The beyond GDP myth: Why the government shouldn’t try to maximise our happiness

Just at the moment when the economic literature appeared to have reached a decisive conclusion about the negative impact of government size on economic performance, the debate has shifted. Suddenly, the impact of government on happiness (subjective well-being or life satisfaction), not growth, is all the rage. 

 

We’re told three things. First, that we’re living in a world “beyond GDP”, where rising affluence (per capita income growth) is less important to life satisfaction. So making the economy more efficient, by shrinking the state, won’t make us any happier. Second, we’re told that bigger government is associated with greater happiness. Third, it’s said that there is a role for government in helping create the greatest happiness of the greatest number. All three assertions need to be refuted.

 

Nobel Laureate Angus Deaton has shown there is a strong positive correlation between economic prosperity (GDP per capita) and life satisfaction. Subsequent research has shown the correlation is high not just across countries, but within them as well.

 

Read more: Yes, money really does make you happier

 

The cross sectional evidence is powerful. There is more debate over the evidence for individual countries over time, but we’re emphatically not “beyond GDP” yet. Growth still matters, and “beyond GDP” is all too often code for an anti-growth agenda. The idea that we’re not “beyond GDP” is also implicit in interventionists’ calls for a greater re-distribution of income, which falls foul of their own argument. If money doesn’t matter, why do you want to re-distribute it so much? 

 

Is bigger government really associated with greater happiness? One recent study found that, where governments intervene more frequently in the economy, there is a higher degree of self-reported happiness. Other studies find that the relationship depends heavily on the quality of government. And of course, there are studies which find the opposite – that government activity is negatively correlated with life satisfaction, due to state failure. 

 

While I don’t deny higher life satisfaction scores can be found in bigger government societies, I do question a strong causal relationship from government to happiness. There is something about bureaucratic organisation that fundamentally grates with human happiness. Big is ugly and small is beautiful. The positive correlation is almost certainly due to omitted variable bias. Simple correlations don’t tell the full story.

 

 

The literature also shows a powerful positive relationship between economic freedom and subjective well-being. I call this the government-freedom paradox, because it’s difficult to reconcile a strong positive effect on subjective wellbeing from both freedom and bigger government, all at the same time. 

 

The third point relates to state intervention to help determine the greatest happiness of the greatest number. Who decides? How do they decide? What about those who are made unhappy? The state has neither the information, nor the moral authority, to intervene in this area. The ultimate consequences of such a policy would be a politically correct tyranny of the majority. We would have moved on from a world of economic crowding out (the cost of the public sector on the private sector) to PC crowding out (statist views trump all others). 

 

Happiness will be greatest when the family and extended family are strongest. Consequently, the state must do nothing to undermine the family. There’s an economic payback as well. The optimal size of the welfare state, when families and extended families are strong, is zero! Less government and more family would be good for growth and subjective well-being.