LSE Economics Essay Competition 2020 Submission - Economics of Happiness

Background Information

Over the summer, I completed a few essays and submitted them into respective essay competitions, just as a little bit of fun during the boring and seemingly eternal lockdown. This essay is the first competition that I have heard back from. Unfortunately, I did not win the essay competition; however, it has still provided for an invaluable experience. Not only have I learnt a lot more about the economics of happiness - which will inevitably help me to stay more positive in the future - but I believe it has aided me greatly in the other essay competitions that I have since then competed in (results pending). Finally, it has really helped me to cope under pressure as I only found out about this essay competition a few days before the deadline; keep in mind that entrants normally spend up to two months perfecting their essays. I hope that you enjoy my following essay and learn something valuable from it - I know that I did during my research! Let me know your thoughts and questions down in the comments section below.

The Essay

Q - According to Thomas Jefferson,‘The care of human life and happiness… is the only legitimate object of good government. ’What will change if governments make happiness the only policy objective?'

Seemingly everyone strives for happiness yet it eludes many. [1] Amongst academics, it is referred to as hedonia - ‘the presence of positive emotions and the absence of negative emotions’. [2] The task of providing an all-encapsulating definition of happiness is arguably an impossibility due to the subjective nature of the emotion. [3] However, increases in happiness follow changes in objective metrics, which can then be manipulated to improve a nation’s happiness. [4]

One of the fundamental assumptions behind traditional economic theory is the concept of utility theory. Consumers are assumed to be rational agents who derive utility - satisfaction - from consuming goods and services. [5] In any society that allocates goods in accordance to the price mechanism, consumers must have sufficient income in order to consume said goods. In effect, higher incomes allow consumers to reach higher indifference curves, thereby increasing their total satisfaction. [6] As satisfaction is synonymous with positive emotions, happiness should therefore positively correlate with increased incomes; which is the case when comparing the average scores of different nations on the World Happiness Report with their respective GDP per capitas. [7]

Ergo, one may argue that in order to increase societal happiness, governments must ensure that increasing real income levels is a major economic objective. Governments must thus focus on stimulating non-inflationary economic growth, resulting in an increase in real GDP. Typically, a firm, and thus an economy as a whole, must demand a greater quantity of labour so that it may increase its output. In order to incentivise more workers, firms must offer higher wages, resulting in increased income levels across the economy. [8] Greater incomes result in increased levels of consumption, resulting in greater economic growth and creating a self-perpetuating, virtuous cycle, assuming ceteris paribus. [9]

As expressed in the traditional Solow neoclassical growth model, technological progress is vital to increasing productivity and thus providing sustainable, long-run economic growth. [10] Thus one could argue that increasing investment in research and development initiatives will bring about greater economic growth in the long run. Such economic policies are already present in the UK economy. For instance, the UK government has recently unveiled The Sustainable Innovation Fund - a £200 million package dedicated to helping innovative businesses to recover from the coronavirus pandemic. [11] Such an initiative should result in increased incomes - as new jobs will be created - and living standards due to the potentially revolutionary goods created, increasing the average happiness of individuals.

Perhaps the best example of this is the exponential development of the digital industry in the past few decades. [12] Within the UK alone, the internet industry has created approximately 382,000 jobs, as well as contributing £44.6 billion to GDP. [13] Such economic growth alone will increase income levels, therefore allowing consumers to purchase more luxurious goods, which in turn should increase their level of happiness. But, it has also made information far more accessible, increasing social opportunities. Practically every industry is utilizing the internet in one medium or another, and thus this innovative good has revolutionized society. [14] Indeed research has shown that the internet has and will continue to improve global living standards. [15]

Thus, if maximising societal happiness was the government’s only policy, one could argue that it would be imperative to increase spending on technological innovation. One key issue, however, is a potential tradeoff between short and long-run happiness. To finance enormous fiscal policy packages, the government would have to sustainably source funds or risk accumulating an immense fiscal deficit. [16] Raising income tax, for example, may provide a quick source of revenue for the UK government. Disposable incomes, however, will decrease, resulting in falling aggregate demand within the economy. Thus, whilst the government is raising revenue, consumers may derive less utility, resulting in lower living standards. [17] Studies have also shown that higher income taxes normally cause a decline in overall happiness. [18]

However, this short-run tradeoff is arguably vital in order for happiness to increase in the long-run. The government will be able to utilise the increased revenue to fund projects that have the potential to improve the economy’s productive capacity. Individuals will be able to benefit from positive externalities generated from such spending - increased day-to-day convenience, for instance - as well as from increased real incomes. [19] Traditional economic theory would thus argue that despite a short-run decline, societal happiness should ultimately increase. 

