Does $ Buy Happiness?

Economics of Happiness

 According to Justin Wolfers, as you get richer, you become happier than poorer people. He offered as evidence different graphs of a range of countries, and there was a strong correlation between higher income and amount of happiness. Still, there is the Easterlin Paradox to consider where richer societies as a whole are not higher than poorer societies as a whole. In comparison, Cornell professor NAME explained that the human brain is not evolved to be happy all the time, that rather, happiness is a fleeting sensation. To survive, we seek happiness but are consistently uncomfortable, angry, upset etc. to better our situation.
Both experts offered important points, but like one of the audience members, I am doubtful that happiness is such a broad emotion. As an anthropology minor, I have a basic understanding that we cannot help but have a cultural bias; is it possible that we could have skewed the results? In any case, I think it's a bitter fact that we don't want to swallow that our lives would indeed be filled with more happiness if we had more money in our pockets.

How the Heck Did We Get Economics?

Income = Expenditures                             "Every dollar spent is income to somebody else"

             = (C - T) + I + G + NX

C=consume consumer goods

I= invest; financial assets

T= taxes

G= gov't purchases (ex, pay teachers, build bridges)

N= french wine? (trade)

*macro-multiplier story*: pay more at grocery store, all richer, right?

well, is someone going to pay Rizzo more when he buys more macaroni? No? Bummer.

French Physiocrats: How did we get this process?

• Source of wealth = agriculture
• Simply, without food we would die
• Farmers feed family, produce surplus they can sell and rest of family can work!
• new horse? machine? son sent to workshop to "tinker"
• farmer becomes even MORE productive
• unjust to not allow farmer to keep food
• Source of wealth linked to production

Mercantilists did not agree. Real source of wealth was:
     1)Amnt of gold in teasury
     2)Wealth / finances of the king
     3)Positive balance of trade

-Trade is zero-sum, wealth was fixed; money is wealth

  --> one nation rich by trading with another, which makes that other country poorer

  --> more gold = able to execute war; everyone recognizes gold as worth something

-King should control trade; supposed to push positive balance

(2 policy implications)

                        Restrict Imports           <----                                ---->           Promote exports

ex. you want French wine; you give away $ & the king does not benefit, France gets the moolah.

(not a problem if $ stays in the country)

-Trade can't be free; individ. would seek private interest that is not in harmony with social interest (social interest is to have gold)

Scottish Moral Philosohers 
-People are compassionate, generous
-Good economics about more than prudence
  -->private choice & social virtue not mutually exclusive

Hume = smarty pants                                       VS.                         Hutchinson = moral absolutest
1)Moral values themselves are social constructions                         2) virtuous activity yields pleasure

Hume : businessman; 1752 read = modern approach to econ.

• Unlike physiocrats, econ. not a social concept (wait.._
•      --->rejected mercantile doctrine, rej. source of wealth was agriculture
• ==> Commerce = source of economic growth
• specie flow mechanism; we can't eat coins, can't wear them, can't live in
• ex: before king wanted a loan, spends his $, goes into circulation, prices of goods go up
• -> let's say prices are cheaper in France, as ppl start recognizing the price change, prices in Fra.increase and prices in Eng decr.
• workings of prices is fine
• mercan. wrong about dynamics

Hume wrote about jealousy of trade:
       1) Competition (merc. thought compet. = destroy)

• Actually --> innovation, efficiency, improvement
• Ex: Kodak didn't switch to digital, Amer. cars vs. Japanese enviro friendly models, east/west German cars

      2) Learning & Innovation
             Amer. work force learned from Japanese production; changed entire process
      3) Division of Labor

•             Imagine producing only for your small town vs. producing for the world
• ex: Kodak employed over 60,000, sold to mass market. Dumb to buy big machinery if only sell a little

Economics of Scale

• machines for lots;  Dumb to buy big machinery if only sell a little
•  Large amnt of goods, ppl divide up labor --. ppl richer, we have more

Law of One Price 
-everything worth..the same?
-$ is neutral, we can about goods & services
- mo' money, --> higher prices
  no money --> lower prices     => mercantilists only looks at 1/2 of equations
  --> prices across borders will naturally adjust


Last thought: what if every country tried same policy? Who has authority to intervene in trade?

