Hayekian vs Keynesian happiness

Posting has been very light this last week because I have been at the Sydney meeting of the Mont Pelerin Society, an international (36 countries represented at this meeting) organisation of classical liberals started by Hayek and Friedman in the late 1940s.

I was a discussant on Jason Potts‘ paper on happiness economics. Jason’s paper was on an aspect of what I see as the conflict between the classical liberal and social democratic views on happiness research.

Social democrats (eg Richard Layard) look for statistical associations between happiness levels and social or economic conditions, with the hope that by manipulating those conditions they can increase happiness. In Jason’s perspective, this is happiness Keynesianism – a confidence in the ability of government to identify and manipulate macro social and economic indicators to maximise gross national happiness.

Jason took what might be called a Hayekian view of happiness – that knowledge of what makes people happy in specific social circumstances is highly decentralised. We receive information from our own feelings and from observing those around us – information not readily available to the happiness central planners. Adaptation of attitudes and behaviour at this micro level is the key to achieving individual happiness.

Despite the large literature on happiness, I don’t believe this debate can yet conclusively be settled empirically, though I don’t think the social democratic case is looking very strong.

The social democrats haven’t shown that countries that adopt the changes – such as higher taxes to discourage status competition and reduce inequality – they propose improve their happiness levels in a lasting way. But this will always be very difficult to do, given that major changes are rare and causation difficult to prove given that there will be many other things going on at the same time.

But the fact that most Western societies have experienced gradual but cumulatively very significant changes in the post-WW2 period, including big increases in the size of goverment and the welfare state, without significant lasting increases in happiness seems to count against the social democratic hope. On the other hand, the welfare state has not (on average) caused happiness to decline significantly either.

Longitudinal research shows that people’s self-reported assessment of their lives as a whole does go up and down, sometimes in long-term ways. While Jason’s explanation of the informational processes behind these changes is plausible enough, he did not establish it empirically or deal directly with the informational critiques – that we can acquire wrong ideas about happiness from misleading social signals, such as ‘keeping up with the Jones’ social competition; or from short-term pleasures that lead to long-term loss of well-being, eg eating too much, risky behaviour, etc.

Of course, as I noted in my comments, there are important philosophical issues here as well. For liberals there are many possible ways to lead a good life, including ways that don’t maximise personal happiness. We should not fall for a shallow utilitarianism that insists that we must all be as happy as we can be.

21 thoughts on “Hayekian vs Keynesian happiness

  1. Hey Norton,

    I don’t think you can write off the social democrats approach as simply providing a welfare state to increase happiness. Welfare should be used as a stop-gap measure to prevent people falling into negative and self-reinforcing cycles. Furthermore, if you look at the broader policy objectives of social democrats it is to foster communities, income is just one variable that potentially stratifies communities.
    I haven’t read any studies per se, but improvements in transportation and communication physically disperses communities over larger areas, so again I think to write off these objectives as society reorganises around change is one step too far.
    And lastly, I have very strong doubts that an individual can be happy and alone, no matter how much financial/material choice/wealth they possess. Therefore the Hayekian measure of happiness can only be seen as a second order level of happiness, or right for a set of preconditions.


  2. Alex – You may be right about what welfare should be used for, but a thread of the social democratic happiness literature argues that differences in relative income matter independently of levels of absolute income – so that people who are very wealthy by international or historical standards may nevertheless have their well-being reduced because they are less wealthy than others in their community.

    The Hayekian argument isn’t that individuals can be happy alone; it is that individuals have better information about what will make them happy than governments.


  3. You’re right that there are important philosophical issues here — the pre-eminent one being what “happiness” actually is — and opponents of the Welfare State would be well advised to address them.
    A case in point: a few years ago the philosopher Anthony Kenny and his economist son, Charles, distinguished three elements of “happiness”, all of which are independently variable:
    (1) contentment
    (2) dignity (including liberty and relative status)
    (3) welfare (including bodily health and related material needs)
    (See the last few pages of the sample first chapter at http://charleskenny.blogs.com/weblog/2006/10/life_liberty_an_10.html)
    The possibility that an individual can enjoy one or two of these elements without the third poses a problem for Hayekian-style anti-Welfare State arguments.
    For although individuals are surely better placed than anyone else to say what makes them content (#1-happiness), it may happen than an external observer (who may be a government social worker, or even an economist) has the best information about what will promote a given individual’s welfare (#3-happiness).
    If an anti-Welfare State argument equivocates between different senses of happiness then it is fallacious. If it focuses on contentment to the exclusion of welfare then the best that can be said of it is that it is incomplete; the worst is that it is irrelevant (because it is welfare and not contentment that the Welfare State is all about).


  4. Alan – This particular debate is about (1) or related emotions, with possible claimed connections to (2) and (3). Curiously modern classical liberals have generally had not much to say about (1) – it is more being considered defensively as social democrats have raised it than proactively as an argument for a free society. Mostly being economists they have tended to use the concept of utility instead, which I take to be a much broader concept than happiness, and would include welfare as you define it in (3).

