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April 11, 2005
The extinction and the happiness paradox
Additional money beyond a middle-income level (by international standards a few thousand dollars a year) does not clearly make us happier. There still maybe wonderful freedom and efficiency based arguments for people to take view unfettered markets as the optimal form of resource allocation. But happiness? That jury is still out, but weighing against at this point. A simple (and major) criticism is that even the very best (most powerful) models of predicting happiness only manage to predict 60% self reported of happiness. That is pitiful when you consider that this includes income, wealth, social-status, nationality, social-ties, occupation, education, health, and more factors. In fact, some estimate that the most accurate (corresponding to true underlying models as opposed to merely over-fitting survey data) models really only predict 30%.
Now income may the factor among of all of these that is easiest to modify through economic policy. But, once a country is no longer mired in poverty and per capita income reaches a few thousand of dollars a year, income ceases to be a predictor of happiness. Sure, relative income matters, but since this zero-sum lump to distribute, economics cannot really help here either. Don't worry, the emperor still has clothes. People crave additional income and claim (at least briefly) that they are happier when they get it. Nevertheless, this has some tremendous consequences in economic decision-making.
What does all this have to do species extinction?
You see in cost-benefit analysis, where we try to figure out efficient methods of making complex decisions by weighing the costs of implementation and its benefits, we depend heavily on a concept called the discount rate. The discount rate in effect establishes how much society will pay today for a dollar next year. The idea here is since we would rather have a dollar today than next year, you have to pay me to delay getting my dollar for a year. In general, since people use things like the average rate of return on the stock market or bond markets because this reflects an aggregate measure of this preference getting your money faster. For many projects, this makes sense. If you can build, sell your factory today for a million bucks today or in a year for $1.03 million, then knowing you can invest your money in the stock market for the next year at 8% would help you decide to sell today. However, people carry this tool far from this narrow use, leading to strange conclusions.
You see one reason that we argue for using up natural resources and endangering wildlife is that we cannot afford not to. Many people treat economic progress as a necessity. With all of society’s problems, with too many unable to afford the full prosperity of American life, protecting charismatic macro-fauna and their environment can seem unimportant. What if these luxuries don’t make us happy?
Then we have permanently given up a fraction of our heritage and part of the world’s beauty for a few baubles. Moreover, we know that people value nature for its beauty and as a good with intrinsic value (i.e. even if they never visit or benefit from it) often at far greater value than public policy seems to indicate. Therefore, if public policy is predicated on the notation that maximizing aggregate (or even maxi-min) utility requires economic progress at the expense of permanent damage to the natural world, then public policy is misguided. We should either switch to justifying markets based on the freedom they engender or revisit public policy to reflect true utility maximization.
Posted by OneEyedMan at April 11, 2005 10:30 AM
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