Chapter 1: Happiness: Everyone’s Ultimate Objective?

1.1 Happiness as the Ultimate Objective

Almost everyone wants to have more money. However, virtually no one wants more money for itself. Typically, one wants more money to buy more goods, services, and assets. The consumption and/or ownership of these yield satisfaction, security, power, etc. These items in turn are valued because they make the person concerned happy. A miser may not want to spend his money and may just feel happy looking at his heaps of money or just knowing that he is wealthy. Nevertheless, his wealth is important to him because it makes him happy. But happiness is valuable in itself, either to a miser or to a typical person.

It is true that happiness may also have instrumental values. For example, happiness may make one healthier or make one more successful in one’s job. However, being healthier and more successful in the job, etc. is valuable, ultimately speaking, only because they make one (or perhaps also others) happier, or happy for longer.

That happiness is valuable in itself is self-evident to everyone. One knows that pleasant feelings in taste, smell, sex, spiritual fulfillment, success, etc. are intrinsically enjoyable in themselves. The unpleasant feelings of pain, aches, distress, etc. are intrinsically undesirable in themselves. Thus, if there are no side effects to the contrary, happiness is valuable and good in itself and unhappiness is bad in itself. One does not have to argue with philosophers for thousand of years to know this common sense.

It may be more debatable to argue that, ultimately speaking, happiness is the only valuable thing. Moral principles, freedom, democracy, human rights, justice, etc. (you name it) may be very important. They should even be insisted upon at the political or practical level. However, one may argue (as done in Ng 2000a) that these important principles are important precisely because they ultimately are conducive to happiness. However, there are respectable scholars (including Nobel laureate like Sen 1979, 1997) who regard these principles are valuable in themselves, independent of their contribution to happiness. Fortunately, for the purpose of this book, one does not have to agree that happiness is the only valuable thing ultimately. One only has to agree that, if other ultimate objectives, if any, are not sacrificed, an increase in happiness is desirable. In particular, if an individual becomes happier without violating the law and moral principles and without making others worse off, this will not only be good for the individual, but generally also for the society.

1.2 What is Happiness?

Different people attain happiness in different ways. Some enjoy reading; some seldom open a book. Some enjoy spending money; some enjoy owning wealth. Others enjoy non-material pursuits. Everyone wants to be happy. However, what is happiness?

A person is typically seldom very happy or very unhappy. The first author enjoys the music he listens to while working and he also enjoys most of his work. However, he also feels a little tired late in the afternoon after working seven hours for the day. (So he almost never works at night as it decreases his happiness.) As a biological organism, we feel good eating fresh and nutritious food when hungry. This clearly has survival value. Thus, contrary to the pure subjectivist, happiness is not completely subjective. The pleasant or unpleasant feelings are subjective in the sense of being felt by a subject. But they have at least a substantial objective basis, though this is also shaped by the different experience of different subjects.

We feel bad when we are sick. We are sure virtually all others are like this for the biological reason of survival. If someone enjoyed getting ill, he would get ill more often and had a lower chance of survival. His genes would not be passed on as successfully. In time, such genes would be competed out of extinction. Hence, no one gets good feelings from sickness. Thus, we can be quite confident that sickness makes the individual feel bad. This is so despite the belief by Lu Xun, a famous Chinese writer in the first half of the 20^th century. He said that, small sickness was a blessing as it made the person enjoy a few days off work. The poor old Lu Xun must be very overworked!

The (net) happiness of an individual over any period of time is their pleasant feelings (‘positive affective feelings’, as the psychologist calls it) less their unpleasant (‘negative affective’) feelings over that period, with both types of feelings weighted by their intensities and duration. This is a subjective conception of happiness and needs some explanations.

1) Only affective feelings are included. These are all feelings that the individual ‘cares’ for positively or negatively, or that make them feel good or bad. This is the meaning of ‘affective’ here. One may visually feel the difference in colour of a book. However, if they do not care which colour it is, their feeling of colour here is not affective.

2) All affective feelings are included, including the more basic good and bad feelings of smell, taste, sight, etc. and the more spiritual or sophisticated feelings of proud, delight, shame, distress, etc.

3) Different types of feelings may be qualitatively different; beautiful sights are different from delicious tastes. However, in principle, we have no difficulty in comparing different types of feelings in terms of their quantitative significance. True, in practice, it may be difficult to compare the happiness significance of pushpins versus poetry. We may not have enough information regarding how many people really enjoy poetry and to what extent, etc. However, this is a matter of inadequate information, not incomparability in principle. For ourselves, we have no difficulty in honestly saying that we would rather give up using pushpins than giving up poetry.

4) Of course, we care about things other than our own feelings, such as the feelings of others, moral principles, etc. However, these relate to the happiness of others and the happiness of ourselves and others in the future. For the happiness of an individual in a given period, it consists of and only of their positive and negative feelings as described above.

5) The preceding point does not mean that, for any given period, an individual only cares about or maximizes their happiness in this period. Obviously, they take account of the effects on their future happiness. It does not mean they maximize their own happiness only. Not only that we may derive happiness by helping others to be happy (by writing this book, for example), we (and any other person) may be prepared to sacrifice a little of our own happiness if the happiness of others may be increased substantially.

Despite the above explanations, some people may still prefer to have a different conception of happiness. For example, consider two hypothetical scholars who both died in an air crash at the same age. Madam A suffered from debilitating illness and a broken family throughout much of her life, making her undergoing enormous pain and distress. However, working long and exhausting hours, she made important breakthroughs in knowledge and was awarded a Nobel prize just before her death. Though she died happy, her unhappiness throughout her whole life clearly outweighs her final happiness for a few days. Mr. B was a healthy and happily married man who enjoyed life a lot. He also enjoyed his work and performed satisfactorily. Just before his death, he learned that his expected promotion did not go through as it was found out that his only major contribution was contained in another publication years before his. He died unhappy and his career was not a very successful one. However, his final unhappiness for a few days is far exceeded by his high level of happiness for a long time.

According to our conception of happiness, Madam A had an unhappy life while Mr. B had a happy one. However, according to some scholars’ conception of happiness (which emphasizes final satisfaction with one’s life), A had a happy life and B an unhappy one. Moreover, some, if not many, people may prefer to have a life like A’s to one like B’s. Several issues are involved here.

a) To simplify from the complication of interest earnings from savings, assume an economy with zero interest rate and zero inflation rate. Consider two similar persons in all aspects except that X had a high income and consumption level ($40,000) during the first half of his life but the level was unexpectedly halved for the second half of his life. In contrast, Y started with half the initial level of X’s (i.e. $20,000) for the first half of his life but the level was unexpectedly doubled for the second half. Though their income and consumption over the whole life are the same, Y probably had a happier life, provided that the level of $20,000 per annum was not so low as to make him malnourished. (Malnourishment in the first half may be worse than that in the second half as it could affect one’s health for both halves.) Subject to this proviso, most people also prefer to be in the situation of Y than X. When one has been accustomed to a high level of consumption, one needs a high level to be happy. Thus, subject to the absence of health-damaging under-consumption, it is better to have a profile of increasing consumption level than one that is decreasing. However, this consideration does not apply to the case of Madam A versus Mr. B where the profiles are already in terms of happiness.

b) Many people may have ‘faulty telescopic faculty’ so as not to make full allowance for the future, as believed by Pigou, a well-known economist early in the 20^th century. When one looks backward in time, events far back may also appear less important. But this is a similar mistake as having a faulty telescopic faculty.

c) Madam A had a more successful life than Mr. B who had a happier life. The difference is due to A’s much higher contribution to knowledge which, presumably, would make others happier.

d) Madam A may also have a higher life satisfaction than B, at least at the end, but this is still not a happier life. A may prefer to have her unhappy life over B’s happy life. She may rationally have this preference if she believed that her contribution to knowledge would make others happier and if she cared for the happiness of others.

