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Images: Lauren Stewart
Images: Lauren Stewart

PartnersJuly 11, 2023

How happiness should – and does – influence our money decisions

Images: Lauren Stewart
Images: Lauren Stewart

Are the richest people the happiest? Professor Robert MacCulloch’s studies into the economics of happiness aim to answer this age-old question. He spoke to The Spinoff about why the answer is so important.

“Do we need to keep growing if economic growth isn’t driving happiness?” asks Robert MacCulloch. The University of Auckland Business School professor is a world leader in the area of “happiness economics”, which attempts to correlate people’s wellbeing with the wider state of the economy. 

To do this effectively, you need massive amounts of data. In one of MacCulloch’s landmark papers, published last year, he and two colleagues use data from the Gallup World Poll, which surveyed 1.5 million people in 141 countries over 14 years. Using different variables, this data was analysed alongside information about welfare and monetary policy, to figure out how movement in the economy impacted how people felt about their lives. 

The results were startling. For instance, the study found that becoming unemployed – much more likely to happen in a recession – made people feel six times worse than inflation, which creates rising costs. This information can be used to generate a model where you can estimate the impact on social welfare by inputting the amount of inflation or the rate of unemployment – an idea which might be vital for policy makers at central banks around the globe. “If you take these findings seriously you couldn’t try to bring down inflation by triggering a recession, you should bring it down more gradually,” says MacCulloch. “Unemployment causes real hardship.”

MacCulloch’s research, and the field of happiness economics more broadly, also raises profound questions about what an economy is for and what it means for a government to influence it. Do we want to live in an economy which produces wealth, or one that produces happiness? Or are they the same thing – line goes up, there are more jobs, less inflation, everyone is richer and more happy. “The single biggest question is ‘how does money affect happiness’”, MacCulloch says. “But nobody knows the answer.” 

In the short term, having more money does increase happiness, as studies of lottery winners often show. But in the longer term, especially for those with stable finances, does it make much difference whether you’re “middle-class” or “very rich”?

The data that MacCulloch works with, as a leader in the field of happiness economics for two decades, does show some markers about what makes people happy. “Having a stable job with a close and connected family group and good health are the main drivers of happiness, because they’re long-lasting.” 

Of course, an issue with all this data is that it’s based on correlation – and as many people have had drilled into them, correlation and causation are not the same. This is a major issue for economics studies that are focused on wellbeing, McCulloch says. If someone is depressed after losing their job, did they lose their job because they were sad and listless, or did losing their job cause them to feel that way?

“It’s a curse in economics – what you really want, like medics testing a drug, is a treatment and a control.” But a huge variety of factors go into the economy and people’s personal lives – and it’s not exactly ethical to make someone lose their job for the sake of an experiment. That said, there are some ways to see natural experiments – perhaps comparing a country with high rates of inflation with one that has less inflation, even if the overall per-capita GDP is the same. 

The other important factor in determining causation is being able to track different measures of the economy and wellbeing over time; for instance, to see how people felt 20 years ago – or 200. “We have millions of observations but they don’t go back all that far, maybe 20 years at most,” MacCulloch says. “It sounds silly, but it would be good to know how happy people felt in 1200 or 1700 – you need to track people for 200 years, through generations, to be able to see if people in this country or that country really are happier than they were a century ago.” On average, people in the world now are richer than at any point during history, so being able to ask an ancient Roman living in poverty how they felt about their life would offer a way to understand how wealth (and education and healthcare!) connects to wellbeing. 

Despite this, the gift of working with large datasets is that there’s more information all the time. When MacCulloch started studying happiness in the 90s, it would take hours for computers to crunch the numbers and establish the correlations he was trying to find. “There’s an unprecedented amount of information about people’s wellbeing”, MacCulloch says – at the least the computers now are faster to digest millions of variables and find associations between them. 

Ultimately, this research points to how understanding and interacting with the economy using different measures can offer unique ways to make policy that truly responds to people’s wellbeing. “There’s such a strong positive effect from social insurance, like the jobseekers benefit,” he says. His research draws a picture of understanding economics and business that goes beyond numbers and asks serious questions about how to distribute resources in a way that works for everyone. “When you think about how inflation and unemployment hurt people, it changes your approach to monetary policy.”

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