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Living Wisely, Agreeably and Well: The Political Economy of Happiness Richard Reeves

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In affluent western societies, the challenge facing us is how to live well and cultivate the arts of life. Further wealth is not making us happier; it is our families and friends, our health and our hobbies that increase our wellbeing. Yet we don’t pursue these goals as individuals or as a society. Rather we make bad choices – chasing increased wealth and material goods. Should the state make us make better choices?

THE ARTS OF LIFE In 1930, John Maynard Keynes wrote that by about the present day we should have ‘solved the economic problem (ie. reached a sufficient level of affluence that further growth was unnecessary)’ and would therefore be faced with our ‘real, permanent problem…how…to live wisely and agreeably and well’. He went on: ‘It will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself…who will be able to enjoy the abundance when it comes.’ This essay argues, first, that in the West and certainly the UK we have solved the economic problem; second, that we are not however living ‘wisely and agreeably and well’; third, that this is because we are failing to cultivate the arts of life, in preference to the science of economics; and fourth that the solution to this problem lies less in the adoption of ‘happiness policies’ than in the collective promotion of a different social ethos – one that knows the value, as well as the price, of everything. Facts first. In recent years, a great deal of work has been undertaken measuring people’s life satisfaction, or subjective wellbeing, with ‘happiness’ often used as a (not entirely uncontentious) substitute for these technical terms. Two key findings emerge from this literature. First, that past a certain point of economic development, further economic development, as measured by GDP, has no influence on the average levels of happiness in a given society, as Figure 1 demonstrates. Above about $10,000 dollars GDP per head the line on the graph veers sharply to the right, meaning that more growth is bringing no more joy. Of course there are exceptions: Puerto Ricans, Colombians and Filipinos are happier than their income would indicate – while the Germans, Austrians, Japanese and French are somewhat less so.

Richard Reeves argues that it should not. Instead, government should challenge the prevailing social ethos that material wealth is the only worthy goal, and set the conditions so that the better choice is the easy choice.

Just to confirm this point we can look at growth in average personal incomes and reported life satisfaction across Europe (Figure 2). Far-sighted politicians sensed this gap decades ago. Robert Kennedy said of GDP: “It does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include 2

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Mean of percent Happy and percent Satisfied with life as a whole

100 95

N. Ireland Ireland


Finalnd New Zealand

Puerto Rico


Columbia Taiwan Philippines



Ghana Nigeria

Uruguay Mexico

South Korea


Chile Argentina China Dom. Rep. BangPoland Czech ladesh India Pakistan Slovenia S.Africa Turkey Croatia Slovakia Hungary Yugoslavia Macedonia

75 70 65 60


same rate as our income. You get a car, you want a second; ditto houses. As Emerson said ‘Want is a growing giant whom the coat of Have was never large enough to cover.” Even lottery winners quickly adjust to their pre-win level of happiness, perhaps griping now that the private Lear jet is ten minutes late because of a fault, rather than being stuck on the bus in a traffic jam.

Iceland NetherSwitzerland Denmark lands Sweden Norway Australia Belgium U.S.A. Britain Canada Italy France West Germany Japan Austria

East Germany Portugal

Peru Azerbaijan







Income and happiness


25 February 2003 Source: Inglehart and Klingemann (2000), Gigure 7.2 and Table 7.1. Latest year (all in 1990s).


40 Ukraine


The second factor corroding the power of money is rivalry. In affluent nations, consumption is as much about securing a higher relative status as it is about meeting absolute material needs. The problem, of course, is that if we are all engaged in the same activity, we end up exactly where we started. In our attempts to keep up with the Jones’s, we are of course being Jones’s ourselves.




Belarus Moldova

30 1000







GNP/capita (World Bank purchasing power parity estimats, 1995 U.S.$)

Figure 1 100


Adaptation and rivalry cut both ways. Most of us think that we will be much less happy were we to lose a limb. In fact, after a drop, the happiness level of typical amputees returns to about its previous level. Similarly, being exposed to people in worse circumstances that oneself – in one study, people on dialysis machines – has a positive short-term effect on happiness, a kind of reverse rivalry effect.