True, despite the above explanations, some people may still opt to use a somewhat different conception of happiness than the one we define above. Most people will agree that the good and bad feelings one has are important in affecting whether one is happy or not, even if not exclusively. Thus, one does not have to agree with our conception of happiness completely to find the rest of this book interesting and important.

Chapter 2: Does Money Buy Happiness?

2.1 The Rat Race for Making More Money

Almost everyone is eagerly engaged in the rat race for making more money. And almost every nation is eagerly engaged in the rat race for increasing its per-capita income. If money does not buy happiness, people and governments must be quite mad or stupid. So, the answer seems to be that money does buy happiness. But does it really?

Studies by psychologists and sociologists show that, both within a country and across nations, the happiness level of people increases with the income level, though not very significantly. For example, using regional and cultural classifications, the Northern European countries with high income score top on happiness, followed by the group of English-speaking US, UK, Australia, and Ireland. Central and South-American countries including Brazil come next, followed by the Middle East, the Central European, Southern and Eastern European (Greece, Russia, Turkey, and Yugoslavia), the Indian Sub-continent, and Africa which does not, however, come last. Southern and Western European (France, Italy, and Spain) score significantly lower than Africa. And the last group is East Asia, including the country that leads in income, Japan. Singapore has an income (per capita) level 82.4 times that of India. Even in terms of purchasing power parity instead of using exchange rate, Singapore is still 16.4 time higher than India in income. However, the happiness scores of both countries are exactly the same, both significantly higher than that of Japan. (See Cummins 1998. The low happiness scores of the East-Asian regions despite their high incomes and high rates of growth, dubbed the East-Asian happiness gap by Ng 2001b, is further discussed in the last chapter.)

While there are notable cases like Japan and France that are far off the regression line, a statistically significant positive relationship between happiness and income exists cross-nationally globally. This is due mainly to the inter-group difference between the high-income and high-happiness advanced and free countries and the others. The analysis by Schyns (1998) shows that there is no positive relationship between income and happiness within either of these two groups. (Professor Veenhoven assured me that, in a recent study, a positive relationship for the poorer group of countries was shown.)

We presented the above results in a seminar at our university. A colleague said, ‘Cross-national relationship between income and happiness is affected by cultural differences. The relationship should be stronger within the same country.’ In fact, the relationship between happiness and income level intertemporally within the same country (at least for the advanced countries which have such data) is even less encouraging in terms of giving a positive relationship. For example, from the 1940s to 1994, the real income per capita of the US nearly trebled. However, the percentage of people who regard themselves as very happy fluctuated around 30%, without showing an upward trend; another measure of average happiness fluctuated around 72%. (Blanchflower & Oswald 2000 noted a slight decrease in the happiness level in the U.S. from 1972 to 1998, but Hagerty & Veenhoven 1999 show a slight increase.) Over the similar period, the income level in Japan increased by a much larger multiple. However, its average happiness measure fluctuated around 59%, also without an upward trend. (See Diener and Suh 1997; Frank 1997; Kahneman, et al. 1999; Myers 1996, p.445; Oswald 1997; Veenhoven 1993.)

Within a country at the same time, it is true that income is positively correlated with happiness, though only marginally. However, it seems that no income group is contented with their income level, as judged from the answers to the following question by the Americans in 1980: ‘What would be the smallest income … your family would need to make ends meet?’ (US Bureau of Labor Statistics 1986). As Lebergott (1993, p.71) comments, ‘the more one has, the more one wants. Families with incomes below $5,000 felt that $7,822 would suffice. Families with incomes from 5,000 to $10,000 felt $10,139 was needed. Those who averaged $44,837 knew that almost three times that sum was absolutely necessary’.

When you are starving, eating is important. Thus, income matters more for happiness at very low levels of income. Without exception, researchers after researchers find that income either does not matter or only matters slightly in happiness, at least after a certain biologically minimum standard of living is reached. Millionaires are only slightly more happy than the average person (Diener, Horowitz and Emmons 1985). Taken together, the evidence suggests that income matters more for happiness at very low levels of income but it still accounts for less than 2% of the overall variance in individual happiness (Diener, et al 1993). In fact, all objective factors combined seem to contribute little to happiness. Thus, Campbell, et al (1976) found that demographic factors (including income, age, gender, race, education, and marital status) explain less than 20% of the variance in happiness. Andrews & Withey (1976) find that these factors account for only 8% of the variance in happiness or well-being. If we take away marital status (which correlates significantly with happiness), other objective factors are very unimportant indeed.

Many people spend a lot of money and time in buying lottery tickets. However, there is evidence that lottery winners are no happier than non-winners (Brickman, et al 1978). True, they are delighted after winning. However, their happiness levels fall back to the original levels within weeks. (A recent result of Frederick & Loewenstein 1999 shows a quick decline back to a level slightly above a control group.) Their original expectation of having a much happier life after winning is not fulfilled. It is thus not really worthwhile to spend say $10 per week plus the time and trouble when the expected return is only $6, unless you get a big kick in daydreaming about the nice time of spending the big win. In other words, you mainly just buy a hope. We would rather put our hope elsewhere.

2.2 Why the Rat Race if Income Does Not Really Buy Happiness?

The positive relationship between income and happiness for any given year and the lack of the relationship over time may be explained by the importance of relative-income effects (Easterlin 1974). The concept of relative-income effects was discussed by economists including Rae (1834), Veblen (1929), Duesenberry (1949), Hirsch (1976), Akerlof (1976), Frank (1985, 1999), and Ireland (2001),. After a certain biological minimum level, people’s satisfaction from consumption is explained less by the intrinsic usefulness of goods but by the relative levels of income or consumption. One may have enough nourishment, accommodation, and has a car to move around. However, he may still be unsatisfied if others consume more and have more luxurious cars. A seminar speaker, an economist, disagreed with our view that money is no longer for happiness, saying, ‘I would certainly be happier with a BMW.’ Our reply was, ‘The BMW may make you happier, but it will make others less happy.’ Hence, lower income-groups are less satisfied and higher income-groups are happier. Thus, money buys happiness in this sense. (Even so, money only buys small amounts of happiness; there are many other factors that correlate more significantly with happiness than money.)

