Does it make sense to think of trade-offs between life satisfaction and wealth?

Before you answer the question, I would like you to conduct a couple of thought experiments.

The first step is to answer the following question:

All things considered, how satisfied are you with your life these days? Please give your answer as a number between 1 and 10, with a rating of 1 is you are dissatisfied and 10 if you are satisfied.

That is a standard question that has been asked by happiness researchers. Now we come to the thought experiments.

Thought experiment 1:

Imagine that your circumstances suddenly change so that it becomes possible for you to increase your peronal life satisfaction rating by 25% if you are prepared to sacrifice some wealth. What is the maximum amount of wealth that you would be prepared to sacrifice in order to achieve an improvement of 25% in your life satisfaction rating?

Don’t worry if the 25% improvement would take you beyond the top of the rating scale. For the purpose of this exercise it is deemed to be possible to increase your life satisfaction beyond the end of the scale e.g. from 10 to 12.5. That makes sense because people who are completely satisfied with their lives sometimes find that their lives get even better.

Thought experiment 2:

Now imagine a different scenario. Your circumstances change so that it becomes possible for you to increase you wealth by 25% if you are prepared to sacrifice some personal life satisfaction. How much life satisfaction would you be prepared to sacrifice in order to achieve a 25% increase in wealth?

My guess is that in answering the first question there are not many people who would be prepared to sacrifice all their wealth to obtain a 25% increase in life satisfaction. In relation to the second question I don’t think there would be many people who would be unwilling to sacrifice any life satisfaction (if only for a limited period) in order to obtain a 25% increase in wealth. Those are just my guesses. If large numbers of people tell me that I am wrong, I will have to admit that I have made a mistake.

What is the point of this exercise?  Some economists have been prepared to assume that the sole aim of individuals is to maximize life satisfaction as measured in social surveys. That might seem to be a reasonable assumption until you think of the implications. If your sole aim is to maximize personal life satisfaction it would be irrational not to sacrifice all your wealth in order to obtain greater life satisfaction, if that possibility became available. Similarly, it would be irrational to sacrifice any life satisfaction under any circumstances to obtain greater wealth.

If the choices that people make imply that they do not aim to maximize life satisfaction, that doesn’t mean that they are irrational. It just means that there are some things more important to them than life satisfaction, including some things that money can buy.

What could be more important to people than life satisfaction? Some clues are offered by research, discussed here a couple ofmonths ago, which asks people to choose between hypothetical situations with different ratings of life satisfaction and other well-being indicators. 

The people surveyed indicated a stronger preference for options offering high overall well-being to you and your family than for life satisfaction. Other well-being indicators ranked above life satisfaction included personal health, being a good, moral person and living according to personal values, the quality of family relationships, financial security, your mental health and emotional stability, a sense of security about life and the future, having many options and possibilities in life and freedom to choose among them and a sense that your life is meaningful and has value.

How does economic freedom promote tolerance?

The headline of Tyler Cowen’s recent article in the NYT is: “Economic Freedom Does Not Necessarily Lead to Greater Tolerance”. Tyler has acknowledged on his blog that the headline “doesn’t exactly capture” the message his article that economic freedom does tend to lead to greater tolerance. The headline seems to me to be almost as bizarre as suggesting that sunshine doesn’t necessarily cause plants to grow.

Tyler Cowen’s article provides a good summary of research findings by Niclas Berggren and Therese Nilsson, particularly their paper “Does Economic Freedom Foster Tolerance?” I urge people to read Tyler’s article, so I will just provide the briefest possible summary of his summary.

The main points are:

• Societies characterized by economic freedom tend to exhibit greater tolerance toward gay people. There is a similar but weaker relationship between economic freedom and racial tolerance.
• This greater tolerance is strongly associated with certain features of economic freedom i.e. secure property rights and low inflation.
• Economic freedom has a closer association with tolerance in societies which exhibit high levels of social trust.

Niclas Berggren and Therese Nilsson suggest that economic freedom promotes tolerance through two main mechanisms: market institutions protecting private property offer a framework in which it becomes less risky to engage in transactions with unknown members of other groups; and market processes involving interaction between members of different groups lead to greater understanding and recognition that intolerance comes at a cost (e.g. loss of profit from failure to employ the best person for the job).