But, there have been recent criticisms of such economic theory. Psychologist Daniel Kahneman concluded that beyond an annual salary of $75,000, increases in income have little impact on emotional well-being; in effect, money begins to suffer from diminishing marginal returns. [20] In certain circumstances, earning a higher income can reduce happiness as it requires working longer hours, resulting in increased social isolation. [21] Moreover, economic growth is not without its negative externalities.

Global economic growth has placed increased strain on natural resources. [22] In some major cities, air pollution has reached record highs and has contributed to the premature deaths of millions. [23] The threats of global warming, an issue exacerbated by globalisation, are ever-prominent in the minds of millions. [24] Thus, in developed nations, such as the UK, purely focusing on increasing incomes to correspondingly increase happiness will likely result in the opposite. The UK government, for instance, could sell its green spaces to housing developers in exchange for an immense monetary injection into the economy. However, such green spaces are valued at £30 billion a year for the direct benefits to wellbeing that nearby residents receive. [25] There seems to come a point where increasing incomes are no longer sufficient in improving one’s happiness. 

Leading economists point towards a policy of full employment and tackling inequity issues in order to increase a nation’s happiness. A job not only provides one with an income, but also a sense of belonging to a larger community. [26] Increased economic growth, according to Okun’s Law, does indeed reduce unemployment. [27] However, a key factor in happiness is job security; psychologists have shown that job insecurity drastically increases anxiety, reducing one’s happiness. [28]

The UK's JSA scheme acts as a safety net by ensuring that individuals who are seeking work have sufficient income to purchase the basic necessities of a modern society. In turn, consumers are less worried by unemployment prospects, reducing any potential stress. Classical economists argue, however, through the job-search theory, that such welfare benefits reduce incentives to work, thus increasing unemployment rates. [29] Despite this, data supports the notion that benefits claimants actually maintain a closer attachment to the labour market and thus spend a longer duration of time searching for a job that is better suited to their skillset. This does not only reduce employee turnover, but also improves job satisfaction and productivity as workers are able to do the jobs that they most enjoy. [30] This is also beneficial for the economy as a whole as increased productivity will result in increased macroeconomic growth. Thus the key in improving happiness seems to be improving social opportunities, which in turn will promote lower unemployment and increased economic growth.

This approach is likely the pivotal reason why Scandinavian countries consistently top the rankings in overall happiness. [31] Denmark has greatly improved social equity by offering free healthcare that is funded by a progressive tax system. Moreover, barriers to education have greatly been reduced due to their heavily subsidised childcare system and tuition-free universities. [32] In turn, parents with young children can still be economically active, and students can receive a higher education, regardless of their economic background. 

Such an economic system is often criticised for being extremely expensive. Indeed, Denmark is one of the most heavily taxed countries in the world. However, Danish happiness is not tainted by such high tax rates. [33] Contrary to traditional theory, behavioural economists have shown that altruistic acts yield greater happiness than simply receiving a higher income. [34] Ergo, Danish happiness is not affected as the fruit of their taxes are evident in the equality within their society. Such a welfare policy improves social cohesion, resulting in citizens having a strong sense of community and thus higher levels of happiness. [35] Psychologists have shown that relative performance is far more influential over one’s happiness than absolute performance. Individuals who see themselves as having equal opportunities and similar lifestyles to their peers are far happier than the contrary. [36]

Some argue, however, that such social equality results in a lower entrepreneurial spirit. Lower taxes in Western nations, such as the USA, reward those who climb the ‘social ladder’. In turn this promotes an environment for innovation. [37] Revolutionary products, such as AI systems, could greatly improve the living standards of millions, increasing the happiness of many. However, such a culture arguably results in individuals constantly comparing themselves to their counterparts, leading to mental health issues running rampant. [38]

The key to happiness thus lies in an equilibrium between innovation and social equality. Equality in sectors such as education is key to producing an innovative society. Governments must thus ensure that taxes are high enough to fund welfare measures that promote such equality, without significantly disincentivizing career progression. Such an outlook will create an environment that gives consumers all the necessary tools to build a happy, successful life.

Word Count (Excluding References): 1500/1500

References

[1] - Rainey, L., 2014. The Search For Purpose In Life: An Exploration Of Purpose, The Search Process, And Purpose Anxiety. [online] University of Pennsylvania. Available at: <https://repository.upenn.edu/cgi/viewcontent.cgi?article=1061&context=mapp_capstone>.