However, an increase in the relative income of one person means that the relative incomes of some others must decrease. For the whole society, the relative incomes of people on average cannot increase. This may thus partly explain why happiness does not increase with higher incomes over time, yet people are still engaged in the rat race for making more money. We said ‘partly’ because the small amounts of higher happiness associated with higher incomes (even assuming the causal relationship all goes from income to happiness) do not really justify a fierce race for making more money. There must be other explanations.

The most important explanation is that people (ourselves included) are ignorant and irrational. This is a remarkable, if not ‘courageous’ (in the sense used by Sir Humphrey in ‘Yes, Minister’), statement by economists. Many economists may regard this statement as a sufficient proof that we are not competent economists. Economists typically assume that an individual tries to maximize their stable objective function subject to feasibility constraints. They pride themselves by being able to explain behaviour involving apparent changes in preferences as really caused by changes in such economic factors as incomes and prices. They are really quite skilful in such analysis which is very useful for many problems. Due to this focus, they hardly discuss changes in preferences, not to mention ignorant choices and irrational behaviour. Economists take people’s preferences as given. Apart from logical consistency, economists do not question the rationality of people’s preferences. (Among very few exceptions is Scitovsky 1976.) By saying that people have irrational preferences (worse, as will be seen later, we regard some of their preferences as simply ‘incorrect’), we prove ourselves to be not competent economists. Or so might many economists believe.

The above view of many economists has some rationality. First, if you can explain certain things without resorting to the assumption of preference changes, ignorance and irrationality, it may be nicer. Secondly, almost anything can be explained by some forms of preference changes, ignorance and irrationality. Despite this, the fact remains that preference changes do happen in the real world and people are not perfectly free of ignorance and irrationality. Perhaps it is a little extreme and not quite nice to say that people are ignorant and irrational. So, let us agree to change it into saying that people (ourselves included) are not fully informed and not perfectly rational.

By being fully informed in, say, the consumption choice, one does not have to know everything including quantum mechanics. It does mean that one knows the relevant prices, qualities and effects of the relevant goods and their substitutes. Even with this sense of being fully informed, it is clear that most consumers are not fully informed in most of their choices. However, in most cases, the extent and/or effects of the imperfection in information are small. They should be neglected. The more significant cases may justify such measures as government inspection and regulation of food, drugs, and other goods and services. In the US, there are such government bodies as the Consumer Product Safety Commission, the Food and Drug Administration, and the Federal Deposit Insurance Corporation to protect buyers. However, even in these areas, economists argue that ‘markets can provide for the regulation of quality standards without any government involvement. … regulations through firms in the private market is likely to be superior to government regulation for two reasons. First, firms have more of an incentive to be effective regulators. Second, individuals will be more likely to check the quality standards that are being regulated rather than assuming that the government is taking care of them’ (Holcombe 1995, p.103). We find Holcombe’s arguments persuasive at least in certain important aspects. Yet we are not sure whether we should leave everything to the market. Nevertheless, most people would agree that there is scope for the removal or simplification of some unnecessary regulations in some areas.

Economists are even more reluctant to say that people are irrational (even in the mild sense of being less than perfectly rational) than that they are not fully informed. Yet, there are good reasons to suggest and good evidence to show that people are far from fully informed and/or fully rational. At the end of Section 2.1, the case of wasting much money and time on buying lottery tickets has already been discussed. Ignorance and/or irrationality is likely to be involved as winning a large sum of money does not really bring a lot of happiness.

Most people believe that, rather than becoming disabled (losing both legs or both eyes), it is better to be killed in an accident. We have taken shows of hands at classes and public lectures, the answers are consistently about 2-3 to 1 in favour of being killed (i.e. about 2.5 times more people choosing being killed than those choosing being disabled). We would then tell them, ‘your preferences are incorrect!’ Studies show that quadriplegics are only slightly less happy than healthy people (Brickman, et al, 1978). After a period of adjustment, the happiness levels of seriously disabled accident victims are restored to levels close to the pre-accident levels. They are then glad that they were not killed in the accidents.

In the last section, it is also mentioned that, the more income people have, the more money they think they need to make ends meet. At any income level, people feel the need and urge to have more. They believe that the additional income will make them significantly happier. However, once they have the additional income and are accustomed to it, they become no significantly happier than before. Instead, they then think that more money is needed to make them happy. Most people ignore or underestimate the negative effects of current consumption/enjoyment on future happiness and the positive effects of current abstinence/suffering on future happiness (Headey and Wearing 1991). The failure to take adequate account of the adaptation effect and the influence of the ‘market culture’ are also used by Lane (1993, 2000) to explain why people think that money is more important than it really is.

In fact, there is evidence that the more materialistically inclined are less happy. People whose goals are intrinsic, i.e. oriented towards self-acceptance, affiliation, and community feeling, are happier than those whose goals are extrinsic, i.e. oriented towards some external rewards such as financial success, popularity, and attractiveness. (See Kasser & Ryan 1993, 1996, 1998; Richins, et al 1992, Ryan, et al forthcoming, Wright & Larsen 1993). ‘Materialism, a preoccupation with economic well-being, is negatively correlated with SWB [subjective well-being], and especially so in those that believe that more money would make one happier’ (Offer 2000, p.20, reviewing Ahuvia & Friedman 1998, p.154, 161). Yet, people continue to be or even become more materialistically inclined.

A specific example may illustrate the high happiness costs of materialism. As reported in Ming Pao Daily (a reliable leading daily in Hong Kong) on 23.3.97 (p. A11), a man in Tienjin was sent to a hospital after he fainted while cycling. Further investigations revealed that he decided to buy a mobile phone costing more than RMB-9,000, despite having a monthly salary of only about -600 and a life saving of only -5,000. He thus cut down on all his expenses including food. After more than four months of semi-fasting, he managed to buy the mobile phone with a loan of another -2,000 from relatives. The phone was not for any business or other essential use. Rather, he used it to show off to his friends, cycling from one house to another, ending up in the hospital. Maybe he was ignorant of the possibility of fainting. However, even if he did not faint, we do not think that the happiness he would obtain from showing off his phone would be more than his welfare loss from spending more than -9,000, including making himself rather unhealthy from semi-fasting. His desire to have the phone is likely to be irrational.

People want to be happy; so why do they have irrational desire and do certain things that reduces their happiness?

2.3 A Biological Explanation of Irrationality

While people are largely rational and want to be happy, they are not perfectly rational, if for no other reason than the fact that they are also biological organisms. The importance of relative standing may have, at least partly, a biological explanation. After reviewing biological and non-biological evidence, Frank (1999, p. 145) concluded that ‘concern about relative position is a deep-rooted and ineradicable element of human nature’. Individuals compete for survival and in reproductive fitness. For an individual (and natural selection works mainly at the level of the individual) and beyond the absolute minimum standards for survival, reproductive fitness is determined largely by relative standing, especially for the male members. In the animal kingdom and in our long history of evolution, it is/was the dominant male that has/had the almost exclusive access to a whole harem of females. The (mainly male) fetishism on sports competition may also partly be traced to this biological factor of the ‘winner takes all’ in male competition (Deker & Scotchmer 1999). The male dominance in spheres where aggressive competition to get to the top is important (e.g. chief executive officers in business) may also be partly explained by the same factor. Of course, the biological inclination may also be reinforced by nurture, especially in our society that values competition and materialistic achievements. (On the biological basis of behaviour, see Wilson 1975, Dawkins 1989, and Robson 2001.)

