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The Dismal Science Measures The Meaning of Life
By Daniel Altman

(Business 2.0) – Does Money Really Buy Happiness? Not In Japan, Apparently. Even the United States, the alleged capital of materialism, is not nearly as happy as its per capita income suggests it should be. Colombians and Costa Ricans, on the other hand, claim a level of satisfaction with their lives that is totally out of proportion with their income. Economists would love to know why.

A serious study of happiness is long overdue; after all, it's basically synonymous with utility--economic theory's yardstick for the satisfaction people derive from the decisions they make and the goods and services they consume. Economics is based on the idea that people try to gain as much utility as they can.

In theory, levels of utility can be measured and compared, but that's easier said than done. Economic policy often assumes that money and happiness are synonymous, and economists routinely use wealth as a proxy for well-being--though they know the correlation isn't perfect. For a better approximation of people's satisfaction with life, economists rely on surveys, despite the subjective results they yield. (A jobless heroin addict might report being blissfully satisfied, so long as he gets his daily fix, while a prosperous person may rate himself unhappy if he's extremely ambitious.) Another technique involves asking people to list all their needs and desires, and then check off the ones that have been met; the higher the fraction checked off, the happier the respondent.

Despite their obvious limitations, happiness surveys can provide useful insight into economic policy questions. MIT economists Jonathan Gruber and Sendhil Mullainathan recently circulated a survey-based paper suggesting that cigarette taxes make both smokers and nonsmokers happier, because the taxes help commit the former to quitting while also discouraging the latter from ever lighting up. In another study published last year, Stanford University economist Justin Wolfers surveyed the impact on happiness of an interest rate rise that would reduce inflation by 1 percent permanently while increasing unemployment by 2 percent for one year. His analysis indicated that in several European countries, a tight money policy could make the average person less happy in the long term. (Something for Alan Greenspan to remember during an election year.)

The granddaddy of joyousness yardsticks is the World Database of Happiness, a compilation of international surveys maintained by Ruut Veenhoven of Erasmus University in Rotterdam, Netherlands. A key part of the database summarizes responses to the question "All things considered, how satisfied or dissatisfied are you with your life-as-a-whole now?" on a scale of 1 to 10.

This yields some curious conclusions. Countries where people have more purchasing power generally score higher on the happiness scale, but there are big exceptions. Of the 68 countries surveyed, Colombians tied with the Swiss as the happiest people in the world in the 1990s, even though they recently ranked 45th in purchasing power. The United States ranked 14th in happiness, although Americans' purchasing power is nearly six times that of Colombians. Are Colombians better at living in the moment? Or are Americans simply harder to please? The answer is elusive, which is too bad. In the practical world of business--and not just in economic theory--the greatest utility of all would come from knowing what truly makes people happy.