What is... | August 9, 2010

What is the economics of happiness?

A new book details the growing study of "happiness economics" - and if a big pay cheque really brings joy. Being happy is a goal that many people have. But the keys to happiness are, at times, hard to pin down.

The growing study of “happiness economics” looks at factors that make people happy (as well as those that make people sad). eZonomics has covered several examples of happiness economics (such as the effects of money, commuting and marriage) – and now a new book hopes to shed light on the issue by highlighting lessons on happiness from economists.

Magic equation for enhanced happiness
In The Happiness Equation, Nick Powdthavee asks why all our well-intentioned decisions do not always result in greater happiness. Crucially he claims to have drawn up an equation that will gives people the potential to make decisions that will enhance their happiness.

Money, money, money – is it the answer?
Powdthavee writes that the pursuit of happiness has become identified with the pursuit of personal wealth – but this may not lead to the joy people seek. He cites research by economist Richard Easterlin showing happiness did not rise in line with economic growth in the years after World War Two. Powdthavee says one reason is that once people have satisfied basic needs such as food, housing and transport, extra money they earn is spent on keeping pace with neighbours’ wealth – “keeping up with the Joneses”.

If the money’s right
This implies that there might a way of working out how much money a person needs to make them happy. Powdthavee cites research by Andrew Oswald into calculating the value of intangible assets such as the joy of friendship as well as the value of a pay rise on a scale of one to seven. By designing a happiness equation, Powdthavee shows a £1,000 pay rise may deliver an increase of 0.0007 on that scale but seeing friends more often is far more valuable – calculated as worth 0.161 on the scale. The equation implies swapping a sociable life for an isolated one requires a pay rise of 0.161/0.007 – or £230,000 (EUR280,076) a year. As with a lot of economics, the full equation contains too many algebra symbols for eZonomics to publish.

Save, save, save
It may be that many of us already have as much money as we need to be happy.In these cases, the theory goes that seeking extra income will not deliver greater happiness.
Powdthavee quotes famous American Rabbi, Hyman Schachtel: “Happiness is not having what you want, but wanting what you have.”
It implies saving might even increase happiness levels, with money in the bank an alternative to spending on goods that fail to enhance happiness.
An eZonomics guide offers basic savings tips. Alternatively, people could consider giving “spare” money away – with researchers in Canada finding those with a small windfall who gave money away were happier than those who spent it on themselves.

A book to bring a smile to the face
For people wanting to learn more about the economics of happiness, Powdthavee’s book is likely to bring a smile to the face. It is a lively tour through the happiness literature, with Powdthavee’s own ideas woven in. For those seeking to understand less jolly topics, it also includes thoughts on the impact on happiness of divorce, injury and bereavement.


Phil Thornton
Phil Thornton

Lead consultant at Clariti Economics