Intrinsic Motivation > $ Incentive

http://www.ted.com/talks/dan_pink_on_motivation.html

"There's a mismatch between what science knows and what business does"
stated Dan Pink at his TED presentation, The Surprising Science of Motivation.

Pink explained that intrinsic motivation, autonomy is a much greater opportunity for employees and businesses to innovate and produce.
Some companies, like Google, have taken this idea and actually allotted time for their employees to work on whatever they choose. Google has seen creations like Google News  and Google + develop as a result.

Pink gave another example of when free choice is better than monetary incentive.
In the 1990s, Mircosoft enlisted its engineers and software developers to create an online encyclopedia, Encarta. It flopped.
Few years later, a company offered the opportunity to its employees and experts the chance the develop on online encyclopedia at their own free will for no money. Wikipedia was born. And I'm sure I don't need to tell you it was a huge success.

Pink's economic advice: focus on autonomy, mastery and purpose.
1)20th cent. awards only sometimes works. narrowly.
2) If-Then rewards stunts creativity
3) Rewards/Punishment stinks BUT with unseen intrinsic drive, when we do thing because we want to, then the best results are produced

Basically, Adam Smith was an econ-rock star

We knooow the direct causes and conventional reasons why the I.R. began
-> business class, innovation, entrepreneurs, inventors blah blah. But why did it all happen in the first place?

How Did We Get Rich?
new machines--> each worker becomes more productive
                       --> wages rise! (able to sell more goods)
                       --> more working, more training, = instigates new technology
So we are NOT replaced by machines.

What Made IR Possible (Indirect Reasons)
Recall, ancient Greece had steam power, Romans could flood the colosseum, Chinese invented practically everything else.,and England? Not much. Not many resources besides coal either...
SO that means there was no single massive cause. No single event, law or personality that caused the IR
Here's what happened:
1) Gradual incre. of national political units
  -->uniformity of laws, standards
2) Slow decay of religious mysticism
   --> Italian Renaissance; life during the day became as important as the after life
3) Material changes made market systems possible
   --> power away from nobility and shift to the merchant class
4) Pure science actually not important
   --> top down sci. played small part, we should be thanking the tinkerers
      - IR not from sci. innovation, improvements made on existing technology
     -trial / error. vague understanding (ex. one person not responsible for cell phone)
    -smart people stole ideas from each other (enlightenment helped too)

Farewell to Arms: technology of defense outweigh tech. of predation
  -build state to protect markets, court systems
  - fear of too much power (gov't self imploded)
  --> Eng. political institutions reflect this

Adam Smith: institutions -->determine wealth
  -stuff we do socially to improve living standards (w/out $) cultural values count
  - when men are free able to...do great things
  Ex: gay acceptance, dress strangely: worthy of respect, accept human aspect

Eng: freedom/opportunity led to change; also had a solid foundation
Why 17th cent?
  -Magna Carta --> individ. have some rights; nobles consulted king
  - gov't created as response to revolution (think bronze, agrarian, IR)

 commerical activity --> honesty is key; capitalism is a virtue.
-incentives matter, culture matters
-but guess what? brainpower wise, they were just as smart as us! (wait, didn't we hear in class that we're better at computing today? hm)

Mercantilism: system that reigned w/ feudal system until mid 18th cent; "progressive corporatism"
1) restrain on indiv...9 am on Monday this sometimes happens
2) protectionism
3) craft guilds created
4) licensing; gov't granted monopoly
5) dutch, eng, spain, fran grated...
6) limits on production
  -->king cut off
7) extensive price control
  old days: if you violated the rules, to the stockade!
  King furthered own self interests