In nature, species and individual organisms have to compete with other species and individuals for scarce resources and the opportunity to mate. Those individuals not performing well in the competition will not be able to pass their genes on to the next generation. Thus, characteristics that make individuals good in the competition for survival and reproduction will be selected naturally. Thus, in nature, the ultimate forces are survival and reproduction, not happiness. This is the fundamental reason why even individuals in the most rational species, Homo sapiens, us, are still not fully rational. (We define irrationality as preferring, choosing, or doing something against one’s own happiness not due to ignorance or a concern for the welfare of others. We define welfare as happiness. At the ultimate level, we certainly regard our welfare as certainly nothing more or less than our happiness.)

When there were only relatively few and simple species, the environment was relatively simple. Some simple strategies like orienting towards light may be adequate for survival. With the evolution of more and more species (from random mutation and natural selection) and more and more complex species, the environment became more and more complex. This made the use of more complicated strategies more important for survival. This created an evolutionary pressure for complexity. The existence of more complex species also made the evolution of even more complex species possible. Evolution was largely through gradual changes, even though there might be some occasions of ‘punctuations’ (relatively sudden changes) in the dynamic equilibrium.

When the environment became more complex, the number of alternative behavioural responses for different circumstances quickly exploded into astronomical magnitude. This made programming all the optimal behavioural responses through hard wiring in the genes very costly. This created a selectional pressure for the evolution of consciousness. A conscious organism may use its consciousness to size up the situation and make choices like ‘fight or flight’ on the spot, relieving the necessity to pre-program all the responses for astronomical number of alternative situations. How consciousness is possible and how it actually evolved are unexplained. (Perhaps, such ‘world knots’ may never be explainable.) However, it is clear that, once consciousness did evolve, it bestowed an enormous advantage. This explains its survival despite its high costs. (It is known that our brain, while accounting for only a few percentage of our bodily weight, consumes a disproportionately high percentage of our total energy requirement.)

We may define a second concept of rationality (distinguished from the first by being written in italics). A species A is more rational than another B, if the behavioural responses of A is determined more (than B) by conscious choices than by hard-wired programs. The evolution of more and more rational species then made the environment more and more complex and made the evolution of even more rational species more selectable. This created a virtuous cycle in favour of complexity and rationality, cumulating in the emergence of Homo sapiens. (See Ng 1996b for details.) This virtuous cycle partly explains the spectacular speed of this evolution, a speed questioned by creationists. (Of course, all this only partly explains the evolution theory as a possible hypothesis; they do not prove that consciousness was not created by God. Thus, on such fundamental problems, one must maintain some degree of agnosticism. The argument below is based however on the presumption that the evolution hypothesis is valid.)

Conscious choices could be selectable only if the choices made were largely consistent with survival and reproduction. God (or evolution) solved this problem by endowing the conscious species with a reward and punishment centre(s). Thus, activities like eating nutritious food when hungry are rewarded with pleasure; injuries to the body are penalized with pain. This makes (survival and reproductive) fitness-consistent choices largely also conducive to happiness. However, the consistency is not perfect. Since evolution is largely fitness-maximisation and the happiness-enhancing aspect is only indirectly to enhance fitness, some divergence between our behaviour and our happiness is unavoidable. For example, traits that incline individuals to produce a number of offspring larger than that dictated by happiness maximisation may be selected (Ng 1995).

Apart from the ex-post reward and penalty, evolution also programmed us to have certain biological or psychological drives to propel us to do certain things that enhance our fitness for survival and reproduction. An obvious example is the strong sex drive which propels especially young people to engage in careless sex, resulting in unwanted pregnancies and the contraction of AIDS and other diseases. Obviously, such activities may be happiness reducing in the long run. While this is partly due to ignorance, the role of biological drives cannot be denied.

A biological drive that is particularly relevant for our purpose here is the accumulation instinct. It is clear that the hard-wired instinct to store/bury food by ants, mice, squirrels, etc. is fitness enhancing, as it reduces the probability of dying from starvation. In times of scarcity, our inner urge to accumulate increases both our fitness and our happiness. Since scarcity was the rule in our thousands of generations of evolutionary history, our accumulation instinct is still present. In this age of plenty (at least for rich countries), our accumulation instinct still propels us to make more and more money even if that no longer increases our happiness. We end up in an affluent (Galbraith 1958) but joyless (Scitovsky 1976) economy. Many people are prepared to cheat, to harm others, and to risk losing good friends, family members, and even their own freedom and lives in order to make more money that does not really increase their own happiness. Like careless sex, this is clearly irrational. Only if one can see through the stupidity of such happiness-reducing quests for money that one may regard one as truly ‘having no illusions’. (Confucius said, ‘I became independent at thirty, had no illusions at forty, knew the mandate of Heaven at fifty, ….’. The first author tries to have no illusions but without complete success. Thus, in the signature of his emails, he adds, ‘Though I have long known the mandate of Heaven, I still have illusions.’)

Chapter 3 What are Important for Happiness?

Important Correlates of Happiness

If money is no longer important (for rich countries at least) for happiness, what are important for happiness? Or is (net) happiness unchanged, always equals zero, with happiness offsetting unhappiness, as some people believe? This belief is incorrect. Happiness does vary a lot between different people, between different countries, and an unhappy person may become happy.

First, on average, married people are a lot happier than all categories of singles, young, old, divorced, or widowed (Veenhoven 1984, Blanchflower & Oswald 2000). This is found to be so virtually universally. In the US, the proportion of people who regard themselves as very happy fluctuated around 40% over the past many decades (since such data were available) for married people, but fluctuated around just above 20% for single adults. (See Myers 1996, p.510.) It is true that correlation does not prove causality. Also, the causality may go the other way. Happy people probably have less difficulty in finding someone to marry, but the percentage of people unable to find a partner to marry is not high. It is almost certainly true that marriage is important in contributing to happiness, if for no other reasons than fulfilling our biological needs (not just for sex but also for companionship). Married people are on average happier than the single, the divorced, and the separated. The separated are even less happy than the divorced. People in their first marriages are happier than those in their second marriages (Blanchflower & Oswald 2000). Here, the causality is more difficult to ascertain, as it may be that less happy people are more likely to end their first marriages.

When we tried to impress upon a yet unmarried relative on the importance of marriage, he said, ‘But all married couples I know of fight with each other!’ What he said is quite true. However, the fact is that when there is a problem or a fight, this becomes known by close friends and relatives. When they are happily enjoying themselves at home or in their bedrooms, others do not know.

