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The Economics of Happiness

2013 April 28

Happiness is supposed to be what we value above all else. Even in ancient times, Aristotle wrote that “Happiness is the meaning and the purpose of life, the whole aim and end of human existence.” I think most people would agree. After all, who wants to be miserable?

So it’s strange that we pay so little attention to happiness. When the OECD ranked the US first out of 36 countries in terms of household wealth, but only 12th in life satisfaction, the response was… nothing.  No big headlines or blue ribbon panels or congressional committees or even a furrowed brow.  Nothing.

Compare that to the sanctimonious handwringing when there is even a slight dip in GDP or a weak jobs report or a mildly troubling manufacturing index and it becomes clear that, while we say we pursue happiness, we do very little to produce it, or even measure and monitor it.   Is it any wonder than we’re ever more prosperous but no more happy?

A Personal Story

When I moved to Eastern Europe in the mid-nineties, the first thing I noticed was how poor everyone was.  It wasn’t just incomes that were low, housing was in shambles, streets were dirty, stores lacked products and food quality was pitiful (I got food poisoning on a regular basis that first year).

Yet as I settled in, learned the local languages, travelled widely throughout the region and visited people in their homes, I began to realize that many of them were genuinely happy, even if their living conditions left much to be desired.  What’s more, they were generous, readily sharing what little they had.

It took awhile, but I eventually began to realize why.  Much of what we need doesn’t require money (or at least not very much of it).

Those who don’t go to fancy nightclubs can visit friends at home.  A doctor doesn’t need a Mercedes to serve her community, just skill and caring.  Favors can be traded, goods bartered.  Gifts, even modest ones (like the bottle of shampoo someone presented me with one Christmas), can be given and received enthusiastically.

The Clothesline Paradox

Tech visionary Tim O’Reilly calls the phenomenon I experienced in Eastern Europe the Clothesline Paradox, based on an argument for alternative energy dating from the 70’s. The basic concept goes like this:  If you put your clothes in the dryer, the activity gets counted as part of the economy, but if you hang it up on a clothesline, it just disappears.

O’Reilly sees the dilemma as a fundamental confusion between value creation and value capture.  We find it easy to put a value on the activity of Goldman Sachs and Morgan Stanley (except, of course, when they crash markets), but very difficult to calculate the contribution of Tim Berners-Lee, who created the Web and gave it to the world.

On an individual level, it is easy to see why a highly paid investment banker works a 90-hour week, but somewhat harder to quantify the pleasure and sense of accomplishment a hacker gets from contributing code to Linux, Apache or a host of other open-source platforms that have become crucial to the information economy.

Economists call situations like these externalities and try to account for them by estimating their economic contribution, but the concept is a clumsy one.  When a kid creates a viral video and uploads it to YouTube, money ends up at Comcast or another Internet service provider in the form of higher usage fees.  Who gets the country club membership?

When Profit Doesn’t Suffice

Anybody who has ever run a business knows that accounting has its limitations.  You try your best to make the numbers work, to allocate costs in a sensible way and to reward true performance, but you know that ultimately good management is about judgment, not calculation.

As Irving Wladawsky-Berger described in a recent blog post, when formulating IBM’s Internet strategy in the ‘90’s, he had to look beyond direct revenues because much of the benefit was thinly distributed across the company.  Narrowly looking at the profit and loss of the Internet initiative alone would have compromised the well-being of the business.

This is often known as the profit paradox.  Just as societies who excessively focus on GDP can harm general well-being, managers who pursue only profits often earn less for their enterprise. Once we start pretending that what we can’t easily measure doesn’t actually exist, we begin to sow the seeds of our own destruction.

Former GE CEO Jack Welch called the notion of formulating business strategy on the basis of shareholder value the dumbest idea in the world.  Can the notion of basing a society’s policy priorities on economic value be far behind?

The Quest For A “Happiness Indicator”

In order to fill the gaps left by GDP and other economic indicators, many organizations are beginning to try to formulate a broader approach through the concept of Gross National Happiness.