--> French Physiocrats & Scottish Moral Philosophers
Physiocrats= laws that govern phys. law but be laws that govern social behavior
(Francis) Quesnay: economy = indpep. relationships; life is a tapestry;

income = expenditures
factor market / goods market "circular flow"
individuals & firms ==> constant flow of stuff btwn the two
- pay money, spend money; "circular flow" of goods & services

Bias is BIG

http://www.huffingtonpost.com/2011/09/22/obama-economy-blame-survey_n_975871.html

This is a classic example of Economic Attribution Errors that we discussed in the most recent recitation. Obviously, one man, even the president, is not responsible for all of our current economic woes and troubles. President Obama works with advisors, Congress and several organizations to develop a comprehensive budget. Consumers and market trends are also independent and can have problems separate from legislation passed by Mr. Obama.

What Social Science Does- and Doesn't - Know

"Unlike physics or biology, the social sciences have not demonstrated the capacity to produce a substantial body of useful, nonobvious and reliable predictivee rules about what they study"

Scientific experimentation:
 talking
--> logic
--> repeated experiments (dropping heavy balls)
--> controlled experiments (scurvy)
-->random (disease and impact of genetics)
--> widely distributed (crime in different areas)
Ex: literacy program in one school may not be effective in another

"In short, no program within this universe of tests has ever demonstrated in replicated or multisite randomized experiments that it creates benefits in the excess of costs"

-Experimentation is key to success. Find what works.
"These days, experimentation is something that one assumes from a successful online commerce company"

3 Lessons:
1) Doubt effectiveness of random/replicated trials
   --> trial / error better
2) Don't try to change people, try to change incentive
  ex: cannot force people to stop commiting crimes. Counseling, transitional aid, boot camps do not        work. But changing the criminal environment (clean up the area) does.
3) No magic; Programs that do work lead to small improvments in comparison to the problems they are trying to address

"Science may someday allow us to predict human behavior comprehensively and reliably. Until then, we need to keep stumbling forward with trial-and-error learning as best we can"

We Haven't Actually Wrecked the Planet

1980s war: 10,000 deaths/ year Now: <1,000 deaths/year
War is less violent, fewer conflicts today, able to handle a bullet better (improved nutrition, medicine)

-Tripled amount of food produced, but did not expand land plots
-All resources are more abundant and cheaper today
    -->environmental problems less today
    -More slice of pie --> $ towards environmental reform
    -Mega farms actually use less land and less resources to produce food (does this account for the clean up of nutrients/fertilizer that runs off? Or the cost of public health problems due to contamination?)

Are We Unhappy Now?
-material gains do not necessarily translate into happiness
Easterline Paradox: within a country, those that have more income -->people are more happy
  -Note, Americans are not necessarily happier than poorer countries
Layad: $15,000 = limit, same level of happiness

"Great Stagnation" The 'developing' world has just experienced its best decade ever
Difference btwn our grandparents and our parents is much greater than the differences btwn our parents and us.
Nearly entire record of human history is characterized by misery, suffering, death, war, stagnation
Great Recession= income levels of 2007

Extraordinary Commercial Revolution = the transition from stagnation to accelerating growth
-Considerable difference btwn Modern Age & previous periods

1) Classical Theory: We "use up" our increased productivity with more people
2) Modern Theory: Continuous improvements in technology, knowledge & human capital allow productivity to outpace populations on growth
   -When productions goes up --> change in behaviour

Better Living Standards Mean More Slices of the Pie

Typical 1790s Farmer --> 75% of $ spent on food, 91% on necessities
             1900s American --> 44% spent on food, 72% on necessities (new: transportation, medical care)
             2005 American--> 14% spent on food, 36% on necessities (new: education, savings)
-incomes increased by a factor of 7

Chart Analysis: We are 2x as rich as 100 years ago
-Less difficult to buy necessities --> Spend $$ on other things
1) Risk; being poor isn't about the amount of stuff, it's really living on the edge
     -People starve; in 1790 HAVE to focus on food--> bad when food prices double
     -Now if food prices rise, few people starve...or notice.
2) More Slices: Spend $ on other stuff
-WW II did not help us out of crisis: the amount of $ for food increased
-Healthcare on the Rise: 1960 5.1%, 2008:17.6%