Apart from marriage and sex life, other factors important for happiness include friendship, health, work, and leisure. (See Headey & Wearing 1992, Chapter 6.) A purpose in life, including religious belief, is also very important for happiness. The unemployed are markedly less happy than the employed (Winkelmann & Winkelmann 1998). The difference is many times larger than what can be accounted for by the importance of the forgone earnings. What makes the unemployed unhappy is not so much the low income or consumption level but the psychological effects of frustration and the loss of confidence and purpose. Loneliness correlates very negatively with happiness and very positively with stress. Intimate relationships (confidants), followed by friends, and then by allies or helpers, contribute a lot to happiness and the prevention of stress.

On the other hands, race, gender, and immigrant status (after a period of adjustment) have no positive or negative correlation with happiness. Man and women, and people of different races have similar levels of happiness. ‘One would expect members of ethnic groups who are disadvantaged and/or discriminated against to be relatively dissatisfied with their lives. The same would apply to immigrants. In fact ethnic minorities and migrants reach the same equilibrium state of well-being and show similar levels of psychological distress as the native born, provided that major changes are not occurring in their lives. There is unmistakable evidence, for example, that in the 1980s American blacks and Hispanics have differed little from whites in well-being and psychological distress’ (Headey & Wearing 1992, p.80). However, we are inclined to interpret the evidence differently. The discrimination does make the ethnic groups unhappy but this is offset by the intrinsic higher level of happiness of these groups. This is so because it is the more adventurous, more energetic, and more extroverted who tend to migrate. Since the extroverts rate much higher than the introverts in happiness (see below), the migrants would otherwise achieve higher happiness level if not discriminated against or have other problems of adjustments. This is in fact confirmed by the Australian data. Immigrants achieved similar levels of happiness as native Australians after ten years and after twenty years, they enjoyed life more than the natives (Headey 1988).

The relationship of happiness to age appears to be U-shaped. The young and the elderly are happier than those around thirty (Blanchflower & Oswald 2000). Perhaps the difficulties of paying for house mortgage and raising young children without much experience may be relevant. Thus, readers who may not be very happy now should not despair. Apart from the possibility of learning to achieve happiness from reading this book, you may expect to get happier as you get older, rather than be less happy as commonly believed. Just learning about this fact alone may be worth many times your costs of reading this book. If someone is not happy in her thirties, she may think thus, ‘I am so unhappy even at this young age, it will be far worse when I get older.’ She may then commit suicide. Thus, knowing the true relationship between age and happiness may save her life!

The U-shaped relationship also applies to marital satisfaction by stage of family life cycle, with the honeymoon and the empty nest periods being the best (about equal in happiness), and the stages with children under five and adolescent children being the least happy (Argyle 1999, p.360). Readers undergoing this difficult periods may at least look forward to large expected improvements in the future and may thus treasure their marriage more. This knowledge may itself reduce the unhappiness during the difficult periods and even save the marriage from breaking up.

A very important factor correlating strongly with happiness is personality which is affected both by nature (genetic factors) and nurture (education and social influence). Extroverts are happier than introverts and the neurotics have more psychological stress than the stable. Using the dual personality classification of Eysenck & Eysenck (1969), we have four personality types. Type I is the stable extroverts who rate high on well-being and low in stress and hence are very or pretty happy. Type II is the neurotic introverts who rate low on well-being and high in stress and hence are very unhappy. Type III is the neurotic extroverts who rates high on both well-being and stress. Type IV is the stable introverts who rate low on both scales. These last two types have intermediate levels of happiness.

Once a person has acquired a certain personality type, it tends to remain stable. This also explains the fact that happy people tend to remain happy throughout their life and similarly for unhappy people. However, it does not mean that happiness cannot be changed, nor that one cannot learn to become happier. The fact that most people do not does not mean that you cannot. Most people do not read this book but you do. You should thus already have an advantage. Nevertheless, it means that, apart from inheritance, education and other influences during childhood may be extremely important in affecting the happiness of one’s whole life. We will come back to discuss the policy implication of this in the concluding chapter.

For factors at the more national level, both freedom and democracy are positive correlated with happiness. Veenhoven (2000) shows the positive correlation between freedom and happiness. Frey & Stutzer (forthcoming) show the positive correlation between democracy and happiness. Thus, freedom and democracy are not just abstract principles but really contribute to our happiness.

We already mention earlier that the more materialistically inclined are less happy. Parallel to this is the interesting result that those who help others are happier (Benson, et al 1980, Switzer, et al 1995, Konow & Earley 1999). Together, these results tend to support the conjecture of the ‘hedonistic paradox’ in the philosophy literature. A version of this conjecture says that a person who seeks pleasure or happiness for themself will not find it, but a person who helps others will find happiness. This paradox may be explained by the fact that we are a social species. By nature and nurture, we feel happy by doing useful things for others. Also, self-interested behaviour may yield short-term gains but is bound to make one lose true friendship, rewarding intimate relationship, and good reputation.

There are two different concepts of hedonism. The first, used mainly academically, takes hedonism as the belief that the ultimately valuable thing in life is pleasure or happiness. Belief in hedonism in this sense does not imply that one is purely self-interested. A hedonist in this sense may achieve happiness by helping others to be happy. We are hedonists in this sense. The second sense takes a hedonist as seeking only their own pleasure and is prepared to do so by hook or by crook, even by making others miserable. Evidence suggests that such self-interested hedonist is unlikely to find happiness. Such a hedonist is not only bad for the society but is also bad for themself. The first lesson in happiness study should be: stop being too selfish and too materialistic; start doing things useful to others.

Chapter 4 Private Consumption or Public Spending?

Except for poor countries, increases in income and consumption can no longer increase happiness appreciably. However, this does not mean that economic issues are no longer important and that we may stop studying economics. As argued below, a shift of resources from private consumption towards public spending, especially on education, research, and environmental protection, may significantly increase happiness.

4.1 The Futility of Private Consumption

After a biological minimum, the futility of money to buy happiness, at least at the social level, has already been discussed in Chapter 2. In rich countries, the increase in consumption has been really phenomenal. In the century between 1880 and 1980, cigarettes consumed per capita in the US increased by 300 times (not percent). But for the recent concern with the health hazards of smoking, the figure would have increased further. Between 1900 and 1990, real per capita consumer spending increased by 6.4 times on housing, by 20.6 times on household appliances, and by 21.7 times on automobiles. (But spending on public transport actually decreased by 4%. See Lebergott 1993, p.76 and p.85.) As early as eight decades ago, Veblen (1921, p.12) said that ‘something like one-half of the actual output is consumed in wasteful superfluities’. Since then, real output per capita in the US has increased by nearly three times. However, as noted earlier, measures of happiness have fluctuated around the same levels, without an increasing trend.

The failure of higher income to increase happiness may be explained by the following considerations.

