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‘Money is not the only thing.’ I bet that all of us would have heard this age-old saying at least once in our life. But history knows that we have always measured our economic growth and development based on just the GDP figures and monetary terms which certainly indicates that money is everything for our policymakers. GDP as a measure of economic activity has been in use since 1944 and no one has been able to challenge it.

A country with the highest GDP figures and monetary growth is considered to be the most developed through all these years. Now, exactly what is the problem that I wish to point out in this system?

Even the pandemic has impacted human well being and happiness to a great extent. Increasing deaths and lockdowns, loss of jobs, salary cuts etc. led to stress, anxiety and trauma among humans. Quite surprisingly (actually not so surprising) in response to the pandemic, we have always discussed the factors like economic growth, per capita income, FDI but never talked about human well being.

Our system and valuations have clearly ignored the aspects related to human well-being and welfare. Even though (to some extent) monetary growth leads to the removal of poverty and development, it fails to account for human satisfaction and personal growth. Similarly, growth in income and employment levels do not necessarily result in better lives and do not depict a complete picture of personal growth. Countries like India, China, Germany, the US and Turkey are the perfect examples wherein on one hand we witnessed economic growth but on the other hand, life standards declined. Surprisingly, the US reports a maximum number of mental health cases despite having a strong economy of $21.43 trillion (approximately). GDP does not include activities like unpaid household work; however, it is clearly an activity of great importance. In the 1980s Amartya Sen argued that there is a need to distinguish between ‘commodities’ which are included in GDP and ‘capabilities’ which are not accounted for in GDP. Now, if considered from an economic point of view globalisation has led to increasing opportunities and development thereby leading to a decrease in poverty. However, some believe that it led to income differences, and insecurities among the people who weren’t capable to adopt the latest technologies.

It is quite evident that the objective (monetary terms) and subjective aspects (i.e. how people experience the happening of a certain event and in different circumstances) don’t tell the same side of the same story.

Not only do both these aspects give us two different sides but considering just the objective aspects may even lead to half picture. For instance, there is a tendency that people choose satisfaction over salary while choosing a job. This act of choice defeats the concept of utility maximisation as seen in a classically Walrasian sense.

Therefore, it becomes really important to understand both the objective and subjective aspects to get a complete picture of the story.


Robert F Kennedy once said, “GDP measures everything, except that which makes life worthwhile”. This statement can turn out to be an eye-opener for our policymakers and can force them to think about the authenticity of GDP valuations.

The need to broaden the horizon from monetary terms to human well-being and welfare is being emphasised not just because the subjective aspects complement the objective part but also because the subjective part is really valuable in itself. Being happy and content in life is something that everyone is looking for in his/her life, therefore subjectivity becomes an important criterion.

Therefore, people’s accounts and viewpoint on how they are doing in their life is an important standard and can provide information that standard progress indicators of work quality, monetary measures may fail to do or may provide misleading results.

For example, an economist looking at salary and compensation alone may not decide why workers decide to quit their job. But by including job satisfaction or perceptions of doing meaningful work such job changes and quits may become clear.

So it is really important to include such subjective aspects in our calculations and we need to discover the best and the most appropriate method for the same.

Now, most of you might be thinking that how can we measure social standards like happiness, satisfaction, comfort etc in quantitative terms. Your thought process is absolutely correct and just like you, the classical and neoclassical economists saw happiness, human well-being, or life satisfaction, as unmeasurable and unattainable.

But things changed when, in the early 1950s and 1960s, various psychologists and sociologists started questioning GDP valuations and argued for the discovery of a quantified evaluation of social indicators. This led to the discovery of “happiness economics”(also known as proxy economics). However, happiness economics is not just about happiness. It is much more than that and focuses on all the social and emotional aspects of life such as satisfaction, comfort, security, stability etc. one experiences. The word happiness has been attached just because many consider it is a ‘buzz’ word that attracts immediate attention.

This theory came into existence for the very first time in the early 19th century when various philosophers and economists such as Mill and Bentham viewed happiness as the sum of good minus bad feelings.

Soon scientist named Edgeworth came up with an instrument called “hedonometer” similar to a thermometer which was used to measure physiological feelings such as pleasure, pain, satisfaction etc. Since then, the economic pursuit of happiness has grown and have become more quantitative.

