Thursday, September 27, 2007

Investing to enhance happiness by constraining demands

There were some good papers at the Australian Conference of Economists that I have just returned from – I enjoyed a session on water resource economics - but overall my impression of the Conference was one of slight disappointment. The venue in Hobart was great – the seafood restaurants were outstanding and the local economics group displayed great hospitality – but some of the papers presented didn’t move me.

An exception was a paper in one of the final sessions by Professor Yew-Kwang Ng of Monash University on ‘happiness’ research. In my view Kwang is one of the most innovative and interesting contemporary Australian economists. He is a profoundly original thinker and a fun person to discuss economics with. I have been a friend of Kwang for close to 20 years.

Kwang started researching ideas on happiness in the 1970s before the field became main-stream and continues to contribute in a major way. The present paper pursued a ruthlessly logical line of seeking to maximise happiness (not income) in contemporary societies when the social value of marginal consumption was low. Pursuing this approach one might, for example, want to spend a great deal on protecting workers from risk, or even from the threat of unemployment, following a tariff cut. The idea is always that lost consumption as a consequence might not have a lot of social value given positional good issues and environmental externalities. It is a boldly provocative line of argument that has the advantage of explaining why governments act as they do.

The exact content of Kwang’s address was, as usual, interesting but, as he was talking, as is so often the case when a good paper is being presented, a number of ideas formed in my head that were only distantly related to his presentation. In particular I keep returning to the question of what we can learn from this happiness research for the personal issues we face in making our own individual lives happier? For example we study behavioural economics partly to pick up quirks in behaviour that make us less than rational. Accounting for these quirks can improve our decision-making skills.

I’ll set the provisional ideas here. They are fairly obvious and not fully thought through.
Economists usually take consumer preferences – their tastes - as given, perhaps by their genes cor upbringings, and to depend on the quantities of goods and services that consumers themselves enjoy. Of course we know that in reality preferences are not given in this sense – they are triggered by external events such as behavioural and chemical addictions and by other-regarding behaviour such relative reward effects.

Addictions can be good things - such as cultivating an appreciation of classical music, great wine or good novels - or bad things that impose long-term costs such as cigarette smoking or compulsive behavioural disorders.

Likewise ‘other-regarding behaviour’ - paying attention to the consumption choices of others - can be a positive if it encourages a sympathetic regard for the plight of those much less fortunate than ourselves. But it can also be a negative if it takes the form of covetous envy. A colleague of mine in a beautiful home in a reasonably attractive Melbourne suburb takes little pleasure in his good fortune because his workmates (including me) bought much less attractive homes in more beautiful surroundings. He cannot put it down – the grass is always greener and he just cannot be happy with his beautiful new home.

Clearly if we are smart enough we can train ourselves, or perhaps our children, to avoid negative interdependencies that foolishly influence our preferences. Working to free up associations so as to prevent negative addictions and seeing the illogic of buying certain goods simply to ‘keep up with the Jones’ can help to enrich us by making us enjoy the things we do have. For given incomes we can enjoy greater standards of happiness simply by constraining our desires in ways that make sense. This seems to me to be one of the sensible ideas of atheistic Buddhism – optimising preferences (as well as incomes) to optimise overall happiness.

This optimisation of preferences is not costless. Learning Buddhist meditation and learning to detach yourself from materialist obsessions involves as lot of work. Restricting your consumption of alcohol and coffee so that pleasures of life do not become compulsions also involves formulating personal rules that involve effort in implementation. Even drinking and appreciating a great bottle of wine or accessing the beauty in a great poem or novel requires the acquisition of skills which, in turn, requires effort. Acquiring a sense of discrimination rather than pursuing the very human, though mindless, accumulation of material goods is not a costless activity. In a sense it is something like exerting greater discrimination in a search activity and this does involve real costs.

Vaguely I think one might model things this way. Our environmentally given preferences on a set of goods X might lead to utility U(X) which falls short of our bliss (‘blissed out’) maximum achievable level of utility B* by B*-U(X). Here no investment in happiness is made and the optimal consumption bundle is X*. Expending contemplative effort e might reduce this gap to V(e,X) which is less than B*-U(X). Given goods prices p and a cost of effort q (one could regard this as a cost of time employed or just a reduction in income M that follows an increased allocation of time to contemplation. Then when allowing for optimally determined endogenous preferences on the basis of an effort choice one would seek to select a bundle of goods X**,e** which minimises V(e,X) subject to pX+qe being less than M. The resulting optimisation would yield demands for goods X** (less than X*) and introspection effort e** that depend on all prices, the cost of meditative effort and income and would produce a level of happiness B**-V(X*) that exceeded the utility obtained by optimising over the level of goods alone and not making any introspective effort.

I put this together in a few minutes. I am sure there are better ways of setting out the same idea. The budget constraint you might won't to define might be on time rather than income and it is by no means clear that expending contemplative effort in a source of disutility.

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