Personal income


12,000 70 10,000




Satisfaction 40


Percentage very happy

Average income after taxes in 1990 dollars


All of this makes common sense. Generating the financial resources to have homes, hospitals, schools and plumbing might be expected to make people happier. And it does. But there comes a point after which the new goods and services generated by markets have much less dramatic effects on happiness, because they no longer meet real material needs. A DVD player only makes you happy for a while, and often only if your neighbour still has a video. Time erodes both effects.

30 4,000 20

Satisfaction in European countries



(Myers 1992) 0

0 1930









Figure 2 the beauty of our poetry or the strength of our marriages, the intelligence of our public debates or the integrity of our public officials. It measures neither courage, nor our wisdom, not our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America, except why we are proud to be Americans.”

MONEY CAN’T BUY YOU LOVE What then does make us happy? Thanks to the burgeoning research in this field, we can now begin to answer this question with a fair degree of empirical certainty. Broadly, being in a lasting marriage, in a job that you enjoy, in good health and being either young or old is good for happiness. So, too, is gardening. Being separated, widowed, unemployed or in poor health is bad for happiness. No real surprises here: the important thing is that there is now robust data to support our intuitions. Perhaps the one big surprise in the literature is that children – which people rank as very

MONEY DOESN’T EQUAL HAPPINESS There are two reasons why higher incomes do not translate into greater happiness: adaptation and rivalry. Adaptation means that we raise our aspirations and expectations at the 3

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important to their happiness – have no impact, or if anything a slightly negative effect, on life satisfaction. On the age front, most studies find a U-shaped distribution of happiness with the nadir at about the age of forty. So, in that sense, life really does begin at that age. Having an above-average number of friends and regular hobbies are also good.

from diminishing returns to happiness, non-material ones show a rise. The implication of all of this research is that for most people in affluent countries, the best investments to make for happiness are those which market mechanisms are unable to capture. Or as the Beatles put it more succinctly, money can’t buy you love.

The research quoted above suggests that money is not terribly important. Work by Andrew Oswald at the University of Warwick allows us to put a ‘price’ on various aspects of life, or the amount of money we would need additionally each year to have the same impact on our happiness as other factors. Not having a major long-term health problem is worth about £500,000 per annum. Being in a lasting marriage is worth £70,000, being in employment £100,000. The point, then, is not that money cannot buy us happiness – it is just that there are generally easier ways to come by it.

WELLBEING: A MARKET EXTERNALITY There are those who argue that the market itself is causing a loss of happiness – by turning us into hypercompetitive, acquisitive Gordon Gecko ‘greed is good’ monsters. There is little evidence for this. The less exciting truth is that wellbeing is simply becoming a market externality – that its sources cannot be priced, traded or banked. In this sense, the market is neither good nor bad; it is simply past its sell-by date. Not that this stops advertisers from trying to merge our non-material needs into their product, of course. It is striking how many are marketed on the basis of the indirect benefit they will bring. A mobile phone will give you solitude in the bath. A car will produce for you an adoring spouse, adorable children and doting dog. And a particular brand of crisp – the ‘Friendchip’ – will bring you companionship.

“A mobile phone will give you solitude in the bath. A car will produce for you an adoring spouse, adorable children and doting dog.”

But the real problem with the market is that we spend so much time and energy trying to wring wellbeing out of it. Despite the diminishing happiness returns from the market, we continue to believe – or at least to behave as if we believe – that it matters greatly. That’s why the shift that needs to take place is one of attitude, of mindset – or ethos.

And there is an important difference between the happinessinducing effects of different sources over time. A purchase or pay-rise is followed by a downwards sloping line on the graph in terms of happiness: the initial uplift wears off. Certain other activities have the opposite characteristic: their impact on life satisfaction may initially be very low, but rises over time.

