Talking about success

happiness is the secret of success

Rising national wealth does not necessarily make people more satisfied with their lot, so economists and politicians are looking beyond growth to questions of well-being

Happiness is just as important a measure of the success or failure of a society as GDP, according to economists such as Joseph Stiglitz. Photograph: Rex Features

In the wistful imagination of wage-slaves chained to their desks in grey, rainy Britain, France is a land where everything is better: long holidays, crusty baguettes, fine wine and a Gallic disregard for money-grubbing individualism. So perhaps it's not surprising that Nicolas Sarkozy wants to export the French penchant for the good life to the rest of the world. Last week he launched a major new report by the Nobel-prize winning economist Joseph Stiglitz and a panel of experts about how to ensure that governments take full account of their citizens' happiness and well-being, instead of measuring their success by gross domestic product (GDP) alone.

Sarkozy made no secret of his target: the rapacious Anglo-Saxon neo-liberals who hoovered up multimillion-dollar bonuses while bringing the world economy to its knees. "For years, we proclaimed the financial world a creator of wealth, until we learned one day that it had accumulated so much risk that it plunged us into chaos," he said.

But there is much more to Stiglitz's work than a critique of the naked pursuit of profit. Even before the crisis, a growing number of serious economists were beginning to question whether a single-minded devotion to maximising GDP growth led to governments neglecting other important goals.

GDP simply totals up everything made within an economy in a year, from widgets to whizzy financial products, at their market value. It was John Maynard Keynes, the great 20th-century economist, who pushed for more detailed "national accounts" to guide governments seeking to manage their economies, at a time when reliable data was scarce.

But just as corporations have been accused of fetishising "shareholder value" in recent years, pursuing quarterly gains in their stock price, sometimes through sheer recklessness instead of steady, step-by-step growth, economists have been charged with losing touch with the reasons we were interested in GDP in the first place – as a measure of social, as well as economic, progress.

There have been two pressures for wider measures of national success from outside mainstream economics. Environmentalists point out that conventional national accounting doesn't allow for the heavy costs of economic progress, in terms of pollution, depletion of natural resources and so on.

As Stiglitz explains, looking at GDP without accounting for environmental damage in the figures gives an artificial picture. "A firm would look at its assets and liabilities if it wanted to see if it was better or worse off," he said, "yet we don't look at any of these things when we talk about the balance sheet of society."

Meanwhile, psychologists – and economists with a psychological bent – have for decades been gathering a large body of evidence showing that beyond a certain point, rising national wealth stops making the population any happier, a puzzle known as the Easterlin paradox, after the economist Richard Easterlin, who worked on the question in the 1970s.

In the ensuing 30 years, a whole branch of "happiness economics" has developed, mapping the correlations between people's reports of how satisfied they are with their lives and a host of different criteria.

Some of its insights have been quirky, rather than having obvious policy implications: a 2003 study by David Blanchflower, the former member of the Bank of England's monetary policy committee, and Andrew Oswald, a professor of economics at Warwick University, showed that having regular sex makes people happier, especially if they're well educated, for example. But other findings – such as that people in more equal societies tend to be happier – have sparked deep thinking about what constitutes a successful economy.

In his 2006 book The Challenge of Affluence, Avner Offer – an Oxford historian rather than an economist – wrote about the prevalence of obesity, eating disorders and family breakdown in wealthy modern societies. "Well-being is more than having more," Offer said in his conclusion. "It is a balance between our own needs, and those of others, on whose goodwill and approbation our own well-being depends."

Oswald, a pioneer of happiness economics in the UK and a member of the Stiglitz panel, said: "Nobody starves any more in advanced societies, and we're more likely to have a BMW than an old Ford, so in the modern economy, thinking about people's mental health and their enjoyment of their lives is key."

