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Saturday, February 05, 2005


Economics of Happiness

The Wired article I just posted reminded me of another idea that I've wanted to write about for a while now. A recent article (sub.) in Time magazine has brought this to the masses, but there has been a significant amount of research going on in this field for a while.

Dr John Helliwell at UBC here in Vancouver is one of the new generation of economists doing really cool research on Econ. I attended his public lecture on this subject in downtown Vancouver last year, and he was kind enough to let me blog his presentation slides as well as a copy of his NBER working paper.

Some recap for context : the fundamental premise of modern economics is that of material scarcity and the value of utility. Econ 101 teaches that goods are finite compared to their demand, and therefore suppliers price goods according to the demand curve in a free market. Price conveys information about the expected utilty a consumer may derive from the goods.

John's key insight is this : given that we live in an era of hyper-productivity and high affordability in this age of abundance that we find ourselves in, the value of utility from goods in developed post-industrial economies has diminished. Modern economics is therefore inadequate to serve the purposes of this generation in western world. Economics must therefore be expanded and revitalized to base itself upon personal happiness, rather than utilty from goods.

Clearly, goods utility will be a sub-set of happiness utility. But the notion of re-building econ around personal happiness is truly revolutionary. This is the only way of thinking that I am aware of that can reconcile the ideals of a free-market system with the collective angst of a generation of hyper-consuming zombies, as well as the few sensible voices of the new age left that has genuine concerns about the concentration of corporate power and diminishing social capital in western societies. John actually goes on to quantify the value of happiness in his research, and puts dollar figures on negative and positive factors of happiness. This stuff has huge implications on macroecon, policy making and politics. Imagine, for example, being able to rationally debate about the cost of removing a social safety net : now you can actually put dollar figures on the cost to the society out of resulting unemployment and poverty. Remember that price expressed in monetery terms is only a measurement of value in the market. If we could extend it to the realm of subjective notions of happiness etc at even a societal aggregate level, we could get an order-of-magnitude higher insights. Psych and econ would come that much closer, and we'd be able to put a lot of socio-political issues in a whole new context.

John and other economists working in the field of Subjective Well Being (SWB), should be able to figure out an analytical framework for applying the SWB theory into the realm of the practitioner. Very important questions are already being asked, which is usually the sign of us being onto something. For example, see "Is Economic Growth Being Given Too High a Priority?". And this one: "National Happiness: Universalism, Cultural Relativism, or
both?
". You can almost see the emergence of explanations for things that we intuitively felt, but could never quantify. For example, every time I traveled back home to India, I could never understand the huge discrepancy between people's incomes and their happiness levels. People seemed to be far happier than what you'd expect them to be, based on their income levels. However, the reverse is true, in my personal experience, in Canada and US. Using the SWB framework, this could perhaps be explained by the much higher level of social capital arising out of numerous close personal relationships and family ties in Indian society compared to North America. A comparison of per capita GDP ranking vs. national SWB ranking makes for a very illuminating study. It is quite obvious that America would rank much lower on such surveys, for example, as the US society is driven by unhappy hyper-consumers, low social capital, high crime and low social safety nets. In fact, the model can even be extended to explain the US society's long-term movement towards extreme christian fundamentalism as a result of a collective quest to find their subjective well-being in religion.

I personally believe that these ideas also have the potential to revolutionize business management as we know it today. Just think about how much premium you can charge in real dollars over every dollar of happiness utility you can provide in your product. The entire service industry can be transformed overnight using these metrics : the opportunity cost of losing business due to bad service can now be literally quantified. Salaries can be designed by companies by accounting for a collective happiness expense. For example, we all intuitively know that if a job is more secure, people will accept less salary. Using the econ of happiness, some day we'll be able to calculate how much "insecurity premium" can we apply to jobs that can be terminated at will - or, even better, debate about the social cost of legislation that allows employees to be fired at will. Issues like this that have real implications on the society have never been analyzed in such a framework before.

This is awesome stuff, folks! It has the potential to revolutionalize business strategy and marketing as we know it today in the western hemisphere, and it will unleash vast opportunities for innovation over the next few decades.

NBER Paper

Presentation


-- Mahashunyam // 7:17 AM // 4 comments


Comments:

The Helliwell paper sounds fascinating, but I can't find an active link in your post. The NBER text reference at the end is not a live link.

Brian
// Anonymous Anonymous // 9:27 PM
 

My apologies...I've fixed the link now and it points to the paper. Still trying to tame blogger into uploading the presentation file, as it was personally sent to me by John and it's not posted on the web.
// Blogger Mahashunyam // 9:37 PM
 

Thanks!!

Just scanning the paper and it looks very interesting. I'm curious to see how it dovetails with the Kim/Mauborgne approach to value innovation.

Brian
// Anonymous Anonymous // 10:24 PM
 

That is a great post - nice one!
// Blogger umair // 6:07 PM
 
 

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