Thursday, June 26, 2008

How important is the right to choose?

This is a story about Mathew and Mark, identical twins, who were separated at birth and still do not know of each other’s existence. My story begins when both felt a little unhappy most of the time – not depressed, just not happy. In terms of the objective circumstances of their lives there was no obvious reason why they should be unhappy. Jill, who happened to meet Mathew and Mark by chance and figured out that they must be identical twins, felt that their unhappiness was largely genetic. Jill actually had the expertise to make such a judgement because she was a neurologist who conducted research on happiness.

Jill decided that rather than arrange a meeting between Mathew and Mark she would keep them ignorant of each other and use them as subjects in her research on the electrical stimulation of certain parts of the brain to induce feelings of pleasure. So, she befriended both men and arranged to have apparatus for electrical stimulation of their brains installed in their favourite chairs without their knowledge. (Don’t ask me how this might work. I don’t know.) Without asking their permission Jill stimulated the brains of both men while they were relaxing in their favourite chairs.

After this, both men spontaneously reported to Jill that something wonderful had happened to them. From out of nowhere, they said, they had begun to experience pleasurable feelings that were better than any feelings that they had ever felt before – better than the pleasure of fine food or wine, better than the esteem of friends and even better than the pleasure of sex.

As she had planned all along, Jill told Mathew that she had caused his pleasurable feelings through brain stimulation, while suggesting to Mark that what had happened to him must be “just one of those things”.

When Jill told Mathew that her experiment was the source of his pleasure, he was not amused. He said that he felt that he had been manipulated and that his trust had been betrayed. Even though he would have readily participated in the experiment if asked to volunteer, he viewed Jill’s failure to ask an inexcusable breach of his autonomy. He told Jill to leave and not return, and she did as she was asked. After a week or two Mathew’s life returned to normal and he became his old unhappy self once again.

By contrast, Mark continued to receive the brain stimulation and never learned about the source of the pleasure he experienced. You could say he lived happily ever after – because he remained in ignorance that the pleasure he continued to experience was the result of Jill’s surreptitious intervention.

It seems to me that this story, which I have just made up, demonstrates that freedom to choose is more important than happiness. Mark is unquestionably happier than Mathew, but it is reasonable to predict that if he knew that his happiness was the result of Jill’s manipulation he, like Mathew, would make an informed choice to be unhappy rather than to continue to be manipulated by a person who does not respect his autonomy.

I made up the story after reading an article by Yew-Kwang Ng, who taught me just about everything I know about welfare economics in 1971. Yew-Kwang suggests that the technology of electrical brain stimulation to increase happiness is well known and that its widespread use would increase happiness enormously. He wonders why this technology has not already been developed for common use. Yew-Kwang also contemplates the use of genetic engineering to increase happiness. (‘Happiness studies’, Economic Record, June 2008).

It seems to me that the crucial point is that people should be free to choose whether to use such technologies. It is not clear, however, that those who put happiness ahead of everything see the right to choose as having a great deal of importance. Yew-Kwang Ng writes: “The satisfaction of my (even if informed) preferences as such has no normative significance for me; it is important only because, in most cases, it makes me (and/or others) happier, directly or indirectly” (“Efficiency, Equality and Public Policy”, 2000, p 53). This makes me wonder whether Yew-Kwang would consider that Mathew in my story acted irrationally by foregoing his chance of greater happiness in order to get the manipulative Jill out of his life.

Sunday, June 22, 2008

Why doesn't the World Bank's growth commission admit that experts don't have all the answers?

Bill Easterly suggests (here) that the recently published report of the World Bank growth commission (here) answers the question of how to promote high growth rates by saying something like: “we do not know, but trust the experts to figure it out”.

Does the report really say or imply that? The report identifies some of the distinctive characteristics of high growth economies and asks how other developing countries can emulate them. It talks of the importance of: bringing in ideas, technologies and knowhow from the rest of the world; international trade and specialization; structural transformation through microeconomic processes of creation and destruction; and high national savings rates. The report also notes that an important characteristic of high growth economies is “an increasingly capable, credible and committed government”. It discusses the need to rely on markets to allocate resources efficiently, the role of market and regulatory institutions that underpin mature market economies, the need for investment in infrastructure, education and health, the need for social safety nets to protect the losers from economic change and the need for a commitment to equality of opportunity to give everyone a fair chance to enjoy the fruits of growth.

It would seem from this brief summary that the World Bank growth commission - with its 21 world leaders and experts, an 11-member working group, 300 academic experts, 12 workshops and a budget of $4 m - has actually come to some conclusions about how to promote economic growth. Arguably, there is not much advance here on what the World Bank was writing in the 1990s about “the east Asian miracle” or, for that matter, on what Adam Smith wrote in “Wealth of Nations” in 1776 - but findings about the characteristics of more successful economies are probably worth re-stating from time to time.

So, is Bill Easterly mistaken? Not at all. He makes the point that only two of the 13 high growth episodes the commission studied were ongoing. Yesterday’s growth failures are today’s successes (e.g. India) and yesterday’s successes (e.g. Brazil) are today’s failures. And he points out that much of this volatility is inexplicable and unpredictable.

The World Bank growth commission comes close to acknowledging their own ignorance of the art of policy making when they note that some countries have sustained high growth for quite long periods without the deep institutional underpinnings that define property rights and enforce contracts in mature market economies. Consider the following odd sequence of sentences: “Indeed, an important part of development is precisely the creation of these institutionalized capabilities. Even without them, growth can occur, and these institutions can co-evolve with the economy as it expands. However, we do not know in detail how these institutions can be engineered, and policy makers cannot always know how a market will function without them” (p 4).

