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Economics of Happiness!

GRK Murty
The gauging of a nation’s well-being has become a hot topic for
discussion among the policy makers across the globe, the
trendsetter being the Himalayan mountain kingdom, Bhutan, which
desires to measure “gross national happiness”. The latest to join
the bandwagon is Cameron when he said that Briton needs
alternative measures that would express national progress “not
just by how our economy is growing, but by how our lives are
improving; not just by our standard of living, but by our quality of

Of course, all along GDP has been recognized as the best measure
of economic performance because of the implicit link between
economic growth and elements of well-being such as employment
levels, level of consumption, etc. However, as Robert Kennedy
argued in the 1960s, GDP also measures a nation’s evils in terms of
pollution, tobacco advertising, production of napalm and nuclear
warheads, but not the wit, the strength of marriage, courage,
wisdom, or learning of the people. He said, GDP “measures
everything, in short, except that which makes life worthwhile.”

All these arguments, besides reminding us of what Simon Smith
Kuznets, the Jewish Nobel Laureate in economics, who
standardized the measurement of GNP, said way back in 1934,
“The welfare of a nation can … scarcely be inferred from a measure
of national income”, have set in motion a kind of momentum for
“Happiness Economics”. Now the moot question is: How to
measure national well-being/happiness?

Nevertheless, researchers like Norbert Schwarz, Alan Krueger, and

Daniel Kahneman have come up with “day reconstruction method”
which asks people to recall, episode by episode, the previous day’s
events and the most prevalent accompanying feelings—stress,
peace, exhaustion and elation. Of course, economists like Andrew
Oswald argue that the data pertaining to well-being does already
exist and hence demand more of such collection of data than adapt
an altogether different model, while professors like Kahneman and
Krueger plan for a radical departure by proposing the publication of
“time accounting measures”—how a nation spends its time—
alongside regular national accounts.

The central idea behind this measure is that by asking the survey
respondents to rank the emotions they felt while spending time in
various activities such as cooking, commuting, working in office,
and watching television, a measure can be produced that indicates
how long people spend in a predominantly unpleasant state of
mind because of engaging in tedious works like commuting or
working vis-à-vis a pleasant state of mind by engaging in acts like
having dinner or watching TV. Such an approach to measure the
well-being of people would also enable the government evaluate
public policy interventions such as investing in roads, overtime
laws, creation of leisure facilities, etc.

Yet, as the UK’s National Statistics Office felt, the question of how
to summarize the overall well-being of a nation using a set of
indicators such as health, education, governance, and social
connections, and subjective measures of quality of life, remains a
challenge. Nonetheless, all these arguments lead to the need for
clarifying what indices are most appropriate to measure progress
and how this can best be integrated in the national decision-
making process.

Economists like Joseph Stiglitz, Amartya Sen , Jean-Paul Fitoussi
desire that more emphasis be given to: one, net national income;
two, household perspective rather than economy-wide measures;
three, distribution of consumption and income. They made
another important observation: nations should be cautious in
consumption of wealth, for it leaves little for tomorrow’s
generation. They also feel that the well-being of people must be
measured by focusing more on non-market activity, such as leisure,
for consuming the same bundle of
goods by working for 10 hours a day
gives more pleasure than working for 16
hours a day. So, in a nut-shell, the well-
being of a nation is defined more by the
leisure and quality of life its people
enjoy rather than the total value of
goods produced by a nation.

The next obvious question is: how about the happiness of an

individual, which we shall look into some other time.