The Economics of Happiness: Insights on Globalization from a Novel Approach

Introduction

The economics of happiness is an approach to assessing welfare which combines the techniques typically used by economists with those more commonly used by psychologists. It relies on surveys of the reported wellbeing of hundreds of thousands of individuals across countries and continents. It also relies on more expansive notions of utility than does conventional economics, highlighting the role of non-income factors that affect well-being. It is well suited to informing questions in areas where revealed preferences provide limited information, such as the welfare effects of inequality and of macroeconomic policies such as inflation and unemployment. One such question is the gap between economists’ assessments of the aggregate benefits of the globalization process and the more pessimistic assessments that are typical of the general public (see Rodrik, 1997; O’Rourke and Sinott, 2002; and Graham and Pettinato, 2002).

Standard analyses based on aggregate, income-based measures provide important benchmarks for assessing the impact of globalization on poverty and inequality. This paper highlights the extent to which a novel approach—the economics of happiness—provides alternative measures of well-being, which in turn highlight aspects of the process that also matter to welfare. These include the insecurity caused by short-term movements in and out of poverty; the welfare effects of effects of changes in the distribution over the life or earnings cycle and/or distributional shifts at the sector, cohort, and neighborhood level; and changes in reported well-being that are driven by the widespread increase of global information and its effects on local reference norms.