All the authors of the report needed to add, before putting “the art of policy making” in the too hard basket, was some comment to the effect that the best advice an economist can give policy makers is to consider the incentives that their policies are likely to create.

However, the commission could not acknowledge that it does not have any expertise in advising the governments of developing countries about “the art of policy making”. It couldn’t resist making inane comments like: “Bad policies are often good policies applied for too long” (p 6).

Rather than trying to imagine what might have been going on in the minds of the experts who signed off on that particular pretence of knowledge, readers would be better served by pondering the following quote from Friedrich Hayek:

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. ... The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals. (Nobel prize lecture given in 1974, available here).

Friday, June 20, 2008

Can beliefs about inequality make people unhappy?

In recent posts I have been considering whether some of the findings by Arthur Brooks in “Gross National Happiness” apply to countries other than the United States (see: here, here and here). In this post I continue that theme and focus particularly on the effect of political beliefs on the extent to which people are made unhappy by income inequality.

Brooks observes that levels of happiness, beliefs about inequality and income mobility, and political allegiance tend to go together. Americans who think that income differences are too large (about half the population) are a lot less likely to believe that there is a great deal of upward mobility in the United States. Political liberals are a lot less likely than conservatives to believe that there is a lot of upward income mobility in America. Surveys also show that pessimists about income mobility are a lot less likely to be very happy than are optimists.

There is some evidence from published research relating to other countries that political views tend to influence the extent that inequality of income makes people unhappy. Research by Alberto Alesina, Rafael Di Tella and Robert MacCulloch suggests that in Europe the poor and those on the left of the political spectrum tick down their happiness scores when inequality is high, but in the United States the happiness of the poor and those on the left is largely uncorrelated with inequality. Rafael Di Tella and Robert MacCulloch also report the results of a 36 country study based on the World Values Survey which suggests that low income has less of an adverse effects the happiness of low-income people if it is accompanied by a belief that poor people have a chance of escaping from poverty in the country in which they live. (See: Di Tella and MacCulloch in ‘Some uses of happiness data in economics’, Journal of Economic Perspectives, Winter 2006, p 42).

In earlier posts I have noted that in most countries the happiness of lower income people tends to be closely related to the happiness of middle and upper income people in the same countries (here) and that the gap in happiness between upper and lower income people is not related in any clear and obvious way to differences in the extent of income inequality among different countries (here). I now want to report on some research in which I have attempted to assess whether political views influence the proportion of lower income people who are satisfied with life.

The research involved use of multiple regression to explain the proportion of lower income people who are satisfied with life in terms of: the proportion of upper income people who are satisfied with life, self-positioning on the political spectrum; differences in self-positioning on the political spectrum between upper and lower income people; the proportion of the population who believe that it would be a good thing if there was less emphasis on money; differences between upper and lower income people in the proportions who believe that it would be a good thing if there was less emphasis on money; an indicator of religious service attendance and a measure of income inequality (gini index). (Data used in the study were for 66 countries for the year 2000 and have been sourced from “Human Beliefs and Values” by Ronald Inglehart et al.)

The results suggest that the most significant variables explaining the proportion of lower income people who are satisfied with life are:
  • the proportion of upper income people who are satisfied with life (by far the most important);
  • differences in self-positioning on the political spectrum between upper and lower income people;
  • the proportion of the population who believe that it would be a good thing if there was less emphasis on money; and
  • differences between upper and lower income people in the proportions who believe that it would be a good thing if there was less emphasis on money.

These results support the view that the impact that inequality has on the happiness of low income people is influenced by their political beliefs and their beliefs about the importance of money and material things.

(Research presented on this blog – as on any other blog - should be viewed with more caution than peer-reviewed research presented in academic journals. For quality assurance purposes I am prepared to make detailed results of research available to anyone who wants them and the data available to anyone who wants to replicate studies.)

What is the best predictor of the happiness of low-income earners?

The most obvious answer would be average income level. However, the probability of happiness can vary markedly among countries with similar income levels. This is apparent when we look at the extent to which average income levels in different countries influence the chances of happiness of those on lower, middle or upper incomes. For example, although lower income Australians have about the same probability of reporting that they are satisfied with life as might be expected on the basis of their income levels (70 percent), the probability of lower income Mexicans reporting that they are satisfied with life is about 34 percent greater than expected (75 rather than 41 percent) and the probability of lower income Japanese reporting that they are satisfied with life is about 21 percent lower than expected (46 rather than 67 percent). (These results were obtained by use of regression to fit an equation relating the probability of people on lower incomes being satisfied with life to per capita income level. Life satisfaction data was for 66 countries for 2000 and obtained from: : Ronald Inglehart et al, Human Beliefs and Values, Siglo XXI Editores, Mexico, 2004, A 170).

Some might suggest that measures of income inequality could be used to predict the happiness of low-income people. However, there is no clear evidence that happiness inequality is related to the extent of income inequality (see here).

It turns out that the happiness of those on higher incomes in individual countries is a good predictor or the happiness of low-income people in those countries. Lower income people tend to be less happy than those on higher incomes but the margin is fairly consistent across countries – if those on upper incomes are happy, those on lower incomes also tend to be happy. There are some exceptions. For example, data for 2000 indicates that lower-income Armenians were much more satisfied with life and low-income South Africans were much less satisfied with life than would be predicted on the basis of the happiness of those with higher incomes.

In general, however, a very large proportion of the variation in the probability of people on lower incomes claiming to be satisfied with life can be explained simply in terms of the proportions on middle incomes who claim that they are satisfied with life.