As a result, with its introduction, social and subjective factors are no longer considered a vague and unattainable aspect but are treated as a measurable index.

If put up in simple words, the economics of happiness or happiness economics is an approach to assess welfare that combines the techniques typically used by economists with those more commonly used by psychologists. Quite obvious, it relies on more expansive notions of utility than does conventional economics, highlighting the role of non-income factors that affect well-being.

It basically relies on surveys of the reported well-being of hundreds of thousands of individuals across different countries and continents in order to reach out to results and conclusions. The thought process behind conducting surveys is based on thinking that people are the best judges of how their own lives are going on, so no one can give the best results except the people themselves. Such surveys provide insights into the significance that factors like well-being, health, income, employment status, freedom hold in one’s life.

However, conducting surveys is not an easy tax and involves huge expenditure and time commitment. So is it really worth it?

According to me- yes, it is definitely worth the effort because the results reflected by these surveys and happiness economics provide us with a deep insight into various aspects which the traditional methods fail to do.

  • Happiness surveys help in examining the impacts of various macro policy arrangements initiated by the government and policymakers on human well being, for instance, the unemployment-inflation tradeoff. According to the standard misery index, both inflation and unemployment impact our happiness and welfare equally, i.e., it assigns equal weight to both these factors. However, the results of happiness surveys reflected that the effect of unemployment on human happiness is way stronger than inflation because it not only impacts us financially but also leads to anxiety, depression, low self-esteem etc. Thereby, chances are that the standard indexes underestimate the impact of certain factors and don’t give a complete account of public policies.

  • It provides insights into various social and psychological factors which the economic studies clearly fail to do. For example, happiness research explains that the same psychological factors which impact subjective well being also explains the individual’s ability to adapt to adversities, negative shocks and often return to original levels of happiness. This method of adaptation—to either negative shocks or to the disruptions and changes that usually accompany economic progress and development—is very much influenced by peoples’ norms concerning equity and perceptions of fairness. This helps to explain the reason behind unexpected social stability in poor societies and along with sudden outbreaks of violence and social unrest in the well-progressed societies. The set-point theory even explains how a poor peasant can be happy whereas the standard fightings generalise poor people to be less happy than the wealthier ones.

  • It even explains the welfare effects of the various policy measures and government actions. For instance- a recent study on cigarette tax suggested that the positive self-control is outweighed by the negative financial effects.

Happiness studies and surveys have a wide range of applications and we can’t ignore them.

Factors influencing the levels of happiness:

FIG- the bars indicate the change in life satisfaction (on a scale of 1-10) of the people in the United States from 2009-2018 due to various factors.

As clearly seen, various factors influence happiness and life satisfaction such as age, job stability, education etc. Age is a strong influencer and happiness varies with it. Various studies reveal that happiness rates are highest among young adults(till the age of 18 years) and the ones who are in their late seventies. This is because adulthood comes with greater responsibilities, stress, insecurities, tensions etc. which lead to lower levels of happiness. On the other hand, as one grows older the previous happiness levels are restored because they become thankful of everything they have received, gain better control over their emotions and don’t dwell on the bad events. Thereby one can conclude that the relationship between age and happiness forms a U shaped curve.

Not just age but various other factors such as freedom, security of gains, work environment, rising aspirations, etc also play a role in happiness.

An educated person is generally more capable and more productive as compared to an illiterate, thereby tending to be happier. The environment plays a critical role and it has been observed that the individuals living in democratic societies are happier than the ones living in restricted and repressive regimes. Social connectivity and relationships also play a key role. People with good friends’ circle and continuous support feel happy and positive. However, this bond can turn out to be negative when people start considering each other as their competitors and feel jealous of their success. Thereby, social life influences happiness to a great extent, in both positive and negative ways.

No matter how many factors we discuss, income will remain the most influential factor. It is the most powerful of all these factors and has a huge impact on the level of happiness. Many argue and claim that money can’t buy happiness. But this figure indicted a different story. So we need to think again. Is it true that money can’t buy happiness?

According to happiness studies, this isn’t.

Various happiness studies have found that that wealthier people are happier than the poor ones across the globe. It reveals that there is a positive correlation between income and happiness i.e., greater the income greater is the happiness because higher income not only increases the purchasing power but also enhance the level of satisfaction, comfort, greater access to luxuries along with the social status.