He adds that economists have increasingly been shifting towards the use of so-called "biomarkers" – objective measures such as blood pressure and heart rate – instead of relying solely on surveys asking people how they feel about their lives. But he insists it would be foolish of economists to ignore reports of how happy people are, citing the economist Alan Blinder's comment that, "if molecules could talk, would physicists refuse to listen?"

Politicians, too, had begun to notice the broader idea of "well-being" long before the credit crunch. In David Cameron's early days as Conservative leader, when the GDP numbers still pointed to an impressive track record for Labour, he told a conference: "It's time we admitted that there's more to life than money, and it's time we focused not just on GDP, but on 'GWB' – general well-being."

In government, meanwhile, the idea is gaining creeping acceptance: local authorities have been given an obligation to maximise their citizens' well-being, and John Prescott began publishing a range of quality-of-life indicators when he was deputy prime minister, admitting that GDP alone gave little insight into what's really happening in society.

These moves were an acknowledgement that people's day-to-day experiences do not always tally with what the bare economic data tells us – a problem likely to become more pressing in the coming months. In the UK, GDP may already be rising again, and if this is confirmed by official figures next month, it will mark the official end of recession. But thousands of people will continue to lose their jobs, and the elusive "feel-good factor" eagerly sought by politicians may take much longer to return.

Angel Gurría, secretary general of the Paris-based Organisation for Economic Co-operation and Development, which has done substantial work on how to move beyond GDP, responded to Sarkozy's launch of the report by highlighting the gulf between what statistics show and how ordinary citizens feel.

"This gap can be clearly damaging both to the credibility of political debate and action and to the very functioning of democracy," said Gurría. "Economic resources are not all that matter in people's lives. We need better measures of people's expectations and levels of satisfaction, of how they spend their time, of their relations with other people … We need to focus on stocks as much as on flows, and we need to broaden the range of assets that we consider important to sustain our well-being."

However, the strongest argument for ditching GDP as the sole yardstick of economic progress has come from the spectacular collapse of the debt-fuelled US and UK economies since 2007.

"The crisis gives salience to the work, in two ways," Stiglitz told the Observer. "By looking at GDP, you didn't know whether what was going on was sustainable – and it obviously wasn't. The second point is that when you add apples and oranges to form GDP, you use prices, and they reflect the relative values that people put on apples and oranges."

The problem with this, he explains, is that when there is an almighty bubble in an economy, as there was in the US and UK over the past decade, the prices of some assets – properties and shares, in this case – can move far out of line with reality, which in turn creates an illusion of economic success.

While the US financial sector created extraordinary profits from 2003‑07 – accounting for about a third of total profits in the economy – the vast losses in 2008 wiped them out. Even on its own terms, then, as an objective, mathematical measure of an economy's strength, GDP fails: it sends dangerously misleading signals to policymakers and the public about what's really going on.

For example, Gordon Brown turned on the public spending taps in 2001 safe in the knowledge that the economy was barrelling along at a healthy pace and Britain's financial sector was generating impressive profits – yet much of that has since proved illusory, exactly as Stiglitz describes. "This crisis really highlights the importance of getting our statistical metrics right," he said.

In the US, there were signs the economy was not delivering for its population well before the crash, for those who knew where to look. While average GDP-per-capita looked relatively good, distorted by the lavish share taken by of those at the very top, median income – the pay of the person in the middle – had actually been declining.

"Median income has been going down by half a percent a year for the last eight years. That means that all the increase went to a few at the top: most Americans are worse off. If you're grading an economic system, you have to say, if most people in society are worse off, you can't give it an A," Stiglitz said.

There is a thriving debate about what other criteria would better measure economic success: equality? health? happiness? However, experts have been working hard on this for years, and there have been several impressive recent attempts, including the "happy planet index" from a British thinktank, the New Economics Foundation, to bring together measures of environmental damage, health and happiness with raw economic data.

The crisis of the past two years has already overturned great swathes of economic doctrine; many, including Stiglitz and Oswald, believe the time may finally be ripe for the dismal science to let in a bit of happiness.