The effort, while far from uniform, is already fairly widespread.  The UN has proposed a measure that incorporates 9 indicators, the OECD has developed an alternative approach that aggregates 11 metrics, UK Prime Minister David Cameron has promoted a well-being index and even the small city of Somerville, MA has a happiness project.

Perhaps not surprisingly, the tech community has joined the happiness movement.  John Havens has launched the H(app)athon project which seeks to “hack” happiness by combining questionnaires with sensor data collected through smartphones over a two week period.

The app correlates its sensor data with the questionnaire responses to discover the behavior patterns that reflect happiness, such as whether you’re happier when you’re more active and whether you’re stressed at certain times of the day or week.  The data will then be fed through an algorithm that will both give assessments and make recommendations.

Should We Optimize Happiness?

There is no doubt that happiness is becoming a movement and a welcome one at that. However, there is one thing that nags at me: By quantifying happiness, can we avoid losing sight of its true value?

What most surprised me when I arrived in the former Eastern Bloc was that many people were relatively happy even under the old Communist system.  Not because they liked the system or that they would like to return to it, but because they had many of the things required for happiness, such as good friends, strong families and community ties.

So while happiness is certainly a worthy personal goal, it may be an unrealistic one for societies.  Maybe what we really should be shooting for is dignity, which Immanuel Kant defined as the right for people to be treated as ends in themselves, rather than as means to an end.

In other words, our personal well-being stems from having both the means and the freedom to choose how we wish to seek fulfillment.  The truest measure of happiness, after all, is the right to define it for ourselves.

– Greg

11 Responses leave one →
  1. April 29, 2013

    Greg, LOVE your article – found it through RIT LinkedIn. I would love for you to review my new book, “Living Simple, Free & Happy.” Please let me know and I’ll send you a copy!

  2. April 29, 2013

    Thanks Cristin. Unfortunately, even the thought of “Decluttering”makes me a bit depressed (I’m a hopeless slob), so best to save the postage.

    Good luck with it!

    – Greg

  3. April 30, 2013

    I believe one’s mentality and satisfaction depends on how close the cube is. The more comparable the surrounding, more would be satisfaction level. Consider a small captive village or in sense the North K***a. Comparisons diminish when awareness is at least. Hence the satisfaction increases as comparisons are done on a same level or where,, tolerance from the mean is minute.. Here, I would talk of around 80% of the thought processed psychologies… Other 20 percent may exist out of my sphere! 🙂

  4. April 30, 2013

    Interesting thoughts. Thanks for sharing.

    – Greg

  5. May 6, 2013

    Great article with great hard hitting facts. Loved it. Will share in my circles.

  6. May 6, 2013

    Thanks Sanjay!

    – Greg

  7. May 7, 2013

    Another great article and timely article, Greg. You’ve referred to a lot of interesting citings that I need to spend some time on as well.

    This reminds me of an interesting piece on Adbusters about Ken Boulding, the controversial economist from the 40s-60s who advocated measuring economic output based on quality rather than quantity in order to account for happiness:

    I also think happiness is a very relative measurement. One may be happy with one’s current emotional/economic status but the moment others are brought into the picture to be compared against, one’s self-perception of what should be a point of happiness can drastically shift. If you’re the only one in the neighborhood without a Corvette, then you might suddenly be unhappy to have one!

  8. May 7, 2013

    Very good point Ali. I think “well-being” is probably a better term.

    – Greg

  9. Ria Carlo permalink
    July 22, 2013

    Another terrific article by Greg. I wonder if people in Eastern Europe are happier because they’re not schooled in their culture to the expectation of driving the big cars, living in the big houses, and eating in expensive restaurants…in other words, they might not know what they’re “missing.” This article is so thought-provoking on many levels, including the sociological, economical, and psychological.

  10. July 22, 2013


    The people in Eastern Europe don’t actually rank very high either (my experience was anecdotal), but if you look at the countries that do, like the Scandinavian countries, there is a difference in priorities. It’s not that a big house or a big car makes you unhappy, but equating it with happiness seems to.

    And poverty doesn’t make you happy either (in fact, the opposite is true), but there does seem to be a threshold (around ($75,000 per year) beyond which more wealth doesn’t make you any happier.

    – Greg

  11. Ria Carlo permalink
    July 22, 2013


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