The authors suggest that these positive impacts are reinforced by social trust. Social trust can be expected to have a direct positive impact on tolerance – if you trust people you don’t know, you are more likely to be open and generous in your attitudes to people who are different. Social trust can also be expected to enhance the impact of economic freedom on tolerance – for example, because trust reinforces the expectation that the legal system will treat people equally and in accordance with the rule of law.

So, what do the authors say about the influence of economic development on tolerance? Per capita GDP is included as a control variable in their regression analysis, but the results seem to imply that economic development has no impact on tolerance.

At first sight those findings appear to conflict with other empirical analyses, which I have supported, which suggest that the widespread economic opportunity that tends to accompany economic growth also tends to foster emancipative values, including greater tolerance.

I think economic freedom shows up as being more important than per capita income levels because tolerance is more likely to be sustained if economic opportunities are growing - and because economic freedom fosters economic growth. It is reasonable to expect tolerance levels to be lower in high income countries where economic opportunities are contracting (e.g. where there is high unemployment) than in high income countries where economic opportunities are expanding. That was one of the points that Benjamin Friedman made in his book, The Moral Consequences of Economic Growth, which I discussed on this blog a few years ago.

The point I am coming to is that it still seems reasonable to expect that one of the mechanisms by which economic freedom promotes tolerance is by promoting widespread economic opportunities. When opportunities are expanding, people are more likely to perceive the potential for mutually beneficial economic interactions with others and are more likely to be open and generous in their attitudes toward people who are different. 

Are Fijians really happier about their lives than Australians?

This might be an appropriate question to consider on Australia Day.

My attention was aroused when I saw the headline “Global happiness survey shows Fijians are the world’s most content”, because I hadn’t previously seen any happiness data for Fiji. The headline refers to a survey of 65 countries recently conducted by WIN/Gallup. (The Gallup organisation involved is not the one that conducts the Gallup World Poll.)

When I looked further I found that the survey also has happiness data for Papua New Guinea, which shows that people in that country also tend to be relatively happy. By contrast, Australians appear to be relatively unhappy.

The question asked in the survey was: “In general, do you personally feel very happy, happy, neither happy nor unhappy, unhappy or very unhappy about your life?” I have constructed the average happiness ratings in the accompanying Figure by assigning a score of 5 to “very happy”, 4 to “happy”, 3 to “neither happy of unhappy”, 2 to “unhappy” and 1 to “very unhappy”.

I am not sure what to make of the rankings shown in the Figure because they seem to be difficult to square with the findings of other happiness surveys. This may be because the survey question is interpreted differently in different parts of the world.

A central issue, it seems to me, is whether the question is more likely to evoke emotional responses or responses that involve some cognitive input. John Hall and John Helliwell, who have expertise in happiness research, leave no doubt that they believe survey participants respond differently when asked how happy they are than when asked how happy they are with their lives:

“As has been shown in the first and second World Happiness Reports, respondents to surveys recognize the difference between happiness as an emotion and happiness as a judgment about the quality of life as a whole. The responses of individuals to these different questions are highly distinct. A very poor person might report himself to be happy emotionally at a specific time, while also reporting a much lower sense of happiness with life as a whole; and indeed, as we show later, people living in extreme poverty, whether in terms of income or social support, do report low levels of happiness with life as a whole”.

The WIN/Gallup survey appears to be asking people how happy they are with their lives, but it doesn’t seem to be interpreted that way. I used regression analysis in an attempt to explain the findings in terms of Gallup World Poll data on “life evaluation” (relative to the best and worst possible life) and “happiness yesterday”. The analysis was conducted for 60 countries for which some matching data was available. The analysis was not very successful in explaining the WIN/Gallup data: it suggested a positive relationship with the happiness variable and no relationship with the life evaluation variable.

Further analysis suggests that the WIN/Gallup question elicits a particularly positive response in African, South Asian, CIS and Latin American countries.

