Robert J. Stonebraker, Winthrop University
The Joy of
Economics: Making Sense out of Life
Robert J. Stonebraker, Winthrop
University
Lots of Stuff vs. More Stuff
Life is short. Live it up.
.....Nikita Kruschchev
My first child cried frequently as an infant. It was draining. It was frustrating. How can we fix a problem we cannot understand? If only he could talk. If only he could tell us what was wrong. Or so I thought.
An older and wiser colleague warned that frustrations would not end when my child learned to speak. He explained that raising children never gets easier. He explained that parenting follows a sort of Newtonian logic: For every problem solved (action), there is an equally intractable problem created (reaction). Parenting problems never go away; they just become different. He was right on the money. Parenting is tough.
Children are insatiable. Even children with lots of stuff want more. As an experiment, follow a mother and child through a toy store or grocery store and count the number of "I wants" you hear. Should parents acquiesce? We want children to be happy. But how do we make them happy? Should we haul out our wallets? Should we buy the candy bar, the toy, the video game? If not, how should we handle the inevitable tears and tantrums?
When my own children were young, I was a patsy. Although they might tell a different story, my resistance to their pleas was minimal. Was I right? Was I wrong? Will I ever know? The complexities of differential calculus cannot hold a candle to those of raising children.
Happiness is....
Will more "stuff" make children happy? What does make people happy? Is it income or wealth? By most measures, an average U.S. family is better off than one in Portugal. Yet there is no evidence that the U.S. family is happier.1 Lottery winners should be elated by their new-found fortunes, and initially they are. But given time to adjust, they report no surge of long-run bliss. Could health be the key? Not necessarily. Victims rendered paraplegic by accidents do suffer initial depression. But given time to adjust, they report normal levels of happiness2. Why? What's going on?
Psychologist Daniel Kahneman and economist Richard Thaler think that the answer is adaptation3. We each develop a reference level based upon what we deem normal. Improvements from this level are "good" and regressions are "bad," but the reference level itself is neutral -- neither good nor bad.
Apply this to income. Salary increases push income above our reference level and make us happy. However, in time we adjust. In time we begin to think of our new salary as normal and raise our reference level accordingly. What begins as "good," after adaptation, becomes "neutral." Kahneman and Thaler point out that "if people quickly adapt to whatever they are being paid, then no matter how high their salary rises, they never stay happier for long."4
What works for salaries works in other contexts as well. Given time to adapt, people in diverse situations -- lottery winners and paraplegics, families in the U.S. and families in Portugal -- regard their status quo as neutral and report similar levels of happiness.
If adaptation occurs, and psychologists can marshal an impressive array of supporting data, it has profound implications for economics. Intuitively we think that happiness or utility should rise with income and consumption. But adaptation calls this into question. According to adaptation, happiness or utility is driven by changes in consumption, not levels of consumption.
Economist Tibor Scitovsky reached a similar conclusion. Scitovsky differentiated comforts from pleasures. Comforts include items like color television, dishwashers, and air-conditioned shopping malls -- things we would miss if withdrawn, but take for granted on a day-to-day basis. On the other hand, pleasures are deviations from routine activities -- vacations, birthday parties, and World Series tickets.
Scitovsky insisted that Americans should be spending less money on comforts and more on pleasures.5 Why? Adaptation. Consumers adapt to comforts and, after an initial burst of temporary glee, view them as neutral. But pleasures, being non-routine, are less subject to adaptation and will continue to generate new excitement or happiness each time they are enjoyed.
A bonus from bonuses?
Kahneman and Thaler draw an even more intriguing implication from their analysis. If their adaptation theory is correct, paying workers through bonuses rather than salaries might increase utility at no extra cost.
Suppose that we want to increase workers' pay by ten percent. We have two options. We can raise salaries by ten percent, or we can keep salaries fixed and pay the ten percent through a lump-sum bonus. Although both scenarios generate the same total income, they may not generate equal utility. If workers quickly adapt to the ten percent increase, they soon will be no happier than they were before the increase. However, spikes in income like one-shot bonuses might not alter reference levels in the same way. Each yearly bonus might be seen as extra pay that generates extra utility. Embedding the ten percent increase in weekly checks drives up happiness only in the short run until workers adapt. Paying the ten percent through bonuses might cause continuing increases in happiness each time the bonus is paid.
The bonus system also might increase pleasures. Most of us restrict routine expenses to what our weekly paychecks can cover. These routine expenses will include many comforts; but comforts, after adaptation, do not increase happiness. On the other hand, bonuses are gravy and are more likely to be used for pleasures, pleasures that give continuing increments of happiness each time they are enjoyed.
Parenting redux
And this returns us to the trials of parenting. Have you seen the connection? After reading and reflecting upon Kahneman and Thaler's adaptation theory, I revised my parental approach. I toughened up. I peppered my children with answers of "no."
Did I suddenly turn cheap? Perhaps. But that was never my story. I told them it was for their own good. I explained that if they got what they wanted, they would soon adapt and then need even more. After all, happiness comes from rising consumption, not from than high consumption. I explained that it was my solemn parental duty to depress their current consumption. Only by keeping current consumption low could they enjoy the eventual increases so essential to their well-being. The best way to ensure their future happiness was by depriving them now.
Do you think they believed me? Do you?
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Notes:
1. Easterlin, Richard, "Does Economic Growth Improve the Human Lot?" in David, Paul and Reder, Melvin (ed.), Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, Academic Press, New York, 1974.
2. Brickman, P., Coates, D., and Janoff-Bulman, R., "Lottery Winners and Accident Victims: Is Happiness Relative?" Journal of Personality and Social Psychology, August 1978, volume 36, pp. 917-27.
3. Kahneman, Daniel and Thaler, Richard, "Economic Analysis and the Psychology of Utility: Applications to Compensation Policy," American Economic Review, May 1991, volume 81, #2, pp. 341-346. Most of this essay is based upon Kahneman and Thaler's analysis.
4. Ibid., page 341.
5. Scitovsky, Tibor, The Joyless Economy, Oxford University Press, 1976.
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Testing Yourself
To test your understanding of the concepts in this reading, try answering the following:
1. Use Kahneman and Thaler's arguments to explain why rising income might create more happiness than sustained levels of high income.
2. Explain why Scitovsky argues that we should spend less money on comforts and more on pleasures.