Modern Society & the Economics of Happiness Andrew Oswald October 2011

1. Modern Society & the Economics of Happiness Andrew Oswald October 2011 I would like to acknowledge research support from the ESRC Centre for Comparative Advantage in the Global Economy (CAGE) at the University of Warwick.

2. Is western society going in a sensible direction?

3. Growing evidence suggests that it is not.

4. The problem is this:

5. The problem is this: People care about their relative income

6. ..but about the absolute level of ‘green’ environmental factors.

7. Modern society is stuck. • Individually, we chase higher income and ‘rank’, but for society as a whole this cannot be achieved.

9. The data suggest it would be rational instead to concentrate on environmental factors

10. The data suggest it would be rational instead to concentrate on environmental factors -- not on economic prosperity.

11. Why should you believe any of these claims?

12. Today I will describe results • From fMRI scans • From statistical work on well-being

13. But let’s start with everyday empirical evidence.

14. Consider your wrist.

16. 5 euros

18. 500000 euros

19. “A watch defines a man's look and tone.” Rolex advert.

20. “A watch defines a man's look and tone.” Rolex advert.

21. Subconsciously, humans are frightened of falling behind.

22. This links to new empirical work: Armin Falk and colleagues on relative-income images in the brain (Science, Journal of Public Economics) Peter Kuhn and colleagues on car purchasing by neighbours of lottery winners (AER forthcoming) Ori Heffetz on visible goods (REStats forthcoming). David Card, Alexandre Mas, Enrico Moretti, Emmanuel Saez on peers and satisfaction.

23. Two papers I would greatly recommend.

24. Title: Social comparison affects reward-related brain activity in the human ventral striatumAuthor(s): Fliessbach K, Weber B, Trautner P, et al.Source: SCIENCE Volume: 318 Issue: 5854 Pages: 1305-1308 Published: NOV 23 2007

25. Title: Relative versus absolute income, joy of winning, and gender: Brain imaging evidenceAuthor(s): Dohmen T, Falk A, Fliessbach K, et al.Source: JOURNAL OF PUBLIC ECONOMICS Volume: 95 Issue: 3-4 Special Issue: Sp. Iss. SI Pages: 279-285 Published: APR 2011

26. We are now able to look inside the brain.

27. Armin Falk et al

28. Armin Falk et al While being scanned in adjacent MRI scanners, pairs of subjects had to perform a task with monetary rewards for correct answers.

29. Variation in the comparison subject's payment affected blood oxygenation level-dependent (BOLD) responses in the ventral striatum.

30. Variation in the comparison subject's payment affected blood oxygenation level-dependent (BOLD) responses in the ventral striatum. This brain region is engaged in the registration of primary rewards.

31. Falk et al in Science and JPubEcon

32. Falk et al in Science and JPubEcon • “The mere fact of outperforming the other subject positively affected reward-related brain areas.”

33. The next slide -- very briefly -- is for specialists.

34. Blood-oxygenation equations • (similar with fixed effects, main variation across Ss)

35. So, inside your brain

36. So, inside your brain You simply want to be high up the monkey pack

37. Here is a different kind of evidence.

38. It has been found that

39. It has been found that Relative-income variables show up consistently in well-being equations.

40. It has been found that Relative-income variables show up consistently in well-being equations. E. Luttmer, Quarterly Journal of Economics 2005 A. E.Clark et al, JPubEcon 1996, JELit 2008 GDA Brown et al, Industrial Relations 2008 and Psychological Science 2010 D. Card et al, NBER paper, 2011.

41. A person’s happiness and mental health = f(their relative income).

42. By contrast:

43. The importance of ‘green’ factors • Luechinger, S. “Valuing Air Quality Using the Life Satisfaction Approach” Economic Journal, 2009. • Welsch, H. "Environment and Happiness: Valuation of Air Pollution Using Life Satisfaction Data." Ecological Economics, 2006. • Di Tella, R., and R. MacCulloch. 2008. "Gross National Happiness as an Answer to the Easterlin Paradox?" Journal of Development Economics, 2008. • Levinson, A. “Valuing Public Goods with Happiness Data: The Case of Air Quality” 2011 NBER paper.

44. These studies link happiness data to spatial environmental data.

45. Summarizing, the studies find huge effects from the environment on to human happiness.

46. Summarizing, the studies find huge effects from the environment on to human happiness. A one SD reduction in SO2 is worth in happiness terms about the same to a person as 20% extra income.

47. Finally Professor Easterlin’s paradox.

48. FIGURE 1: Happiness and Real Income Per Capita in the US, 1973-2004

49. Life-satisfaction country averages

50. There is also evidence, perhaps not known to many economists, of worsening mental health through time in some countries.