Friday, September 07, 2007

How You Feeling, Love? Oh, About 2.2

Still 2.2?

A few months back we blogged about happiness economics and how it makes us very unhappy. In particular, we're very concerned that leftwing economists are using it to justify higher taxation.

The argument goes like this. The new happiness research (see previous blog) says that on average growing GDP has not made us happier. And here's a chart from the New Economics Foundation to prove it:

Moreover, while at any one time richer people are on average happier than poorer people, that's only because their greater wealth "positions" them above the rest- ie their greater happiness comes at the expense of poorer people's unhappiness. Couple that with the finding that each additional pound makes you relatively less happy than the previous pound (ie marginal utility really does diminish, just like those Victorian economists theorised), and you've got a case for jacking up top tax rates (see the eye-popping quotes from Hampstead socialist Lord Layard in previous blog ).

For those of us who believe in the overwhelming benefits of low taxation and small government, this is all very discomforting - especially when you get image driven politicos adopting wibbly New Age concepts like General Well Being in place of plain old measurable GDP. The case needed answering simply and clearly by an economist of standing.

Helen Johns and Paul Ormerod have now done just that, in this excellent paper published by the IEA. It's well worth reading the whole thing, since it goes through the entire "happiness" case and specifically refutes the arguments for more government.

One key point is that, although we now have reams of happiness data (and economists love data), it's actually incredibly crude. Ormerod explains how it's generally collected:

"People are asked to register their level of happiness on a scale that often has as few as three categories (‘not happy’, ‘fairly happy’ or ‘very happy’). As a consequence, noticeable changes in average happiness can come about only through substantial numbers of people changing their categories."

It turns out that taking one thing with another, come rain or shine, in pretty well any country , when asked how we're feeling, on average we punters say 2.2.


That's it. Scoring 1 for a "not happy", 2 for a "fairly happy", and 3 for a "very happy", the average keeps coming out at about 2.2- slightly happier than fairly happy.

And it doesn't change much throughout the several decades of data we now have. Indeed, we'd have probably said the same in Victorian times, or shivering in our designer cavewear during the Stone Age.

The fact is, in terms of measuring happiness, this dial is stuck.

There's worse:

"Much more fundamentally, this way of measuring happiness means there is an upper bound to the level of happiness that can ever be recorded. This creates very serious statistical problems when trying to correlate changes in a series that has an upper limit with one, such as GNP per head, that can in principle rise without limit."

No wonder there's no correlation with the ever upward march of GDP. It's a version of apples and pears, and tells us absolutely zip.

And behind all that lurk other problems with such self-reported happiness ratings. EG the well-known lack of consistency between expressed and revealed preference- you may say you prefer small shops to supermarkets, but in reality you actually do most of your shopping in Tescos.

Ormerod concludes:

"Until relatively recently, many well-meaning people on the left believed that the state should play an active role in the day-to-day running of industry. Following the abject failure of central planning in the Soviet bloc, there are few takers for this position today. But the reflex to reductively pinpoint capitalism as the root of all evil, the urge to intervene, the belief that the expert knows better than the ordinary person what is good for him or her, are incurable. Happiness research is one of the latest manifestations of this tendency. But, just like central planning, it is inherently flawed."

Spot on.

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