1. Marginal utility of consumption diminishes quickly: Happiness may respond to higher consumption at low consumption level but the magnitude of this response quickly diminishes as consumption level increases. In the jargon of economics, the marginal happiness/utility of consumption diminishes quickly to a negligible amount. Kenny (1999, pp.4-5) puts the point of fast diminishing marginal utility of income in more objective terms thus: ‘Compare Mozambique, China and the USA. In turn, the countries’ GNPs per capita in 1992 were $80, $470 and $24,740. Infant mortalities were 145.6, 30.5 and 8.6 per 1,000 live births, respectively. Life expectancies were 47, 69 and 76 years. Thus, going 1.6 percent of the distance between Mozambique and the United States in terms of wealth, so reaching China’s income, we move 84 percent of the distance in terms of infant mortality and 76 percent of the distance in terms of life expectancy.’

2. Mutually offsetting effects of competitive consumption: After a biological minimum level, much of the consumption is used competitively to keep up with or surpass the Joneses. At the social level, such competitive consumption is mutually offsetting, making people on average no happier. In addition, the environmental costs of the extra production and consumption may actually make people worse off (Ng & Wang 1993, Ng & Ng 2001).

3. The adaptation effect: Initially, a higher consumption level makes the consumer happy. However, the consumer quickly adapts to that higher level and the happiness level falls back to the initial level.

Due to the above effects, it need not be surprising that higher income fails to generate more happiness. However, it may be argued, especially by economists, that it is the measures of happiness that are problematical. People now may require a larger amount of subjective happiness before describing themselves as ‘very happy’. Thus, despite a substantial increase in happiness, the percentage of people describing themselves as ‘very happy’ may not have increased. It is true that the methods used by psychologists and sociologists to measure happiness are open to the charge of incomparability. Thus, the first author has developed a method that yields happiness measures that are comparable interpersonally, intertemporally, and internationally (Ng 1996a).

Even before using such more comparable measures, there are persuasive arguments that such happiness measures are rather reliable (Kahneman et al. 1999). For example, different measures of happiness correlate well with one another (Fordyce 1988), with recalls of positive versus negative life events (Seidlitz, Wyer & Diener 1997), with reports of friends and family members (Diener 1984), with physical measures like heart rate and blood pressure measures (Shedler, Mayman & Manis 1993), and with EEG measures of prefrontal brain activity (Sutton & Davidson 1997). Pavot (1991) finds that respondents reporting that they are very happy tend to smile more. Di Tella & MacCulloch (2000) note that psychologists who study and give advice on happiness for a living use happiness data. ‘Presumably, if markets work and there was a better way to study well-being, people who insist on using bad data would be driven out of the market’ (pp.7-8). Moreover, correlationships of happiness show remarkably consistency across countries. All these do not rule out remaining problems (see, e.g. Schwarz & Stracek 1999, Bertrand & Mullainathan 2001). However, reported subjective well-being may still be used as good approximation (Frey & Stutzer 2001).

There could be different degrees of cultural bias in reports of happiness levels internationally (Diener, Diener & Diener 1995). For example, people in the US are more inclined to profess happiness, as being happy is socially regarded as something positive. French respondents may have the opposite bias, as Charles de Gaulle was quoted as saying ‘Happy people are idiots’, though this assertion has actually been refuted by the data (Diener 1984). In Japan, the social custom of modesty may make people less ready to describe themselves as very happy. However, for intertemporal comparisons, it is likely that, if there have been any significant changes in such biases, they are likely towards more willingness to profess happiness. Thus, such cultural bias cannot be used to explain the failure of the happiness measures to increase over time with income. Moreover, researchers have used various methods (e.g. the social desirability scale of Crowne & Marlowe 1964) to isolate the effects of such biases without changing the conclusions significantly. For example, Konow & Earley (1999) report that the use of the C-M scale to control for the bias does not significantly affect their findings that people who help others are happier.

Furthermore, the picture is not much different even if we use more objective indicators of the quality of life. Analyzing a panel data set of 95 quality-of-life indicators (covering education, health, transport, inequality, pollution, democracy, political stability) covering 1960-1990, Easterly (1999) reaches some remarkable results.

While virtually all of these indicators show quality of life across nations to be positively associated with per capita income, when country effects are removed using either fixed effects or an estimator in first differences, the effects of economic growth on the quality of life are uneven and often nonexistent. It is found that ‘quality of life is about equally likely to improve or worsen with rising income. … In the sample of 69 indicators available for the First Differences indicator, 62 percent of the indicators had time shifts improve the indicator more than growth did’ (Easterly 1999, p.17-8). Even for the only 20 out of the 81 indicators with a significantly positive relationship with income under fixed effects, time improved 10 out of these 20 indicators more than income did.

The surprising results are not due to the worsening income distribution (there is some evidence that the share of the poor gets better with growth). Rather, the quality of life of any country depends less on its own economic growth or income level but more on the scientific, technological, and other breakthroughs at the world level. These depend more on public spending than private consumption. Many studies (e.g. Estes 1988, Slottje 1991; see Offer 2000 for a review) show that measures of social progress strongly correlates with income level at low incomes (to around US$3,000 at 1981 prices) but the correlation disappears after that. Others (e.g. Veenhoven 1991, Diener & Suh 1999) show a similar relationship between happiness and income.

If private consumption does not increase happiness (at the social level), public spending that reduces private consumption may be costly in dollar terms but not in happiness terms. Since money is not our ultimate objective while happiness is, reckoning in dollar instead of happiness terms overestimate the truly ultimate cost of public spending. It fact, as argued below, even just on dollar terms, the true costs of public spending have been much overestimated by economists.

4.2 The Overestimation of the Costs of Public Spending

(Readers finding this subsection technical may skip it without much loss of continuity.)

Economists are good in recognising the indirect, hidden costs of many things that escape the attention of most non-economists. This is an important function of economists difficult to over-emphasise. However, most economists overestimate the costs (or underestimate the benefits) of public spending, especially on research and environmental protection. In combination with the global public-good and long-term nature of the fruits of research and environmental protection, this may make public spending on these items well below the optimal levels, even before we take into account the failure of higher private consumption to significantly increase happiness and improve the quality-of-life indicators.

4.2.1 Overestimating the excess burden of taxation

For a dollar of public spending, non-economists typically cost it at one dollar. However, economists typically cost it at well in excess of one dollar. A recent estimate by a prominent economist at Harvard University (Feldstein 1997) puts it at $2.65. Such high estimates of the costs of public spending suggest that public projects should yield very high benefits before they are worthwhile to undertake. This conception probably partly contributes to the world-wide trend towards cuts in public spending.

The costs of public revenue include not only its direct cost (the amount of taxes imposed) but also the costs of administration, compliance, policing, and distortion. While the first three types of costs are substantial, they do not vary significantly with the tax revenue raised. Hence, concentrating on the marginal costs of public spending, economists emphasise the distortionary costs or excess burden of taxation due to the fact that taxes distort the free choices of individuals, especially in discouraging work effort, i.e. the disincentive effects. At least since the time of Pigou (1928), economists have emphasized that the benefits of public goods must exceed their direct costs by an amount sufficient to outweigh the excess burden of taxation. An authoritative modern textbook (Stiglitz 1988, p.140) puts the Pigovian principle this way: “Since it becomes more costly to obtain public goods when taxation imposes distortions, normally this will imply that the efficient level of public goods is smaller than it would have been with nondistortionary taxation.”[1]

The economists’ practice of including the excess burden of taxation in the costs of public spending ignored an important consideration pointed out by Kaplow (1996). Basically, the disincentive effects on the taxation side are largely offset by the incentive effects or negative disincentive effects on the spending side. Kaplow argues that public goods can be financed without additional distortion by using an adjustment to the income tax that offsets the benefits of the public good. The ‘preexisting income tax schedule is adjusted so that, at each income level, the tax change just offsets the benefits from the public good. By construction, an individual’s net reward from any level of work effort will be unaltered; any reduction in disposable income due to the tax adjustment is balanced by the benefits from the public good. Because an individuals’ after-tax utility as a function of his work effort will thus be unchanged, his choice of work effort - and utility level – will also be unaffected’ (Kaplow 1996, p.514).