BAD CHOICES If it is true that we are systematically making bad choices for our own wellbeing – for example chasing more money rather than enriching relationships – three questions present themselves. The first – posed mostly by psychologists – is why? The second – posed mostly by liberal philosophers – is so what? The third – posed mainly by a very few policy-makers is – what is to be done?

Two examples are friendship and hobbies. The more time and energy we devote to these, the greater the happiness effects. A casual friend is good: a close friend is much better, and it takes time to get close. Similarly, learning or relearning a musical instrument is often initially painful – and perhaps even more so for family and neighbours. But with practice and a rising skill level, the satisfaction derived from the accomplishment will grow. While material investments suffer

The answer to the first is that we are lousy fortune-tellers, and also very bad at learning from our mistakes. In the 4

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growing field of decision-making psychology and behavioural economics, a great deal of work has been done by Daniel Kahnmann, Daniel Wilson, George Loewenstein and others on the gap between ‘decision utility’ (I’ll buy this vintage sports car and it will make me happier) and ‘experienced utility’ (I’ve bought that vintage sports car and, now that the initial thrill has worn off, I feel no happier at all).

Economics is built on the idea that revealed preference satisfaction is the lodestar of a person’s ‘utility‘ and that preferences are entirely a matter for the individual to formulate and express. But there is now good social science showing that people do not use their resources in ways which maximise their own happiness, and consistently mispredict the utility that will flow from consumption choices. So one of the axioms of laissez-faire economics is mistaken.

Why the gap? Why do I mispredict future utility? The main reason is that I fail to anticipate adaptation. I don’t think we’ll ever just get used to having such a splendid car, but I quickly do. And the intriguing part is that we do not appear to learn our lesson for the next time. By the time the positive blip from the car has worn off, I’m after a helicopter. Daniel Gilbert calls this ‘miswanting’.

THE CHALLENGE OF LIBERALISM But this does not in itself open the door to action to improve people’s choices, for free market economics has a powerful ally: liberalism. Autonomy and freedom have been at the heart of political philosophy since the Enlightenment, with the key British figure in this tradition being John Stuart Mill, author of On Liberty, the classic statement of the value of freedom.

The implications of these two new strands of economics are profound, for philosophy, economics and politics. The empirical work on happiness partially rehabilitates the creed of utilitarianism founded by Jeremy Bentham who stated that the goal of government and society was to promote the ‘greatest happiness of the greatest number’.

In the liberal tradition, it is more important that people are free than that they are right. The notion that governments can know what is best for us and – critically – to act aggressively on the basis of that knowledge contains, in the view of Mill’s intellectual heir, Isaiah Berlin, the seeds of totalitarianism – a view confirmed by the history of the former communist countries. In his most famous work, Two Concepts of Liberty, Berlin wrote that differentiating between someone’s needs as expressed by themselves and as would be expressed by their ‘true’ self “renders it easy for me to conceive of myself as coercing others for their own sake, in their, not my interest. I am then claiming that I know what they truly need better than they know it themselves.” (This is, in fact, exactly the claim of some social scientists today – and it is strong claim too.)

STATISTICAL UTILITARIANISM Bentham dreamed of a ‘hedonometer’ which would measure happiness and thus guide policy. Only in the absence of such a device was he forced to concede that money, because people could spend it in ways most likely to contribute to their own happiness, would have to do instead. While utilitarianism has been widely defeated in philosophical circles, the legacy of this monetary version is with us still, most obviously in economics. Lionel Robbins shaped the discipline in the 1930s by famously stating that it was impossible to peer into men’s heads and divine their needs, and so the best available version of welfare was the satisfaction of their ‘revealed preferences’ ie. what they choose to do with the resources available to them.