Income Elasticity of Demand
-"'Freed Up' Wealth buys bureaucrats, bombs and bailouts"
    --> U.S. Gov't = world's largest employer; 1 in 7 Amer.
 -$700 bill spent on defense
    --> Doesn't include energy, veterans
     -->$1.2 trillon...our defense should be 12th largest country in the world.
-Richest 5% of Indians earn less than/equal to poorest 5% of Americans
-Poorest 5% of Amer. are richer than nearly 70% of other people in the world

Reflecting Divergence
1) Income seriously understate the extent & magnitude of economic growth
2) Commodities themsevles do not matter, it is the services provided by the consumption of them
3) Real economic growth is underestimated by up to 1.4% per year (why don't we just adjust for that?)
4) Is happiness a Red Herring? Is Health Care a good deal today?
  -->answer, no, happiness is a warm gun. bang bang shoot shoot.

What Our Living Standards Measures Miss
-Availability of goods
-Capability of goods (services)
-We are richer; can budget for more
-Quality of goods
-Convenience of goods (same as the first point?)
-Safety of goods/services

Increase high income / Decrease amnt of familiies w/ low income
-->We are safer! (kids, automobiles, natural disasters)
Human liberty is tied into trade!

"I Love Cancer"..and that's a good thing. Sort of.

Health Trends: We are living longer, and living healthy!

Consider Calorie Intake: It's on the rise. But also, consider this,
1) Original diet bland with little variety (unable to get proper nutrients in the past)
2) Occupation in past = physical labor. Now that lack of vitamins is even more dramatic.
What changed? water quality, sanitation, diet, environment

Flynn Effect: typical increase of IQ in a country. We're getting smarter! All of us!

So what? Let's think of value, the benefits of health improvements
1)More people are happy
2) We live longer, and we live richer (income is important)

• 1962-->2009 Chart: The richer every country gets, the longer people in that country live

American Living Standards:

1) Labor Market

2) Household

3) Health

4)Human Capital

5)Income Revi...I blame my handwriting

   -We make 7x more than we did 100 years ago

• Workweek decreased
• Household work down from 12 hours to 3 hours (unless you make homemade spaghetti)
• In 1900, retirement did not exist. Work til you die!
• Women currently outnumber men in college

I LOVE CANCER! =Proof we are living longer

Human Capital= ability to acquire skills you were not born with

      Unfortunately, we spend half the time at our full time jobs "not working"...my boss would love that.

We don't care about stuff, we care about services! (check out my first EWOT!)

The Economic Revolution

In his book, The Economic Revolution, Robert Heilbroner had a strong message:In order to survive, we must socially cooperate. How incredible is it that society could breakdown at any moment and yet somehow business and trade go on freely.
There was no need for ecomics in the past because society was organized by traditions, customs and patterns. The occupation of a father was often passed on through the generations.
There was also commander societies that had the governments in control of the market and the movement of goods. Only after the emergence of the free market and the pull of the consumer that ecnomists were needed.
Heilbroner answers the question to "what changed?":
1)In Europe, national political units developed
2) Less religious as a result of the Italian Renaissance
3)Market system possible because of "material changes"
4) Rise of scientific curiosity
I agreed with the statement that it was "odd that the idea of gain is a relatively modern one"
Heilbroner gives examples of different eras and cultures of how the market system developed and life became more commercialized.

