Revised version of the paper to 7X7 seminar, Wellington, 22 July, 2008
Keywords: History of Ideas, Methodology & Philosophy;
What is the purpose of it all? For 200 years economists have assumed that the more material goods the better, and the purpose of the economy was to supply those goods. The notion that more consumption means you are better off is central to almost all public economic discussion. Keynes’ defunct economists have been shaping the way the public thinks about things. The public believes them.
Today economists are beginning to have their doubts. The accumulating evidence is that if you ask people about their wellbeing, their answers do not correlate with their material consumption. The most spectacular example is that Americans they have been asked such questions for over half a century. In that time their material consumption per person has trebled, but the proportion reporting they are happy has hardly changed at all.
Other evidence is that across rich countries, the proportions who report they are happy is not dependent upon their Gross Domestic Income per capita. Were New Zealand there in the top half of the OECD on this income measure, we would not be any happier – no doubt commentators would grumble as usual too. And people who are higher in the income distribution are only marginally happier than those lower down. It turns out a good marriage has a higher impact than higher income.
And yet people’s responses are largely understandable and consistent. I have not time to go through the patterns, but there are a couple of caveats.
First, the inhabitants of very much poorer countries say they are unhappy. This suggests there is a threshold below which extra material consumption improves well being. But New Zealand is well above that threshold. Perhaps this threshold effect is about Maslow’s hierarchy of needs . The economy only contributes to the lowest – physiological needs, perhaps safety needs – and when they are met, the remaining become more important: the needs for belongingness and love; esteem needs; the need for self actualisation; and the need for cognitive understanding (which is the highest).Second, a rising material standard of living has other effects, such as better health and longer life. So despite not being happier at any point in time, we are happier for longer.
But the caveats dont take away the challenge that additional material consumption in New Zealand probably does not increase self-reports of wellbeing.
By far the largest response to these findings is to ignore the evidence. The world may be round, but we insist it is flat. and ignore the pointers to the roundness.
A second response is to deny the evidence. The most common denial argues that people dont know that they are saying about themselves. But if they dont who does? The implications of that response lead to the authoritarian state where those in charge know what is best for you – they will make you happy.
Thus far there have been two valid approaches to interpreting the evidence. One is to emphasise that material consumption has the potential to improve choice, and that life options are an important goal as is happiness. It is a complex theory and I have not time to explain it this evening. It’s probably tied in with Maslow’s hierarchy of needs.
The second approach is to argue that what determines happiness is not what you consume but how much you consume relative to others. Economic growth – trebling material consumption in fifty years – lifts all boats. Relative positions remain the same on average, so there is no lift in average happiness.
I use the rest of my time to explore the implications of this theory – assuming it is correct.
So as long as we have a single measure of worth – your income or material standard of living – we cannot improve people’s happiness. There are always going to be half below average. But suppose we had a number of different dimensions of the social position, which did not exactly align, so that some people did well on one dimension, but others did better on others; that being rich is not the only thing which gives status in life.
There is a lot of folk wisdom along these lines. My father insisted that decency was more important than wealth. He thought some wealthy were not decent, perhaps they became wealthy via indecent means. On the other hand being wealthy may make it easier to pursue decency. But let us never forget the widow’s mite.
More fundamentally, economists have captured the public debate with a theory that additional material affluence corresponds to additional wellbeing.. They dont have to argue their case because everybody believes it and argues the economists’ theories for them. Yet the economists’ theory may be wrong. We are slaves of defunct economists, and they may well be misleading us.
In summary, then. Dont worry (about economists): be happy.