The issue of paternalism animates and divides the leading lights of contemporary psychological research. Danny Kahnmann says: “If people do not know what is going to make them better off or give them pleasure, then the idea that you can trust people to do what will give them pleasure becomes questionable” – while George Loewenstein, who seems to have read his Berlin, says: “We’re very very nervous about overapplying the research. Just because we figure out that X makes people happy and they’re choosing Y, we don’t want to impose X on them. I have a discomfort with paternalism and

Now of course psychology has been peering into people’s heads; self-report questionnaires have become a kind of hedonometer; and we know quite a lot about what makes people happy. A new kind of ‘statistical utilitarianism’ is thus on the table, one which avoids the fatal economism of the Bentham-Robbins kind. 5

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with us using the results coming out of our field to impose decisions on people.”

than getting envious and dissatisfied. And envy is too shaky a foundation for a political economy of happiness.

And Berlin, following Kant and Mill, also emphasises that a critical ingredient of freedom is the latitude to err. Nobody wants a society like Brave New World, an allegory of a properly utilitarian state, in which ‘everyone is happy nowadays’ in part because of the mood-enhancing drug, soma. Nobody wants to give up the right to make bad choices, and the right to be unhappy. Nobody wants to put Prozac in the water.

“Nobody wants to give up the right to make bad choices, and the right to be unhappy. Nobody wants to put Prozac in the water.”

The fundamental question, then, is this: is it possible to build a politics of happiness without infringing individual liberty?

Mill himself makes a similar argument, writing that: ‘Whoever is preferred to another in any contest for an object which both desire, reaps benefit from the loss of others… Society admits no right, either legal or moral, to immunity from this kind of suffering and feels called on to interfere only when means of success have been employed which it is to the contrary to the general interest to permit – namely, fraud, or treachery, or force.” The restriction of the liberty of my neighbour to buy her car cannot, then, be justified on the grounds of the protection of my liberty not to be harmed.

LIBERTY AND THE POLITICS OF HAPPINESS One of the best proposed answers to this question turns out, unfortunately, to be a dead-end. It might be called the ‘Frank Fallacy’, after the American economist Robert Frank who proposes it along with others such as Richard Layard at the London School of Economics. Their case is broadly as follows. My purchase of a red sports car makes you less happy because your grey Mondeo now looks drab by comparison. My consumption, then, is not simply my own business. It affects others too, and in a negative fashion. It is therefore a form of pollution and should be heavily taxed as such. And the proponents of such policies cite Mill in their defence: he did write, after all, that: “the only purpose for which power can be rightfully exercised over any member of a civilised community, against his will, is to prevent harm to others.”

Given the failure of the consumption-as-pollution argument to surmount the liberal hurdle, is there anything left to argue about? Hasn’t the liberal right to do as we wish – even if that means to mispredict, make bad choices and be unhappy – won the day? Up to a point. There is no good case for taxing people towards happiness. But there is a strand in the liberal tradition, often scarcely visible, which recognises that it is not only governments that are able to restrict liberty. A community, social ethos or peer pressure can all narrow our life-choices, too. The freedom to make bad choices is inalienable; an environment which makes such choices all but inevitable is not.

So we’re not restraining consumption for the person’s own good, we’re doing it to ‘prevent harm’ to others. This is a highly attractive argument. Unfortunately it is not good enough. This is because it rests on a peculiar and indefensible definition of harm. In the case of environmental pollution – to which Lord Layard argues consumption is analogous – the harm is scientifically provable and, critically, not under the control of the person harmed. I cannot decide that carbon monoxide will not give me asthma. But I can decide that your sports-car is an unnecessary frippery, or indeed be happy at the prospect of riding in it myself every now and then, rather

TOWARDS A NEW SOCIAL ETHOS Just consider for a moment the role of advertising in the framing of our choices. In the last decade, spending on advertising in the UK has risen by around 40 per cent – and it 7

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is projected to grow by the same amount over the next ten years. This blanket bombardment of ‘buy-me’ messages should make it unsurprising that consumption is rising at similar rates. And to say that most adverts are attempting to steer our consumption in inefficient ways, from the point of view of wellbeing, would be an understatement. And there are precious few counter-messages. For every pound spend promoting healthy diets, for example, eight hundred pounds are spent advertising food and drink, 95 per cent of which, according to the Food Commission, is bad for us.