The Good Ol' Days..Really Weren't So Great

What is the right kind of inequality to focus on?
-functional inequality, height & health, cross country vs. within, intell, risk-taking
Proof of Richer: cheaper stuff; able to buy more and a real ability consume to
BUT we get pleasure and service from stuff that matters


How Can We Measure $$ from Ancient Times?
1) History: everyone lived similarly; able to imagine, how much did a farm produce? what were the primitive instruments? (pre-industrial revolution) anthropology actually matters! (phew, it's actually my minor)


2) Critical Thinking: Know basically how much $ people needed to survive at the time by comparing it with the minimum bound; compare resources conditions to 3rd world countries


BUT WAIT, what about all that ancient achievemen? pyramids? temples? bridges?
-->operated under feudal system/monarchy/empire; most people were serfs; if you lived on land, 30-40% of what you produced goes to the big guy up top. Boss man has a lot of $$ to work with.
Awesome structures were built because all the work went to something that didn't make these people rich.


"The Good Ol' Days" Would you trade with the past? (cue Rizzo's list of painful, untimely deaths of the big shots of history...I mean dying of strep throat isn't pretty)


Compare the differences then with our differences with Bill Gates; the gap is MUCH smaller than that of peasants and kings.
"We live in the security blanket of modern society", so yeah camping is great, but that's because it doesn't last forever and if something goes wrong, the modern world can fix it.


Also, trend of increasing life expectancy. (We've added a decade to American life since 1960!)

Incentives Put to Practice

http://www.cnn.com/2011/US/09/16/modern.day.gold.rush/index.html?iref=obnetwork

"As prices soar, a new gold rush emerges in the West" reads a recent CNN headline.
This news clip and article that follow the latest rush for gold by retirees and families struggling through the economic times. There are developing entrepreneurs, like Chris Brawn, who used the rush as an opportunity to teach rookies how to sift and mine for gold properly. Some prospectors are paying money to landowners to mine through their rocks and rivers. People are finding many ways to use the gold rush to their advantage. For folks struggling to pay for vacations, the rush in the west has even become an alternative vacation option.

Growth! Wealth! Look out, the population is booming.

Industrial Revolution: 1st quarter of 18th century to middle of 19th century
-Per capita income grew by 50%; rate of growth .05% per year
BUT in past 200 years, there has been 4000% total growth

Rule of 72: determines how long it will take something to double if it grows at a certain percentage
72 / (your number) = years it will take

How to get rich: 
1) make more of what you sell; produce more stuff
2) Trade w/ others to make the product or trade for something else
3) Bequest (ex. mooch off your parents)

Slow Growth is NOT equal to No Growth
The two major events that changed the rate of stuff we were able to product was the agricultural revolution (when we stopped being hunter/gatherers) and the industrial revolution.

Extensive Growth: helps support the larger population
Intensive Growth: helps support yourself

There has been continual human progress; the increase of the population examples the success of a species. It is also important to dispel the notion that others get rich at other people's expense.
The rich are getting richer, and the poor are better off than ever.

It's Better for the GDP to Have a Cow Instead of a Child

I, Pencil Overview
1) Impersonality
2) Self-Interest
3)Cognitive Issue
4)Who gave the orders?

Invisible Hand possibility for people to cooperate with out prodding; it results in social benefits
Tacit Knowledge = importance of type of knowledge that only an individual knows within a process (and couldn't possibly be known by someone else.
    - allows people with info and incentives to make decisions
    - not possible to have central planner; the world is always changing!

What lets people act in a market economy?
PRICES
Price System: perfect signal of scarcity
- terms of exchange; know exactly how much to give up to get something else


History of Economic Growth
"Are you better off today than 10 years ago?" => preposterous question! Even though we expect the answer to be yes
-We live in a world of staggering inequality
-Today's world is charactered by sustained growth
GDP = add up dollar value of everything produced inside the U.S. 
- national income estimate
-BUT not everything produced is valuable, not everything valuable is produced.