[2] - Ryan, R. and Deci, E., 2001. On Happiness And Human Potentials: A Review Of Research On Hedonic And Eudaimonic Well-Being. [online] p.144. Available at: <https://www.researchgate.net/publication/12181660_On_Happiness_and_Human_Potentials_A_Review_of_Research_on_Hedonic_and_Eudaimonic_Well-Being>

[3] - De Neve, J., Christakis, N. and Frey, B., 2012. Genes, Economics, And Happiness. [online] p.1. Available at: <http://eureka.sbs.ox.ac.uk/5468/#:~:text=Genes%2C%20Economics%2C%20and%20Happiness%20We%20explore%20the%20influence,in%20life%20satisfaction%20is%20explained%20by%20genetic%20variation.>.

[4] - Tay, L., Chan, D. & Diener, E. 2014. The Metrics of Societal Happiness. Soc Indic Res117, 577–600. https://doi.org/10.1007/s11205-013-0356-1

[5] - Fishburn, Peter C. 1968. Utility Theory. Management Science 14, no. 5: 335-78. www.jstor.org/stable/2628674.

[6] - OpenStax Economics. 2016. Principles of Economics. OpenStax CNX.  http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330.

[7] - Esteban Ortiz-Ospina (2013) - "Happiness and Life Satisfaction". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/happiness-and-life-satisfaction' [Online Resource]

[8] - Pettinger, T., 2019. Benefits Of Economic Growth. [online] Economics Help. Available at: <https://www.economicshelp.org/macroeconomics/economic-growth/benefits-growth/> [Accessed 28 July 2020].

[9] - DSEDP. n.d. A look inside the virtuous cycle of economic development. [online] Denver South Economic Development Partnership. Available at: https://denversouthedp.org/a-look-inside-the-virtuous-cycle-of-economic-development/#:~:text=A%20virtuous%20cycle%2C%20however%2C%20is%20when%20strong%20wages,and%20globally%2C%20higher%20wages%20are%20powering%20the%20cycle.

[10] - Boianovsky, Mauro & Hoover, Kevin. (2009). The Neoclassical Growth Model and Twentieth-Century Economics. History of Political Economy - HIST POLIT ECON. 41. 1-23. 10.1215/00182702-2009-013.

[11] - GOV.UK. 2020. Government Unveils £200 Million Package To Help Innovative Businesses Bounce Back. [online] Available at: <https://www.gov.uk/government/news/government-unveils-200-million-package-to-help-innovative-businesses-bounce-back> [Accessed 26 July 2020].

[12] - Bednarz, A., 2019. Evolution Of The Internet: Celebrating 50 Years Since Arpanet. [online] Network World. Available at: <https://www.networkworld.com/article/3410588/evolution-of-the-internet-celebrating-50-years-since

arpanet.html#:~:text=The%20number%20of%20computers%20connected%20to%20the%20Internet,handful%20of%20computer%20scientists%20to%201.5%20billion%20consumers.> [Accessed 28 July 2020]. 

[13] - Hooton, C., 2019. Measuring The UK Internet Sector. [online] Internet Association. Available at: <https://internetassociation.org/publications/measuring-the-uk-internet-sector/> [Accessed 25 July 2020].

[14] - ibid

[15] - Manyika, J. and Roxburgh, C., 2011. The Great Transformer: The Impact Of The Internet On Economic Growth And Prosperity. [online] McKinsey Global Institute. Available at: <http://dese.ade.arkansas.gov/public/userfiles/Legislative_Services/Quality%20Digital%20Learning%20Study/Facts/McKinsey_Global_Institute-Impact_of_Internet_on_economic_growth.pdf>.

[16] - Ross, S., 2020. Understanding The Effects Of Fiscal Deficits On An Economy. [online] Investopedia. Available at: <https://www.investopedia.com/ask/answers/021015/what-effect-fiscal-deficit-economy.asp> [Accessed 22 July 2020].

[17] - Gale, W. and Samwick, A., 2016. Effects Of Income Tax Changes On Economic Growth. [online] Brookings. Available at: <https://www.brookings.edu/research/effects-of-income-tax-changes-on-economic-growth/>.

