predictive (to the startling extent that Mises predicted, in 1920, that, although it might take several generations, one day we’d wake up and the USSR would have ceased to exist, virtually overnight).

  8. Every so often, I see something purporting that Africa is the happiest place on Earth. Mebbeso.

  9. “we as individuals are very poor at judging our own future happiness”

    Well, I’m a damn sight better at judging mine than anyone else is. Let them look after their own happiness, and let me do likewise.

  10. Pogo:

    You’d have already lost your bet–many times over.

    You are evidently unfamiliar with the Austrian methodology. Within its sphere of application, it is both reliably descriptive of “what’s going on” and, as well, of what necessary outcomes must look like.

    The normal activity of Austrian economists is not usually focused on trying to predict unique events nor to quantify aggregates but, even in those realms, its adherents have proved surprisingly prescient (and accurate).

    Whether you’d read Mises writing from nearly a hundred years ago or much later (after coming to the U.S.), you could hardly avoid being struck by the accuracy of his anticipation of unfolding
    events, both strictly economic and political (to the extent that the latter were linked to the former).

    Just as a very general example, you’d find that no (and I mean none) Austrian School adherents were in any way surprised by recent events in the financial world: we find in them the completely unavoidable outcome of previous and long-established policy and policy direction (all under the “management” of those presumed “leading lights” in the world of mainstream economics).

    It is true that Austrian School economics has, so far, failed in its primary mission: spreading of economic understanding sufficiently to avert an ever-more-imminent decline of civilization.

  11. Pogo:

    I’m fond (as some have probably noticed) of true stories; so, here’s are a couple for you.

    In 1980, gold hit the unheard-of (and not exceeded until recently) high of $850 per oz. troy.

    That news caused me financial problems. I was on the upper Caroni River (south of Angel Falls in Venezuela) gold-prospecting (actually more or less a glorified camping trip). We’d met a woman in a boat selling fruit and vegetables along the river and she’d given us the market news (from SW radio). The news made our two Pemon guides extremely excited; they wanted to go down-river to the general store where they could “cash in” the dust in their pokes while the price was so high. That meant losing their services (35 miles each way and gasoline at $3.50) for the better part of 2 days. So, I simply offered (without knowing how much they had) to buy their stashes at market (How much could I lose? I could still sell in the same place after we’d returned and only lose whatever amount the market had moved in the interim.) Luckily (for the size of my wallet), the total (between the two, even at the elevated price) came to only $45 (roughly a day’s pay for each of them) and we continued on our way without interruption.

    A couple months later, back at home (in NJ), I was watching TV. The guy talking was fairly well-known at the time, a frequent commentor on financial matters; he was the chief economist for one of the big brokerage houses–a guy by the name of Ed Yardeni. On this occasion, he was describing how excited he’d become on hearing the same news (on TV) as we’d gotten way back in the bush. Up to that time, he’d not bought gold and didn’t think it a good investment. But, on hearing the news, he rushed out and bought (at retail, over a counter) many thousands of dollars worth of Krugerrands. And we all know how that investment played out (at least for the next 20 years or so).

    On 9/12/01, the day after the attack on the WTC, I was sitting in my office; my wife was watching one or another TV news program. I heard whoever was speaking explaining, very forcefully, that, tragic as the event had been in terms of loss of human life, it was, nevertheless, an enormous boon to the U.S. economy, as the destruction would necessitate a wave of rebuilding and even the life loss would require the hiring of so many new employees.

    “Who the hell is that?” I yelled to my gal (though I was almost sure I recognized the voice). “You know who–your favorite economist.” Of course, the guy was the now enNobelized Paul Krugman.

    I ask you: how can presumably intelligent people be so completely stupid?

  12. Gene…

    13:49 – I’m postulating “predictive” abilities not “descriptive”. I’m aware of the Austrian School and that, as you rightly say, its adherents have proven to be “surprising prescient (and accurate). However, as I see it, their prescience is based upon extrapolation and interpretation of prior events, not on what I would consider “genuine computation”.

    I’m (actually “was” as I’m retired) a physicist and I can sit down at my computer, or with a calculator, or (if my patience held out) a pad and paper, and by the application of Newton’s Laws of Motion and his Laws of Gravity, design a framework to move a spacecraft from Earth orbit to Lunar orbit. I know that, strictly speaking, Newton is “wrong” but there’s no need to involve Einstein as nothing’s going fast enough to need the extra precision. That said, Newton’s Laws are accurate enough to calculate such things as re-acquisition of signal after passing “behind” the moon to an astonishing degree of accuracy. No branch of Economics has even remotely similar precision – to this old-fashioned scientist it looks far more like “educated guesswork”, or, as I once saw it delightfully described in a translated manual, “rule of thump”.

    Economics is held back by human nature – something as chaotic as the weather and until we finally develop Asimovian “Psychohistory” it can only be descriptive, albeit forwardly so in a very limited way.

    15:15 – I’m not sure whether you’re trying to make my point for me. 🙂

    I think that the, ultimately dangerously ineffective, involvement of the “rocket scientists” in the big dealing and brokerage houses shows that the markets have a very large degree of innate incomputability.

    “I ask you: how can presumably intelligent people be so completely stupid?”

    Quite easily… I bought RBS when they were about five quid and didn’t bail out in time! 🙂

  13. Pogo:

    You know, of course, about the three constipated mathematicians:

    The first solved the problem with a pencil and some paper.

    The next used his slide rule.

    The last one worked it out with logs.

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