The Case for Collaborative Consumption

http://www.ted.com/talks/rachel_botsman_the_case_for_collaborative_consumption.html

This is a TED talk that identifies the new ways that we are consuming products. Rachel Botsman distinguishes the news ways people are collaborating.
Botsman explained:
"Technology is enabling trust between strangers. We now live in a global village...social networks and real time technology are taking us back: we're bartering trading, swapping sharing"


There is power in numbers and we are no longer passive consumers. The internet removing the middle man --> "Peer-to-peer revolution". Our habits are becoming more sustainable. Our actions are more about products we want than using money. And our incentives are changing: "Culture of me to culture of we" -Botsman 


This generation is changing the economy. Botsman gives four key points (Quoted from her presentation)
1) A renewed belief in the importance of community
2) Atorrent of peer-to-peer social networks and real-time technology
3) Pressing unresolved environmental concerns
4) A global recession that has fundamentally shocked consumer behaviours

We are sharing resources! For example, $8,000 is avg cost of car per year. But I use the Zipcar on campus and share in this resource. Botsman puts it best when she says, "I don't want stuff. I want the needs or experiences it fulfills".

iPencil

a)  It is indeed "miraculous" to sit down and consider the millions of people with a variety of specialization that are linked together in a single, arguably "simple" object. One does not typically consider all of the resources, technology and jobs that are required to make a pencil because like everything else we purchase, the only real interaction with us and the pencil is purchasing it at the store. Maybe people would be willing to pay more for products if there were a label (almost like an ingredient label on food) that lists every material and every company needed to create the pencil.

b)  1. What are ways that we can follow the author's lesson to "leave all creative energies uninhibited"?

2. I, Pencil is an example of how separated we have become from our "stuff". I can say with some certainty, most people in my generation no longer know how to change the oil in their car (something that was widely understood for our parents or grandparents) Now, when something is broken we don't fix it, we go back to the store to buy another product. How else have we become disconnected from the things we own?

3. This article was written in 1958. Can we learn anything about our economy by comparing the price of pencils then to now? What about the rate of inflation? (For example, pencils today are incredibly cheap. So is bread, but bread back in 1958 was relatively more expensive than it is today when the price adjusted)

c) I, Pencil illustrates the dependance that people have for each other's skills and trade. Isn't it incredible that we have no worry that the supply of pencils will diminish, yet there are millions of people and numerous resources required to assemble them. If people were completely self-sufficient, and provided goods and services only for their own benefit, there would be no need for economics. Rather, we are a society that is connected through our work to fill a certain need.

Intentions Don't Equal Results

Why even study economics?
1) Sense of wonder
2) Concepts are important
3) Knowing facts is important too

Isn't amazing how one can listen to music at the touch of a button? I mean it,
a) Collapses space & time
b) There are trade offs everywhere; 2nd order, 3rd order
c) Important facts are misunderstood...wish I was able to connect that better but still necessary to remember

Key: Intentions don't equal results (example, woodpecker worse off on endangered list because people don't want there backyards to turn into sanctuaries)

Is there enough $$ spent on education? Maybe. Maybe not. But not knowing the amount should mean something, right? People talk about concepts when they don't know the facts!  I mean, economics is not complex. Systems are. Economics isn't emotionally satisfying either, but we need to know the consequences of our decisions.

It's All About Scarcity!

CAREFUL! Scarcity isn't limits or lack of abundance, it's all related to demand. We economize when we react to scarcity. Two reactions: expected benefits and expected costs.


Problem with economics is, it's alllll subjective. What I want and put value to stuff might not be the same as what you want or value.

How people work together in a market place is prudence, but the study of property(?) and justice, including man's relationship to other man in society is temperance.


OK ok, I admit, I peeked at my notes for this stuff, but I wanted to remember the key words. Today's example of the ship captain who was paid AFTER the voyage to ensure the well-being of his prisoner passengers was to show the importance and impacts of incentives. 

Throwing $$ Around

Econ 108 started off with a crowded class, money tossed around but no typical discussion of course requirements or deadlines. Rather, we jumped into the "Economic Way Of Thinking" or "EWOT".

There was definitely a change in behavior when Prof. Rizzo held out the the $10 compared to the penny or quarter. The reason? Profit opportunities motive you.

No calculator necessary? Economists don't know enough about this field? This seems like it will be an interesting course.