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"Why Can't the World Bank Be More Like a Bank?"
Background to WSJ Op Ed Piece, June 1, 2005
James S. Henry and Laurence J. Kotlikoff

Wednesday, June 01, 2005

Maximizing Gross National Happiness
Rethinking the Economics of Growth and Inequality
James S. Henry

Each year, by the terms of Jeremy Bentham's 1832 will, his mummified corpse is wheeled out to sit with faculty and students at the University of London.  Apart from this peculiar celebration, however, few people today remember the 18th-century economist and social critic whose life's work consisted of trying to make the British legal system serve "the greatest happiness of the greatest number."

Indeed, most modern economists, under the influence of the Chicago School's homespun version of behaviorism and positivism, have long since abandoned the direct study of "human happiness."

In the economic development arena, this has led many economists to focus on technical policies that are supposed to increase overall efficiency, output, and measured growth, without regard to their distributional consequences.

Happiness3_1In this "neoliberal" view, one person's subjective pleasure is another's pain, and utility functions are unobservable, so interpersonal comparisons of utility are impossible. Distributional questions are therefore purely matters of "personal preference," to which "positivist economics" has nothing to add.

Perhaps not surprisingly, several studies of ethical behavior  among graduate students have even found that those who study economics are more prone to "free-riding" and less ethical than others.

One suspects that this narrow-minded, intrinsically conservative approach causes poor old Jeremy Benthem -- who dedicated his life to identifying social polices that would increase human happiness -- to turn somersaults  in his Auto-Icon.

Fortunately, modern psychologists, anthropologists, and public opinion pollsters have recently stepped in where most neoliberal economists have feared to tread. 


Using a combination of survey research techniques, "objective" indicators of economic and social status, and biometrics,  these social scientists have begun to study the determinants of subjective happiness levels directly -- both within and among countries. 

Among their most important findings:

  • Beyond a certain level of per capita measured income -- about $15,000 per year -- reported happiness levels don't improve very much across countries. There is also a great deal of variation in reported subjective happiness levels poorer countries at similar income levels. In other words, making "measured growth" the sine qua non of economic policy makes little sense.
  • 5cHigh-income groups report somewhat higher "very happy" levels within countries at any given point in time. But among First World countries,  increases in average real per capita income have not led to increased happiness levels over time.
  • Indeed, since the late 1940s, increased real income levels among First World countries have been accompanied by rising levels of alcoholism and drug addiction, depression, and crime  -- an indication of a growing gap between trends in income and happiness.
  • Changes in real income may lead to short-time increases in subjective happiness at the individual level.  But people become "habituated" to new levels of material income quickly -- in less than a year. Since they also tend to underestimate such "habituation" effects, they probably also spend too much time on the job, and too little time with their families.
  • Measured income has much less impact on subjective happiness than many other determinants of happiness --  especially employment, job security, family status,  and health. The country of Bhutan has reportedly already recognized this fact by declaring that its national goal is to maximize "Gross National Happiness" rather than GDP per capita.
  • Happiness54Relative incomes and "rivalry" are other important determinants of subjective happiness. This depends on one's reference group. For example, reported happiness levels among residents of East Germany plummeted after 1990, when they went from having the highest incomes among Soviet-type economies to the lowest incomes in Germany.
  • While genetic factors may help to explain differences among individuals in subjective happiness within any country, differences among neighboring countries -- say, within Europe -- are far too substantial and persistent to account for on the basis of such factors.


From the standpoint of Bentham's original goal of designing social institutions to maximize human happiness, the implications are many.

They include new justifications for: 

(1) Progressive income and wealth taxation;

(2) Polices that help to provide job security, social security, and health insurance;

(3) Using non-material incentives to reward people for doing a good job;

(4) Encouraging people to spend more time with their families; and

(5) Paying more attention to "non-material" development goals like democracy, family values, work force participation, and human rights
-- in striking contrast to the materialist path that now seems to unite both China and the World Bank/IMF on the goal of blindly maximizing measured GDP per capita.

In other words, all this adds up to a pretty interesting justification for -- in effect -- Europe's "high tax/social insurance/long vacation" welfare state version of capitalism. 

From a competitive standpoint, however, the US, China, and other ruthless global competitors are unlikely to adopt such a model any time soon. Indeed, they have been moving in precisely the opposite direction. So the real question is whether any of these Neo-Benthamite policy implications stand a snowball's chance in hell. They may, but only if those of us who are located in the neoliberal vanguard countries are able to push social policies in a more progressive -- and happier! -- direction.

(For a concise summary of the literature, see the following three lectures by LSE's Professor Richard Layard:) 


© James S. Henry, SubmergingMarkets™, 2005


June 1, 2005 at 06:25 AM | Permalink


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Maximizing Gross National Happiness
Rethinking the Economics of Growth and Inequality
James S. Henry


Important stuff! Thank you! Wish you could put me on your e-mail-list in case you send our your new items.

Posted by: Gunnar Adler-Karlsson at Feb 5, 2005 4:26:36 PM