On Australia Day it might be worth thinking for a moment about the kind of response you are likely to get from an Australian if you ask: “In general, do you personally feel very happy, happy, neither happy nor unhappy, unhappy or very unhappy about your life?”. I expect it would be common to get a response something like: “I’m happy enough about my life, I suppose”. The surveyor interprets that to mean that the respondent is “happy”, whereas the respondent might actually feel very happy about his or her life, but reluctant to appear exuberant unless intoxicated.

How long will the "Clash of Civilizations" last?

My main reason for re-visiting Samuel Huntington’s article, “The Clash of Civilizations?” published in 1993, was to see how Huntington’s thesis is faring these days, in the light of the increasing threat of Islamic terrorism and the rise of Islamic state.

Is such violence attributable to an ongoing clash of values that will always make followers of Islam hostile to Western culture, or is a temporary phenomenon that is likely to gradually diminish as economic opportunities expand in Islamic countries?

In his Foreign Affairs, Huntington “set forth the hypotheses that”:

• “differences  between civilizations are real and important”;
• “civilization-consciousness is increasing”;
• “conflict between civilizations will supplant ideological and other forms of conflict as the dominant global form of conflict”;
• “international relations … will increasingly … become a game in which non-Western civilizations are actors and not simply objects”;
• “successful political, security and economic international institutions are more likely to develop within civilizations than across civilizations”;
• “conflicts between groups in different civilizations will become more frequent, more sustained, and more violent than conflicts between groups in the same civilization”;
• “violent conflicts between groups in different civilizations are the most likely and most dangerous source of escalation that could lead to global wars;
• “the paramount axis of world politics will be the relations between ‘the West and the Rest’;
• “the elites in some torn non-Western countries will try to make their countries part of the West, but in most cases face major obstacles to accomplishing this; and
• “a central focus of conflict for the immediate future will be between the West and several Islamic-Confucian states”.

As far as I can remember I was not particularly impressed by Huntington’s thesis at the time it was published. I am still not over-impressed. His labelling of cultures as “civilizations” seems to exaggerate the differences between cultures. I disagree with his view that the “notion that there could be a ‘universal civilization’ is a Western idea, directly at odds with the particularism of most Asian societies”. As I have explained on this blog, it seems to me that there would be widespread agreement among people from different cultural backgrounds about the characteristics of a good society.

However, I have to admit that many of Huntington’s hypotheses look as though they are standing up fairly well in terms of the experience of the last couple of decades. He was spot-on target in pointing out that Western intervention in particular Islamic countries, such as Iraq, would unite other Islamic countries in opposition to the West, even though he did under-estimate the importance of conflict between nations/groups within broad cultural groupings. It is now obvious that he was correct in claiming: “The Velvet Curtain of culture has replaced the Iron Curtain of ideology as the most significant dividing line in Europe”.

Huntington’s also made some accurate predictions about developments in Russia. His prediction that conditions did not exist for Russia to join the West was accurate. The people in Russia were divided on the issue and the West was wary of embracing Russia. Similarly, he was correct in predicting that relations between Russia and the West “could again become distant and conflictual”, if Russians rejected liberal democracy and began behaving like authoritarian traditionalists.

Huntington was wrong in his prediction that the cultural similarities between Russia and Ukraine would enable those countries to avoid violent conflict over territory, but that error could be attributed to a faulty application of his theory.  His discussion of how Russia was torn between the West and traditional Russian cultural influences can also be applied to Ukraine. The difference is that favourable conditions exist for Ukraine to join the West, even though it is being badly torn in the process.

The main problem I have with Huntington’s thesis is that it pays too little attention to the processes of social change. It seems to imply that countries like Turkey will always be torn between Western influences and traditional cultural influences. It largely overlooks the cultural changes (discussed here) that have occurred in the West, and increasingly in other parts of the world, as economic development has led to the growth of emancipative values such as those supporting freedom of speech.

Most people in the West seem to be able to manage to support emancipative values these days, despite the fact that only a few generations ago many of their religious leaders were violently opposed to such values. It seems reasonable to expect that a similar transition toward adoption of emancipative values will occur in Islamic countries during this century. It is difficult to predict exactly how this might happen, except that it is unlikely to be assisted by Western intervention.