theFIREstarter

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Happynomics/Happinomics, or the economics of happiness, or as real economists like to call it: “the economics of subjective well-being“, is a very important topic to your average Firestarter, because ultimately that is what becoming financially independent via the route of frugality and simple efficient living is all about:

Maximising happiness while minimising cost.

MMM is always banging on about this, and with good reason, as there is plenty of anecdotal and empirical evidence to suggest that the amount of absolute wealth a person (or country) has and their happiness are not particularly correlated. An important paper was written way back in 1974 about all this by Richard Easterlin who “discovered” what is now known as the Easterlin Paradox, which states:

“high incomes do correlate with happiness, but long term, increased income doesn’t correlate with increased happiness”

Let’s start with anecdotal evidence first. On my various travels around the world I’ve been to countries with much lower wealth than the UK, and can honestly say that in general the people don’t seem any unhappier than us Brits. Sure, there are a greater number of people in dire situations (illness, homelessness, unemployed, and so on) with little or no safety net as we have here, but that notwithstanding (i.e. everything else being equal in terms of health, etc…), your average Bolivian earning $900 seems no less happy than your average Brit earning £26,500. Walking around villages and towns that look like a bomb has hit them and looking at all the smiling faces it is sometimes quite hard to believe, but if anything, I often got the impression many people in fact seemed happier than us lot in the developed world. Just have a gander at the faces on your average packed commuter train and you’ll see what I mean!

Another great example is children. They start off in life with no concept of money and what things are worth, and often you’ll find them playing with the cheapest toys, cardboard boxes, or even just inventing games with their imagination and having the most joyous fun “for free” over the more expensive gadgets. As we get older and more conditioned by consumer culture, happiness and money become ever more linked in our minds by the constant bombardment of advertising and other more subtle forms of propoganda (mainstream media “articles”, product placement, etc…). Maximising your happiness by living the good life and therefore accidentally achieving early FI in the process crucially depends on reversing this process in your mind.

Studies on Happiness

There have also been plenty of studies on what makes people happy to back up the anecdotal evidence we see. I first came across the field of Happynomics surveys in The Undercover Economist Strikes Back: How to Run or Ruin an Economy by Tim Harford ¹. There is a chapter in the book dedicated to happynomics, which cites an interesting international study on subjective well-being.

It found that people in France were more happy on a day to day basis (“experiential happiness”) than folks questioned in the US, yet people in the US were more happy in terms of life satisfaction (“remembered happiness”). So basically when mes amis look back on their lives, they evaluate it as not being so great, but on a day to day basis are in fact far happier than our buddies from the US. It should be noted that GDP per head and median wages are higher in the US compared to France, the wages of the top 10% are much higher, while the lowest percent’s wages are actually lower in the US (see here for graph). If I were to make bold and unsubstantiated claims I would say that the push for higher GDP at all costs that seems to obsess our politicians and economists is a fools errand, will not (necessarily) make us all happier as a nation, and also that income equality is massively detrimental to the overall day to day happiness of the proletariat. These claims also happen to be backed up by the studies: the fact that relative wealth within a nation is more important at making feel people happier (or worse) than the absolute wealth of that nation, for example, being one of the conclusions they drew.

But there is every chance that Happynomics could be far more reaching and important than just personal and national happiness.

Just to put peoples mind at rest before going any further, when I say “The end of the world as we know it” in the title, I am simply referring to rampant and conspicuous consumerism. You can (hopefully) breath a sigh of relief now! However, there are other more grave threats that are linked into consumerism, as well as other aspects of our life, which I think we must change if we don’t actually want to the world to become uninhabitable for humans and therefore effectively end “for real”.

The Rational Pessimist

The subject of Happynomics came to my attention again recently when I stumbled across it on this excellent blog called The Rational Pessimist ². The blog has an over-arching theme of climate change and resource depletion (mainly focusing on peak oil), but rather than just dooming about it all over the shop as some blogs do, you will find instead a lot of statistical analysis, thoughtful articles referencing the literature on the subjects at hand, and perhaps unsurprisingly, some rational introspection on what it all means for us both on a personal level and as a species. The author of the blog also links these themes into a “slow growth/zero growth” viewpoint, i.e. that to avoid catastrophic climate change and burning through all of our fossil fuels, we need to slow economic growth, and eventually hit a point where there is a steady state economy.

Potential shock announcement: I tend to agree!

This may sound strange from someone who is fully commited into investing for my future, and relying on compounding (as well as a much higher than average savings rate) to reach early retirement as soon as possible. This plan is inherently based on exponential growth of our investment accounts (and therefore the economy), but we needn’t worry all that much. There is clearly not going to be a switch flicked overnight, and there will be plenty of time to adjust to this new state, if we ever get there in our lifetimes, or at all for that matter!

Sorry guys, I don’t have the answers

Please note that I do not have any answers on how this new state of economy would function ³, I am simply stating that on pure logical and physical grounds, I agree with the notion that the economy cannot keep expanding exponentially forever. For further reading on why this is the case, please see the following posts from the excellent Do the math blog, written by Tom Murphy, with a summary of the main point of each one:

Can Economic Growth Last? – Economic growth and energy usage have gone hand in hand since the start of the industrial revolution. Unless we find a new massive and cheap source of energy, the economy must surely stop growing or contract!

Galactic Scale Energy – To continue growth via the method of increasing energy usage, we will cook the planet within about 300 years (forget the complex models of climate change, this is simple and incontrovertible thermodynamics!!!)

Quickly going back to the Tim Harford book, there was actually a section on this where he argued against this viewpoint, but they are weak arguments in my opinion. For example one is that efficiency increases will help increase the economy with productivity gains. However there is only so far efficiency increases can take us, even if we reach 100% efficiency, then that is the end of that, and we are back to relying on energy input increases to get any further gain. The other argument is that “alternative” parts of the economy i.e. services (think solicitors, estate agents, and so on…) will grow to a larger part of the economy – just imagine a world where a high nineties percent of people (and exponentially rising each year) are lawyers or investment bankers. We’ll all wish climate change had baked our sorry asses! 🙂

Tom Murphy also makes the valid point that if that were to happen, people who provided actual real tangible things of value (for example farmers providing food) would have such a low income they would be barely be able to afford to eat themselves, while people dishing out massages would be comparatively loaded. Completely bonkers and it ain’t ever gonna happen!

Conclusions

This post was a bit of a brain dump to be honest and my point is really just that I find all of this stuff very interesting to think about and how it is all related in quite a synergistic way that might not be all so obvious on first inspection. I also think it is something that everyone needs to be thinking about a lot more than they are right now, but thinking obviously only goes so far. At some point we need to listen to and collate the data from all of these wide ranging subjects, and commit to a new plan for modern society to flourish. Whether that is doing away with consumerism, tighter carbon, environmental and resource depletion policies, focus on a zero growth economy, new ideas to combat inequality in society, or more likely a combination of all of the above at varying levels, these are exciting times for sure. The next 20-30 years could well be the pivotal moments on which civilisation either ultimately collapses (see graph half way down that post!!!) and goes back to pre-industrial levels of human activity, or finds a new more enlightened and sustainable way forward.

Thanks for listening to my ramblings on the subject and I hope you found it either interesting, entertaining or gave you some food for thought!

TFS.x

What do you think readers!? Any strong opinions out there on any of this stuff? I would love to hear your views on how we can mould our future towards better, happier and more energy and resource conscious times… Or are you more “optimistic” than myself and think we can keep consuming, growing the economy, and generally going about doing what the hell we want to without any consequences for the environment and future generations? 🙂