For example, if the benefit of a public good is proportional to the income level of the taxpayers, it may be financed by a (or an increase in) proportional income tax. The proportional income tax itself may involve a disincentive effect. However, the tax plus the public good together involve no disincentive effect. For example, suppose the benefit of police protection of properties is proportional to the income level of the taxpayers. With a higher degree of police protection financed by a higher proportional income tax, a person benefits more (in comparison to a lower degree of protection and lower tax) and pays more by the same amount if they earn more, leaving the incentive structure unaffected. Hence, a dollar of public spending needs only to yield no less than a dollar (instead of the $1.35 or $2.65 estimated by economists) of benefits to the public for it to be worth spending.

While Kaplow’s argument has to be subject to some qualifications, there are other considerations suggesting either that the costs of a dollar of public spending should be significantly reduced (possibly to below one dollar) or that the benefits of public spending should be significantly increased from those normally estimated by economists as private consumption have grosser inefficiency (Ng 2000b, 2001c).

4.2.2 Environmental effects, relative-income effects, and burden-free taxes

Even before we take account of Kaplow’s argument discussed above, the costs of public spending are overestimated due to the failure to take adequate account of the environmental effects, relative-income effects, and burden-free taxes.

Environmental effects

The production and consumption of most goods and services impose significant disruption on the environment either directly or indirectly (through input usage), including various forms of pollution, congestion, deforestation, etc. Ideally, taxes should be imposed in accordance to the estimated costs on the society of these environmental disruption effects. However, largely speaking, this has not happened. Thus, general taxes on income and consumption, though designed mainly for the purpose of revenue raising, may in fact serve as rough counteracting measures to the disruption effects involved. Thus, far from being distortive, taxation may be corrective; instead of imposing positive excess burdens or distortionary costs, taxation may serve to improve efficiency, given that tax rates are around 30% in most countries and the severity of the environmental effects, such may well be the case, especially if a global and long-term view is taken. At the very least, the distortive costs of taxation are far less than estimates that fail to account for the environmental effects. Most such estimates (e.g. the one by Feldstein mentioned above) do not consider the environmental effects.

Relative-income effects

The importance of relative incomes (one’s income relative to those of others) is beyond doubt and has been discussed by economists as early as Rae (1834). However, its relevance for the costs of public spending has been ignored. Ignoring the possible concern for the poor, most people (with the exception of those at starvation level) typically would not like a situation where the income of everyone is doubled while their incomes increase by only 5%.

For a single person, an increase in income increases both their absolute and relative incomes. It is thus perceived to be very important. If the friends/school-mates of your child all receive expensive birthday gifts, you also have to give your child an expensive one. If your friends all have luxurious cars, you may feel less satisfied with your standard one. However, since public goods are simultaneously consumed by all individuals, no such relative pressures are present. This causes a bias in favour of private spending or against public spending. The benefits of public spending are underestimated (effectively equivalent to an overestimation of the costs). In most estimates, the marginal benefit of private expenditure is likely to be taken to include the absolute-income or intrinsic consumption effects plus the internal or direct relative income effect (as these two taken together constitute the worth of private consumption as it appears to each individual), but not to include the negative external or indirect relative income effects. This creates an over-emphasis in favour of private expenditure, leading to a sub-optimal level of public spending, as demonstrated more formally in Ng (1987a). (The point about relative-income effects repeats that discussed in Section 4.1 above. However, the point is relevant in both places.)

Burden-free Taxes

Economists regard a tax of $1m as generally imposing a burden in excess of $1m, say $1.35m on the economy. (The $2.65m figure estimated by Feldstein is a remarkably high figure; $1.35m is about the average estimate.) The $1m is the burden that is exactly offset by the tax revenue. The $0.35m is the excess burden that is a deadweight loss created by the taxation distortion of choice. While most economists realize that corrective taxes on say pollution involve negative excess burden or positive efficiency gain, burden-free taxes are regarded as existent only in fairyland. However, there are goods taxes on which create not only no excess burden (the $0.35m) but no burden ($1m) at all. These are pure diamond goods or goods valued for their values rather their intrinsic consumption effects. People consume or hold these goods to show off their wealth, to use them as stores of value or gifts of value. Cubic zirconia looks exactly like top quality diamond but costs only a tiny fraction of true diamond. But no one gives his fiancée an engagement ring of cubic zirconia. For such goods, it is the value (price times quantity) that enters the utility function of the consumer rather than the quantity, as posited in economic analysis. As prices increase due to higher taxes on these goods, consumers may just spend the same amounts to buy the same values without real losses. The revenues raised are pure gains, suggesting arbitrarily high taxes on them (Ng 1987b). While many goods (most precious metals and stones, top brands of most goods, especially conspicuous items like cars and wines) possess various degrees of diamond effect, few if any goods are pure diamond goods. Nevertheless, very high taxes on mixed diamond goods are still efficient. Moreover, as consumers may wish to consume the value (pure diamond) aspect of the mixed goods so much (such as to show off their wealth) as to incur negative utility on the intrinsic consumption aspect (such as health-threatening excessive drinking), taxes on such mixed diamond goods may actually make consumers better off (being able to show off to the same extent without drinking to excess), as shown in Ng 1993.

4.3 Welfare-Improving Public Spending

From the various factors discussed above, the costs of public spending have been grossly overestimated. While it is desirable to do away with the inefficiencies in public spending if possible, it is increases in public spending, especially on research and environmental protection, that can really increase our welfare. The recent trend to check the growth in public spending may be grossly inefficient. In fact, we show that economic growth increases the optimal share of public spending and that, without directly dealing with environmental disruption, economic growth may reduce happiness even if the shares of public spending and environmental protection are being optimized. (See Ng & Ng 2001.) Thus, one may say that the historical increase in the relative size of the public sector is consistent with and is partly explained by this. In fact, we may go further than this and argue that, despite the higher relative size of the public sector, it is still lower than the optimal level. This may be so for a number of reasons.

Environmental quality is to a large extent a global public good. The big mountain fire in Indonesia recently (1997) affected the air quality, climate, and even visibility of neighbouring countries within days/weeks and is fairly certain to affect the air quality (though to a lesser extent) of the whole world for a very long time to come. Decisions by separate national governments based on national interests are unlikely to take full account of the global effects unless there is adequate international coordination. The latter is only starting to emerge and is far from being adequate.

