Once Again, the Myth of Economic Prosperity

Fernan is a fellow of Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, July 24, 2006 edition, page S1/5.

Economics is founded on the premise that a higher level of income (synonymous with more money and more goods) brings about a correspondingly higher level of welfare (also taken to mean a greater sense of satisfaction and happiness). This serves to define rationality as being ruled by an almost pathological need to consume as much as possible, constrained only by the level of prices and income. It is no wonder that the statement that “money buys happiness” appears to be intuitively and perfectly reasonable.

I don’t buy it and some really clever people who have studied this issue don’t either, among them Alan Krueger of Princeton University, Paul Krugman of the Massachusetts Institute of Technology (MIT), and Richard Layard of the London School of Economics (LSE). (A recent article summarizing these points written by Shankar Vedantam appeared in the 3 July 2006 issue of the Washington Post.)

Krueger, in a Center for Economic Policy Studies working paper co-authored with others and just published in Science magazine, said that “most people believe that they would be happier if they were richer, but survey evidence on subjective well-being is largely inconsistent with that belief.”  The report added that “. . . increases in income have been found to have mainly a transitory effect on individuals’ reported life satisfaction.” The report stems from a study conducted by the authors on what they call the “focusing illusion,” the tendency of people to exaggerate the effect of a single factor on the state of their well-being.

Krugman, in an article from 1999 available at his web page at the MIT website (“Money Can’t Buy Happiness, er, Can It?”), stated that “. . . the folk wisdom is backed by hard statistical evidence: you really can’t buy happiness, certainly not for society as a whole.” He noted that the high level of consumption in America has produced “annoyances of prosperity” since spending lots of money hasn’t had the expected effect of making people enjoy life more. He did go on to say that “spending may not produce happiness, but it does create jobs, and unemployment is very effective at creating misery.”

Richard Layard has written a book on the topic (Happiness: Lessons from a New Science, Penguin Press 2005) bringing together the results of studies in the social sciences to get a handle on happiness. In a series of lectures delivered for the Lionel Robbins Memorial Lectures for 2002-2003 at the LSE, Layard provided evidence to show that “despite economic growth, happiness in the West has not grown in the last 50 years.”

If you think the problem may lie in differing definitions of happiness, think again. Layard provides a standardized definition of happiness, “feeling good.” Moreover, happiness can be measured objectively through brain activity, and studies have shown that levels of happiness can be compared between people. Those of you who are not hardwired to the economistic definition of welfare can probably relate to this: in a study of 1000 working women in Texas that Layard cited in his lectures, the respondents agreed that sex and socializing with others (far removed from any economic consideration) were the activities that made them most joyful, and commuting (to work) and keeping company with the boss (both closely related to the heftiness of their pay envelopes), the least.

It is this theoretical malaise that has prompted efforts to try and fix the income measure of welfare, i.e., gross national product, or totally supplant it with alternative rules. The United Nations Development Programme has produced the Human Development Index although the indicators used are still highly dependent on income levels. Others have tried to “correct” gross domestic product by subtracting the loss of value represented by, among others, pollution, the extraction of non-renewable resources, and non-productive activities while adding the contribution of those activities to which no value is currently assigned, such as keeping house.

Still, people and governments continue to put such value on economic growth that one must wonder why. It may be because they know only about the good parts. On such inadequate knowledge has been built an elaborate myth of the power of economics to bring about significant improvements in people’s well-being. I don’t remember any teacher in any of my undergraduate economics courses at the University of the Philippines School Economics who taught me to question the theoretical foundations upon which the elaborate infrastructure of “positive” economics is built. I had to search for the “truth” myself.

The government uses this “more income-brings happiness” argument to bamboozle us with the mantra of economic growth as the solution to all our problems. This myth is the excuse for inviting foreigners to extract our resources by mining, logging, monoculture plantations, etc., in the process destroying traditional cultures and practices and the communities that embody them. And these are communities that have sustained themselves on the premise that they consume only what they need and keep their resources intact for the use of future generations.

This myth has created the great divide between the rich and the poor, with the latter being placated by promises of higher consumption “in the future.” It is also what rich developed countries use to justify the high consumption levels that are driving the planet to calamitous changes in climate. Finally, it gives a bad name to those economists among us who want to make a real difference in people’s lives. If only for that reason alone, it may be worth questioning again the premises that rule our “economic” lives.

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