And even Berlin, admittedly in a footnote, accepted that a factor influencing the “extent of my freedom” includes “what value, not merely the agent but the general sentiments of the society in which he lives puts on the various possibilities.”

Of course advertising is a small part of the prevailing ethos of society (although it may have a disproportionately large impact on the framing of certain decisions, such as whether to buy or not buy). The orthodoxy of economic growth, profit maximisation, income pursuit, and materialist signalling of status is found and sustained in educational priorities, institutional life and everyday conversation. To be clear: there is nothing wrong with economic growth, profit maximisation, income pursuit or materialist signalling of status – there is something wrong with their acquisition of hegemonic status.

POLICY AND THE POLITICS OF HAPPINESS The challenge is now to topple the social tyranny represented by a value system, by a general sentiment that judges nations, organizations and individuals by the money they make and the stuff they buy. Oxford philosopher Gerry Cohen argues that social change cannot come about as a result of state action, of changes in the legislative and institutional apparatus. “I now believe”, he writes – he is a former Marxist – “that a change in social ethos, a change in the attitudes people sustain in the thick of daily life, is necessary.”

The general sentiments of our society are reducing the extent of our freedom to diverge from a materialist path. This is not to say that individuals cannot choose to reject the monetary ethos – just that it is extremely difficult to do so when that ethos is so strong, and so pervasive.

State action can and should, however, be aimed at the social scaffolding that surrounds our choices. The job of government, as Tawney suggested, is to make the better choice the easy choice. On these grounds, a good liberal could support heavy taxation on advertising; new measures of national progress; and a fundamental shift in education away from training for work and towards the cultivation of the ‘arts of life’.

“protection, therefore, against the tyranny of the magistrate is not enough: there needs protection also against the tyranny of prevailing opinion and feeling”

There are policy implications here, but the politics of happiness is not primarily about legislative levers. The politics of happiness cannot be based on mandates, bans and taxes. It has to be about creating an environment in which something closer to free choices can be made. The goal cannot be to put Prozac in the water. It must be to take the depressant – the market ethos – out.

This bias in the environment can be seen as an infringement of our liberty. While Mill, along with most others in the liberal tradition, focused his attention on the relationship between the state and the individual, he also recognized the freedomreducing potential of societal value systems, writing that “protection, therefore, against the tyranny of the magistrate is not enough: there needs protection also against the tyranny of prevailing opinion and feeling; against the tendency of society to impose, by means other than civil penalties, its own ideas and practices as rules of conduct on those who dissent from them” – protection against what he called the ‘despotism of custom’.

Richard Reeves, writer, columnist and Associate Fellow of the Social Market Foundation. 8

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In affluent western societies, the challenge facing us is how to live well and cultivate the arts of life. Further wealth is not making us happier; it is our families and friends, our health and our hobbies that increase our wellbeing. Yet we don’t pursue these goals as individuals or as a society. Rather we make bad choices – chasing increased wealth and material goods. Should the state make us make better choices? Richard Reeves argues that it should not. Instead, government should challenge the prevailing social ethos that material wealth is the only worthy goal, and set the conditions so that the better choice is the easy choice.

THE SOCIAL MARKET FOUNDATION The Foundation’s main activity is to commission and publish original papers by independent academic and other experts on key topics in the economic and social fields, with a view to stimulating public discussion on the performance of markets and the social framework within which they operate. The Foundation is a registered charity and a company limited by guarantee. It is independent of any political party or group and is financed by the sales of publications and by voluntary donations from individuals, organisations and companies. The views expressed in publications are those of the authors and do not represent a corporate opinion of the Foundation. First published by The Social Market Foundation, 2004 The Social Market Foundation 11 Tufton Street London SW1P 3QB Copyright © The Social Market Foundation, 2004 The moral right of the authors has been asserted. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior written permission of both the copyright owner and the publisher of this book.

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