Environmental quality is a very long-term problem. Many pollutants remain in the environment for a long time. The warm-house effect could threaten the coastlines of low-lying cities perhaps decades or centuries from now through the melting of polar ice. In contrast, politicians in both democratic and authoritarian countries are likely to have much shorter time horizons.

In assessing the relative benefits of public versus private expenditures, people are likely to overestimate the true importance of the latter, as already discussed above. Affected by the working of relative-income effects including the desire to keep up with the Joneses, people find private spending very important. However, most people ignore the fact that, if the whole society devotes more resources to supply public goods, on average everyone will have less to spend on private items, making it easier for one to keep up with others.

Research, especially fundamental research, is also largely a global public good and hence is under-funded by national governments. However, once a basic level of consumption has been attained, happiness cannot increase significantly with higher private consumption (especially at the social level due to relative-income effects as already discussed) given the level of knowledge. Many of us can easily double our private consumption. (For those who cannot, many can halve their consumption without much real loss in happiness.) But what is the point? If you are already well fed, well-clothed, well accommodated, increasing private spending does not increase your happiness significantly but imposes significant negative externalities in the form of environmental disruption and relative-income effects. Is it really very important to spend many weeks holidaying in far-away places living in 5-star hotels, while you can walk or jog in nearby parks and read fascinating books or watch interesting programs on TV? Is having a beer or a cuppa with a few friends in a local pub or at home significantly less enjoyable than dining in expensive restaurants or drinking wines US$500 a bottle? Rather than spending luxuriously, our welfare can certainly increase much more if the cities becomes safer, the environment becomes cleaner, a cure is found for some illness, or the method of stimulation of the brain can be improved for common use. (On the quantum leap in welfare with the last method, see Chapter 6.) Most of such items need public spending.

Due to the inefficiency of public organisations, privatization in certain areas and de-regulation of counter-productive regulations may make a lot of sense. It is also easy to find particular areas of waste and ineffectiveness in public expenditures. (This is so since public expenditure is unlikely to be optimally distributed among different items and also unlikely to be provided in the most efficient way.) However, due to the above considerations, the recent global trend towards the checking of public expenditures, especially in the funding of research, may be very negative in terms of social welfare, especially globally and in the long term.

This negative effect may consist to a large extent in the failure to attract talented people to work in the welfare-improving areas of research and the public sector. Top students used to stay to do PhD and remain in the academic world. Now, many good students leave to work for business firms where real talents are largely wasted in competitive rivalry at both the production and consumption levels. True, talents are also needed to have efficiency in production and innovation. However, the very top talents are needed to do research and to serve in the public sector, especially after the satisfaction of basic needs when increases in private consumption without an increase in knowledge are not very welfare-conducive. Many people are sceptical of the productivity of increased funding for research, being aware of many ill-conceived projects and a lot of published rubbish. However, one gem out of many items of rubbish may still be worthwhile. Moreover, long-term social welfare may be improved by raising the rewards and working conditions of researchers and other public-sector employees so as to attract real talents back from the business sector. The market fails here partly because of the public-goods external effect and partly because of factors like relative-income effects (also a form of external effects) discussed above. (An ‘external’ effect is present when the activity of someone affects others without receiving/paying compensation for the relevant benefits/costs involved. An example is a factory polluting the air without paying for the damages imposed on the society.)

Based on the discussion of this chapter, a strong case may be made for international cooperation to dramatically increase public spending on global public goods including environmental protection and research. A few examples may be given to indicate that a lot more research is needed to increase welfare.

The very topic of the appropriate size of the public sector, regarded by Feldstein as the central public finance question, is much under-researched. For example, few if any researchers relate the important issue of relative income to this central question. While we have discussed this and other related issues above, a lot more quantitative studies are needed.

While studies on the effects of specific drugs and ingredients have been done, it seems that a general study tracing the different types of food, drugs, and activities taken by a big enough sample of people (at least in tens of thousands) of different ages and health conditions (not just those hospitalized) over a long period (at least in decades) to discover the desirable and undesirable, short and long-run effects, may be most rewarding. Though the study would be very costly, we would gain very useful knowledge on many thousands of things simultaneously. A recent analysis suggests that ‘even after taking account of distorted incentives, the potential gains to medical advancement are enormous … easily justify … expenditures far above current levels’ (Murphy & Robert 2000).

The stimulation of certain pleasure centres in the brain can induce intense pleasure without the effect of diminishing marginal utility. This has been known since the mid 1950s. Why has the method not been perfected for common use? (See Chapter 6 for details.)

Despite the negative evidence discussed in Chapter 2 and Section 4.1 above, we believe that happiness has increased. (It is likely that people’s standards for describing themselves as ‘happy’ or ‘very happy’ have increased, hiding an increase in real happiness. This increases the importance of using the more interpersonally comparable measure of happiness proposed in Ng 1996a.) However, we remain convinced that happiness could be increased by shifting resources from the largely competitive private consumption to items of public spending that benefit the whole world for a long time.

4.4 Concluding Remarks

While noting that the rat race for material growth may be welfare reducing, we are not anti-growth. Instead of hoping for a slower growth or even a depression, as some environmentalists do, a healthy growth with an appropriate increase in environmental protection measures seems a much superior option. Moreover, if economic growth is conducive to a higher degree of civilisation by providing more resources to support scientific and technological advances conducive to happiness, it may be happiness-improving despite some negative environmental effects. For example, the advance in science and its applications to medicine, engineering, etc. have contributed much to a comfortable and enriched life, the relief of pain, and the cure of many illnesses. The development of the Westminster and other forms of democratic government and the rule of law, the prevalence of modern communications and social interaction have also helped create a freer and more peaceful world. The understanding of the working of the market mechanism has contributed to the collapse of the communist totalitarian system and to the end of the Cold War. Even among students failing to understand the basic elements of subjects studied, a university education broadens people’s mind. (On the importance of primary school education, see Section 7.1 below.) Looking into the future, one can be reasonably confident that further advances in these and related areas will be forthcoming. Moreover, there are likely to be significant or even dramatic increases in happiness from sources most people do not dream of now. For example, the techniques of electrical brain stimulation (discussed in Chapter 6) and genetic engineering (Chapter 7) could be used, after more intensive experimentation and with careful management, to increase happiness by quantum leaps.

Despite the above-mentioned promises, it remains true that a pure increase in GNP (even without any deterioration in income distribution) may be happiness-reducing unless environmental protection and other happiness-improving measures are facilitated. In rich countries, what is important is not simply growth in GNP and the resulting higher consumption per head but how happiness-improving measures (environmental protection, scientific advances, etc.) can be increased. Thus, despite the excess costs (excess burden, administrative, compliance, and policing costs) of raising public revenue, more public expenditures in the right areas (including research) may yet be most-happiness increasing. This is especially so in view of the importance of environmental disruption effects, relative-income effects and diamond effects (with the associated burden-free or at least less burdensome taxes) which may be expected to be increasing in importance absolutely and relatively.

Contents

Preface