Counting Happiness

In recent decades, psychologists and biologists have taken up the challenge of studying scientifically what really makes people happy. Is it money, family, genetics or perhaps virtue? The first step is to define what is to be measured. The generally accepted definition of happiness is ‘subjective well-being’. Happiness, according to this view is something I feel inside myself, a sense of either immediate pleasure or long-term contentment with the way my life is going.

Many questionnaires are used in order to correlate happiness with various objective factors. One study might compare a thousand people who earn $100,000 a year with a thousand people who earn $50,000. If the study discovers that the first group has an average subjective well-being level of 8.7, while the latter has an average of only 7.3, the researcher may reasonably conclude that there is a positive correlation between wealth and subjective well-being. To put in simple English, money brings happiness.

One interesting conclusion is that money does indeed bring happiness. But only up to a point and beyond that point it has little significance. For people stuck at the bottom of the economic ladder, more money means greater happiness. If you are an American single mother earning $12,000 a year cleaning houses and you suddenly win $500,000 on the lottery, you will probably experience a significant and long-term surge in your subjective well-being. However, if you are a top executive earning $250,000 a year and you win $1 Million on the lottery, or your company board suddenly decides to double your salary, your surge is likely to last only a few weeks.

Family and community seem to have more impact on your happiness than money and health. People with strong families who live in tight-knit and supportive communities are significantly happier than people whose families are dysfunctional and who have never found a community to be part of.

Happiness does not really depend on objective conditions of wealth, health or even community. Rather, it depends on the correlation between objective conditions and subjective expectations. If you want an iPhone and get an iPhone, you are content. If you want a brand-new Mercedes and get only a second-hand Fiat you feel deprived. This is why winning the lottery has, over time, the same impact on people’s happiness as a debilitating car accident. When things improve, expectations balloon and consequently even dramatic improvements in objective conditions can leave us dissatisfied. When things deteriorate, expectations shrink, and consequently, even a severe illness might leave you pretty much as happy as you were before.

The crucial importance of human expectations has far-reaching implications for understanding the history of happiness. If happiness depended only on objective conditions such as wealth, health and social relations, it would have been relatively easy to investigate its history. The finding that it depends on subjective expectations makes the task of historians far harder. We moderns have an arsenal of tranquillizers and painkillers at our disposal, but our expectations of ease and pleasure and our intolerance of inconvenience and discomfort, have increased to such an extent that we may well suffer from pain more than our ancestors ever did.

Source - Sapiens

Inequality

Inequality was in the news once again and the news is not particularly good. In a speech, RBI Governor of India commented that increasing inequality could be curtailing world demand. Since the rich typically spend a smaller portion of their income compared with the poor who spend almost all of their income. Most billionaires gained wealth because of their access to natural resources such as land or government contracts.

If Inequality is large or growing in India, there seems to be two key reasons. First, there was death of credible data on income inequality in India. Second, within the economics profession, there was a broad consensus that inequality may often be par for course for a fast growing economy such as India; once it grew richer the tide would turn. Both these aspects are changing. We now have newer sources of evidence on inequality in India. Also, economic thinking on inequality has changed considerably across the globe over the past few years.

Economists were always aware that comparing consumption based inequality in India with income based inequality in other countries was like comparing apples with pears, if not to oranges. Even if the rich earn a lot more than the poor, they are unlikely to spend all of their additional income. Thus consumption based inequality measures are expected to understate income inequality. In terms of income inequality, India seems scarcely better than some of the most unequal countries of Latin America.

Top 1% in India owns more than half of the country total wealth. The richest 5% own 68.6% of the country wealth, while the top 10% have 76.3%. At the other end of the pyramid, the poorer half jostles for 4.1% of the nation wealth. Recent research from the IMF suggests that inequality may in fact harm the growth prospects of an economy. An IMF note published last year put together cross-country evidence suggests that lower initial inequality may facilitate high growth rates for a long duration while high levels of inequality may cause redistributive pressures and lead to an unstable growth path.