    I can’t off the top of my head recall studies of happiness levels in welfare recipients which try to control for income effects. My point above was merely that the creation of a welfare state has not obviously had any net major effect – positive or negative – on self-reported ‘contentment’happiness. But that leaves several possibilities

    1) It typically has no effect at all;
    2) It has positive effects for some people (those who are saved from poverty) but negative effects on others (who are trapped in a life of depenency);
    3) It has positive effects but they don’t show in the averages because of other negative changes in society in the same time period;
    4) It has negative effects but they don’t show in averages because of other positive effects in society at the same time.


  5. Hard – perhaps impossible to measure. But we have

    – a good explanation of why excessive social inequality makes people (and other social primates) less healthy and less successful – an explanation that is causal rather than statistical.

    – a history that suggest that mass societies without a welfare state are prone to extreme and widespread unhappiness, with horribly unhappy results.

    So I would be careful with policy prescriptions.


  6. Dear Andrew,

    One of the manifest failures of economics is to provide the world with a concise, measurable definition of what they cal ‘Utility’. This is no accident: modern neurological studies indicate that a concept of ‘Utility’, which implies a homogenous self, is inconsistent with the way the hotchpotch which we call ‘the human brain’ works. To phrase this more precise: ‘Utility’ is bogus. Or do you have the definition which I have been searching for years? And do you have measurements of utility levels, or methods to measure these?

    Read Paul Samuelson, the witchmaster of this concept, on this. His Noble price lecture does fine. Even he concedes that ‘Utility’ as such is an empty, tautological concept. ‘Revealed preverence’ might, according to him, however save the day for the concept. Alas. Generations of economists have tried to measure ‘revealed preference’. In vain – for the reason given above. The human brain does not know consistent, transitive, stable perferences. Utility is futility. Let’s move on to modern, scientific economics, which concentrates on things which do exist. ‘Utility’ belongs, together with equally elusive concepts like Phlogiston and Ether, in the attic of the museum of the history of science.

    The good news: after chemists disposed of Phlogiston and physicists disposed of Ether, large scientific progress was made (among other things: the discovery that the speed of light was constant).


  7. Recently, some Dutch sicentists measured the realtion between income, wealth and health in the Netherlands. The results for this well organized country with good healthcare and -insurance?

    A. People with high incomes life longer than poor people
    B. People with high incomes are healthier than poor people
    C. Wealthy people life longe than poor people
    D. Wealthy people are healthier than poor people

    The difference, measured in ‘healthy years lived’, is sixteen years (16 years).

    Recently, I read that ife expectancy in the USA is falling behind.
    Dutch link 1.
    Dutch link 2.


  8. “a history that suggest that mass societies without a welfare state are prone to extreme and widespread unhappiness, with horribly unhappy results.”

    Generally only capitalist societies can afford welfare states, and the few countries that had welfare states without capitalism (eg East Germany) showed low levels of well-being.

    Few of the major modern classical liberal thinkers are against state-financed welfare, while critical of its expense and potential for fostering social pathology. The debate is far more at the margins.


  9. I just read Peter Saunders. He does not seem to have his history right. A quote:

    “For example, I might argue: Way back in the mists of evolutionary time, those individuals who were genetically
    programmed to share their goods died out, because they gave away food to others but did not get any back. This has left human beings with a deeply embedded instinct to keep hold of their possessions, which is why egalitarian
    governments bent on income redistribution cause such misery (even among those who do not own very much). Income equalisation causes psychological distress which is then reflected in high scores on the Social Misery Index. A
    more unequal society provides us with a better-fitting shoe”. He admits that this is an overstatement, but still believes a little bit in this version of history (his footnote 182)

    The fact of the matter is that the individuals which gave away their food survived. The hunters shared their food with the gatherers, if the hunters did not catch anything they still got their share of the nuts, roots, seeds and berries (not to mention the caterpillars). In these societies, there was no trade, there was no possession of food. My goodness, is there any other species on the entire earth with young which for so long require so much attention and and which are utterly unable to care for themselves till about puberty? Of all species, humans are the caring ones. We do know this, it’s not hidden in the mist of time. Enough skeletons of old specimens of early humans survive to decide that there was at least some kind of care for the elderly. As you ought to know: old age in nature is extremely rare.

    Of course, humans (surely the male ones) also do seem to have had (and still posess) an uncommon inclination to crack each others skulls.

    The classic read on this one:

    “Guns, Germs, and Steel: The Fates of Human Societies is a 1997 book by Jared Diamond, professor of geography and physiology at the University of California, Los Angeles (UCLA). In 1998 it won a Pulitzer Prize and the Aventis Prize for Best Science Book. A documentary based on the book and produced by the National Geographic Society was broadcast on PBS in July 2005”.

    On poor mass societies with a welfare state (and a high quality of life) please read Sen and others on Kerala.