[18] - Taurean Hutchinson, Ishraq Ahmed & Pavlo Buryi (2017) Impact of income tax on happiness: evidence from the United States, Applied Economics Letters, 24:18, 1277-1279, DOI:10.1080/13504851.2016.1270411

[19] - OpenStax College, n.d. Principles Of Microeconomics Chapter 13.2. [online] OER Services. Available at: <http://cnx.org/contents/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24/Microeconomics>.

[20] - Kahneman D, Deaton A. High income improves evaluation of life but not emotional well-being. Proc Natl Acad Sci U S A. 2010;107(38):16489-16493. doi:10.1073/pnas.1011492107

[21] - Simon-Thomas, E., 2016. Are The Rich More Lonely?. [online] Greater Good. Available at: <https://greatergood.berkeley.edu/article/item/are_the_rich_more_lonely> [Accessed 24 July 2020].

[22] - FriendsOfTheEarth, 2009. [online] Overconsumption? Our use of the world’s natural resources. Available at: <https://www.foei.org/resources/publications/publications-by-subject/economic-justice-resisting-neoliberalism-publications/overconsumption-our-use-of-the-worlds-natural-resources>.

[23] - WHO. n.d. Air Pollution. [online] Available at: <https://www.who.int/health-topics/air-pollution#tab=tab_1> [Accessed 27 July 2020].

[24] - FriendsOfTheEarth, 2009. [online] Overconsumption? Our use of the world’s natural resources.

[25] - Harvey, F., 2011. UK Green Spaces Worth At Least £30Bn A Year In Health And Welfare, Report Finds. [online] The Guardian. Available at: <https://www.theguardian.com/environment/2011/jun/02/uk-green-spaces-value> [Accessed 22 July 2020].

[26] - Easterlin, R.A. (2013), HAPPINESS, GROWTH, AND PUBLIC POLICY†. Economic Inquiry, 51: 1-15. doi:10.1111/j.1465-7295.2012.00505.x

[27] - Furhmann, R., 2020. Unemployment And Economic Growth: Okun’S Law. [online] Investopedia. Available at: <https://www.investopedia.com/articles/economics/12/okuns-law.asp> [Accessed 25 July 2020].

[28] - Nella, Dimitra & Panagopoulou, Efharis & Galanis, Nikiforos & Montgomery, Anthony & Benos, Alexis. (2015). Consequences of Job Insecurity on the Psychological and Physical Health of Greek Civil Servants. BioMed Research International. 2015. 10.1155/2015/673623.

[29] - Faggian, Alessandra. (2014). Job Search Theory. 10.1007/978-3-642-23430-9_8.

[30] - Wadsworth, Jonathan. 1991. Unemployment Benefits and Search Effort in the UK Labour Market. Economica,58(229), new series, 17-34. doi:10.2307/2554973

[31] - Martela, F., Greve, B., Rothstein, B. and Saari, J., 2020. The Nordic Exceptionalism: What Explains Why The Nordic Countries Are Constantly Among The Happiest In The World. [online] World Happiness Report. Available at: <https://worldhappiness.report/ed/2020/the-nordic-exceptionalism-what-explains-why-the-nordic-countries-are-constantly-among-the-happiest-in-the-world/>.

[32] - Denmark.dk. n.d. Why Are Danish People So Happy?. [online] Available at: <https://denmark.dk/people-and-culture/happiness> [Accessed 26 July 2020].

[33] -  Wiking, M., 2016. Why Danes Happily Pay High Rates Of Taxes. [online] USNews. Available at: <https://www.usnews.com/news/best-countries/articles/2016-01-20/why-danes-happily-pay-high-rates-of-taxes> [Accessed 28 July 2020].

[34] - Simon, H. (1992). Altruism and Economics. Eastern Economic Journal,18(1), 73-83. Retrieved August 1, 2020, from www.jstor.org/stable/40325366

[35] - ibid

[36] - Sturm, M., 2019. The Important Distinction Between Absolute And Relative Happiness. [online] Medium. Available at: <https://medium.com/swlh/the-important-distinction-between-absolute-and-relative-happiness-28b10dc5fe7d> [Accessed 27 July 2020].

[37] - Akcigit, U., Grigbsy, J., Nicholas, T. and Stantcheva, S., n.d. Higher Taxes Tend To Suppress Innovation. [online] LSE US Centre. Available at: <https://blogs.lse.ac.uk/usappblog/2019/07/06/higher-taxes-tend-to-suppress-innovation/> [Accessed 25 July 2020].

[38] - Eckersley, R., 2005. Is Modern Western Culture A Health Hazard?. Oxford University