However, an increase in happiness due to an increase in income holds true only up to a certain point i.e. it tends to decrease even with an increase in income beyond a particular level. But the economists have not been able to give a specific point till which there is a direct relationship. A study by Daniel Kahneman and Angus Deaton in 2010 estimated this point to be $75000, whereas a study from Purdue University in 2018 identified the ideal income point for individuals as $95000 for life satisfaction and between $60000 to $75000 for emotional well being. The happiness levels decrease beyond one point even with the rise in income as with a high level of income and development there comes disappointment in terms of discomfort, stress, competition, anomie etc. This result is quite similar to the law of diminishing marginal utility i.e., with every additional rupee/dollar added to the income will lead to a fall in happiness after a point.

This unique relation between happiness and income level is named Easterlin Paradox, named after the famous economist Richard A. Easterlin. This paradox states that at the point in time happiness varies directly with income in both and among nations, however after a certain level it doesn’t tend to rise in correspondence to income. The paradox is based on a unique interpretation that all human beings are on a “hedonic treadmill” which implies that aspirations increase along with income, however, after basic needs are met, relative income level matters to well-being rather than absolute levels of income and the impact it has on happiness fall gradually.

Fig- Relation between income and happiness.

Witnessing the impact of all the factors it is quite evident that the traditional method ie GDP isn’t enough. The question that arises here is that if not GDP then what? Can it be GNH? Gross national happiness (GNH) is a measure of economic and moral progress which was introduced by The king of the Himalayan country of Bhutan in the 1970s as an alternative to GDP. Back in 1729 when the kingdom of Bhutan’s first legal code was written it stated that “if the government cannot create happiness for its people, there is no purpose for the government.” Rather than just focusing strictly on quantitative factors GNH takes into account a mix of various social life factors. Though there are certain loopholes in GNH and there are various other studies that measure well being along with monetary aspects but research can yield important insights into human behaviour and well being which can provide important information and criteria to the policymakers.

Just like every theory and concept, “happiness economics” has certain positives and negatives. Many economists criticise the idea behind this theory due to the following reasons:

  • Validity – Firstly many argued that it is really difficult to quantify the subjective, personal and such abstract factors, and claimed that just the ordinal utility should be studied.

  • Reliability i.e. the consistency in measuring a particular aspect so that one can rely on a particular result. For example- studies revealed that in some areas a poor is happy with his current lifestyle whereas a rich person who literally has all the comfort in his life desires even more and isn’t satisfied. Therefore it is highly inconsistent and unreliable.

  • Imperfect- Happiness economics is imperfect and can be easily influenced. For example, a person’s mood, the atmosphere he is present in, privacy etc may easily impact his responses which might lead to incorrect results.

  • Difficult to compare – Systematic differences in the interpretation of the subjective well-being questions or scales based on culture, expectations, or language may be problematic if researchers compare unadjusted happiness levels between different groups it might lead to false results

  • Adaptation– It is one of the most critical challenges to happiness research. Adaptation here implies that how quickly people are able to adapt themselves to the happening of certain life-changing events like divorce, deaths etc. Studies reveal after few years, as time passes people tend to go back to their original levels of happiness. Thereby, if the happiness levels always return to their original set points then it’s quite obvious that the policy measures just have a short term impact. Thereby the key question here arises that what kind of policies actually have a long-lasting impact without being subject to adaptations, and this can become really difficult to estimate.

Despite all these challenges, one thing is quite evident i.e the inclusion of the happiness index has provided new insights into the field of economics and policy. It has been able to predict our job satisfaction, the happiness one gets on receiving his salary etc. which classical and neoclassical economics failed to do over these years. Though, like most of the studies, even happiness economics have certain errors, biases and loopholes that need to be worked on and analysed upon.

According to me, the economics of happiness nowhere aims at replacing the traditional GDP and related measures but it definitely aims at complementing it to ensure a broader measure to human welfare and life satisfaction. It can enrich the theoretical and empirical spaces in which economics is working right now.

A few economists are shifting towards happiness economics because of the greater availability and easy access to data and continuous advancements in the field of behavioural economics and we do have Human Development Index but certainly, this is not enough. The policymakers need to ponder upon and come up with a blend of both objective and subjective measures so that the results and conclusions reflect the actual welfare and well being.

By Aarushi Doomra


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