  10. Merijn – the notion that humans are the most caring species is in my view wrong. For instance the devotion that the worker ant shows towards the colony (ie mostly consisting of her sisters) is huge. Richard Dawkins outlines very neatly the genetic basis for such altruism in his book “The Selfish Gene”. For anybody that understands the rudimentary basics of game theory the book lays out the logic clearly. He also goes some way towards outlining the limits to altruism.

    Welfare was not invented by government. Friendly societies, trade guilds and trade unions were providing welfare long before governments got in on the act. Not to even mention churches and charities. Arguably they did a much better job. Whilst it’s true they didn’t offer universal coverage at the time that the government got into the welfare business the cover offered by civil society was extensive and growing rapidly. The majority of people could rely on one private institution or another. And then there was also family.

    I’d argue that we are altruistic creatures, as well as being smart creatures, which is why the welfare state is entirely unnecessary. Of course having destroyed most of the alternate civil society welfare providers, along with the social bonds they fostered, if government now ceased to provide welfare would cause serious transition issues. Civil society can not be rebuilt from the top down.


  11. I think there is plenty of evidence that humans are co-operative, willingly share with those close to them, and often help more distant people who they deem needy. But it is a large leap from that to the modern welfare state in which a large proportion of your income is forcibly extracted from you and redistributed to strangers who may not reciprocate in any way.

    Australian public opinion clearly distinguishes between the deserving and undeserving poor – there is generally support for assistance to people suffering from problems that are no fault of their own, with much less support for able-bodied people who are not making a contribution.


  12. “Australian public opinion clearly distinguishes between the deserving and undeserving poor – there is generally support for assistance to people suffering from problems that are no fault of their own, with much less support for able-bodied people who are not making a contribution.”
    Alternatively, what their definition is of deserving and underserving is is not exactly clear — It seems to me that the system we have now is skewed towards middle-class welfare (as some of your colleagues have argued) at the expensive of those really at the bottom level (e.g., the unemployed), who often get maligned. This would suggest that you are really claiming that the deserving poor, according to the Australian definition, are people getting things like FTB-A and B, and the underserving poor essentially have no money at all. I don’t see that as very fair.
    “Richard Dawkins outlines very neatly the genetic basis for such altruism in his book “The Selfish Gene”.
    I think you’ll find most modern theories of altruism, and the data that supports it , pretty much suggest that humans tend to be fairly unselfish (I personally think the current view is too biased toards this now, but that’s just my opinion versus how I could fairly evaluate current findings), and fairness trumps selfishness in many situations (like I’ll bet you’ll divide your money equally in your will, even if you think one of your kids will help you more in your old age).


  13. Conrad – The whole language of ‘tax benefit’ is designed to avoid the suggestion that FTB is welfare, though clearly it is (ironically, given the general tenor of the Howard government, it is particularly good for single parent families).

    While as you know I especially dislike FTB, I suspect most people associate it with helping children and not as something that encourages able-bodied adults to sit around taking handouts. And in fairness to that view, in couple families with kids workforce participation rates are high.


  14. It has long seemed to me that we are hard-wired to be dissatisfied. No unhappy perhaps but never content. That is the cause of human progress – “OK, what’s next?”
    For some that comes out as desire for more material things though in my experience those so affected use material things as an index of success. For others it is recognition and so on.
    If we were not dissatisfied we would probably still be in caves.
    The attitude of those decrying further growth and such seems to be to reflect “progress was OK for a while, but it went on too long”


  15. Ken – I’m not so sure. I’m not a historian, but my lay reading of history suggests that before the last few hundred years fatalistic acceptance of one’s lot in life was the norm. As that attitude lifted stunning progress was made (or regress, from Clive Hamilton’s perspective).

    On the other hand, I think there is some deeper propensity to be alert to novelty – what’s changing in our environment is often the most important piece of information.


  16. TerjeP: In a genetic sense, the entire ant colony acts like a single organism – the devotion shown by the worker ant towards the colony is like the devotion shown by your red blood cells towards your body.


  17. On the wider subject of “happiness” research, this paper is interesting:

    The Happiness—Suicide Paradox

    Suicide is an important scientific phenomenon. Yet its causes remain poorly understood. This study documents a paradox: the happiest places have the highest suicide rates. The study combines findings from two large and rich individual-level data sets — one on life satisfaction and another on suicide deaths — to establish the paradox in a consistent way across U.S. states. It replicates the finding in data on Western industrialized nations and checks that the paradox is not an artifact of population composition or confounding factors. The study concludes with the conjecture that people may find it particularly painful to be unhappy in a happy place, so that the decision to commit suicide is influenced by relative comparisons.


  18. Caf -The paper is rather tentative, for good reason I suspect. At a very broad level, I can see an argument that in cultures where individual happiness is a typical goal (as opposed to duty to family, God etc) those not achieving that goal may be more predisposed to thinking that their life is not worth living. But how are local happiness norms established and perceived (and surely they would be at a smaller level than states or nations)? Whatever the state or national averages, most people will have around them – due to personality and life circumstances factors – people of differing degrees of happiness. It seems to me to be unlikely that they can do the kind of mental averaging to reflect survey results.


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