23 Mar 2011

A thought on happiness

NB: This post describes how economists think about (and fail to see) the real world; I am still learning.

Economists say that people choose actions to "maximize their utility," which raises two questions. What's utility and what's included in its definition?

"Utility" can mean many things, but it basically means happiness, and it includes everything that makes people happy. That can mean making and spending money, but it can also mean watching the sunset.

This inclusiveness helps us understand the problem with programs or policies that contribute to GDP (monetary activities), to the detriment of non-GDP activities. Thus, we may see policies to help moms work (and hire nannies) as "good" for the economy, when they may not be good for utility. (Note that I am talking about changing incentives to participate in these activities, not voluntary participation.)

I was thinking a little more about utility and came up with the following definition:

Utility = peopleαproductionβconsumption1−α−β

This is the first time I've used math on this blog in nearly three years, but this notation uses the classic Cobb-Douglas function, which has two useful characteristics (given that α and β are positive and sum to less than 1). First, we can see that a value of zero for any of people, production or consumption means that utility is zero. Second, more of any of these increases utility according to the values of α and β.

In non-mathematical terms, the main idea is that balance is good, but more is better :)

Now the definitions of people, production and consumption are also interesting.

People includes friends, family, lovers and strangers. Different people attach different weights to each of these subgroups. Both a family man and a swinger can put high values on α, even as they assign different priorities to different subgroups.

Production is easier to understand, as our output of paid and unpaid goods and services. Likewise, consumption involves a combination of goods and services -- everything from a cup of coffee to bungee jumping at Victoria Falls to the 22nd Rolls Royce. People obviously put different weights on different types of consumption and production.

It's important to note here that many economists consider time spent in production as "lost" to leisure (a type of consumption), making production a bad. This simple idea can be resolved by dividing production into fun (additional consumption) and work (lost consumption), but that often-overlooked nuance means that many economic models are not very accurate.

Production as a positive source of utility, OTOH, clarifies the reason that many of us work and choose jobs; less-attractive jobs have lower β value.

Bottom Line: We are the same in our pursuit of happiness but different in the way we find it.