On Balance: Handbook on Wellbeing, Happiness, and the Environment

Happiness Economics (HE) is concerned with the utility consequences of economic choices, while Experimental Economics (EE) studies choice behavior. Both HE and EE are branches of Behavioral Economics (BE) and they often lead to similar conclusions, which are at odds with assumptions of the Standard Economic Model (SEM). In the SEM the decisions maker maximizes a utility function with complete, transitive and self-regrading preferences, which are affected only by the levels of one’s own payoffs (the payoffs of other individuals and other generations are not considered). The SEM has no ethical underpinnings and no distributional concerns. For many economists, as well as scientists from other disciplines that endeavor to develop interdisciplinary frameworks and systems, which include socio-economic considerations, the SEM is unsatisfactory.


BE brings psychology into economics analysis with the basic premises that cognitive limitations lead people to apply heuristics and routines that yield outcomes which individuals consider satisfactory, not optimal. Everything else being equal an agent that has better algorithms and heuristics could make more “rational” (more optimal) decisions than one that has poorer heuristics and algorithms. For example, advances in technology (artificial intelligence and big data analytics) expand the bounds that define the feasible rationality space, also social networks structures in socio-ecological systems drive towards improved rationality (Campbell and Smith, 2020; Smith and Wilson, 2019; Kahneman, 2003).  

While psychologists started exploring happiness already in the late 1940s, the economics of happiness is a more recent field. Economists started studying happiness, or more broadly Subjective Wellbeing (SWB), to clarify issues in welfare economics, since SWB can serve as a proxy for the fundamental economic notion of utility previously deemed unobservable. Since 1970s HE has changed our understanding of the structure of the utility function.

There exist three central unresolved scientific questions that drive the search of an alternative, deeper, more mature understanding of the structure of the utility function. First, the need to recognize that a substantial fraction of the people is also motivated by fairness concerns. People do not only differ in their tastes for chocolate and bananas, but also with regards to how selfish or fair-minded they are, which has important economic consequences. Second, the need to understand how people make decisions over time and under uncertainty. With regards to the latter economics has two separate frameworks: the subjective expected utility framework (where the decision maker weights probabilities) and the discounted utility framework (where the decision makers weights discount factors based on time delays). However, time and uncertainty are correlated, while uncertainty often takes the form of ambiguity (when probabilities of uncertain events are unknown) so we need a unifying framework, which must be derived from a deeper understanding of the structure of human preferences. 

Finally, we need to understand human preferences with regards to public goods, such as education, health, security, and the environment. Currently we are facing  a triple crisis: the health crisis of the COVID-19 pandemic, the unprecedented macroeconomic recession deriving from attempts to contain the spread of the COVID-19 virus, and the mother of all crisis, the Climate Crisis, speculated to have contributed to the emergence of the pandemic (deforestation and biodiversity loss bringing wild life and humans very close, which increases the probability of zoonotic viruses to make the cross species leap)123 and affecting each and every country in the world via natural disasters that translate in billions of dollars in economic losses and millions of human lives lost. An immense amount of effort (from research and innovation, policy-making and politics, business and NGOs, the civil society) is invested in avoiding to “waste this triple crisis” and use this moment of clarity to effectively reboot development towards a people-centric, inclusive, rights-based, participatory and green development envisioned in the United Nations 2030 Agenda with the 17 Sustainable Development Goals and the Paris Climate Agreement (Lancet, 2020). The recovery needs to be transformative with regards to our social, economic, financial and political systems, so that they become human-centric, climate neutral and resilient, and be based on a sustainable digitalized economy and an up-skilled labor force that can embrace the impressive technological advancements in renewable energy production and storage, circular economy, energy efficiency, digitalization, e-mobility, smart food production, protection of human health and biodiversity (Koundouri, Pitits, Smartzis, 2020). We need to understand human preferences and decisions-making, and all the main elements affecting human well-being. We need to move away from imperfect measurements of growth, like the “Gross National Product” measurement, and focus on inclusive measurements of the well-being of nations. The World Happiness Report (https://worldhappiness.report/ed/2020/) is a landmark survey of the state of global happiness that ranks 156 countries by how happy their citizens perceive themselves to be, while there exist a number of efforts for robust measurement of Natural Capital.4

This important book brings together a number of exceptional contributions on Economics, Well-Being and Happiness, and redirects economics research to one important quest that dominated the classical Political Economy and formed the basis of the moral statute of Political Economy in the late modernity: “The telos of Political Economy is to reduce unhappiness by means of reducing material poverty and ignorance, increasing the wealth of nations”. 

The book starts with an excellent historical perspective on economics, well-being and happiness, where Lauigino Bruni explains when and how happiness/eudaimonia has been reduced to utility/pleasure, while in chapter 2 Ruut Veenhoven proceeds with the presentation of the status-quo of archiving of this literature, namely “World Database of Happiness”. In chapter 3, Mona Ahmadiani et al. present and analyze the puzzle of “spatial variation in Life Satisfaction”, namely although income has a positive impact on SWB at a point in time, there is little effect of economic growth after a level of GDP per capita. This puzzle is revisited in chapter 6, where David Maddison and Katrin Rehdanz explain cross-country variations in subjective well-being explained by the climate. In chapter 4 Heinz Welsch explains how Happiness is integrated in Environmental Economics, while in chapter 5 Jianjun Tang et al. present how the concept subjective wellbeing is used in the valuation system of environmental quality. Valuation Environmental Economics relies upon utility maximization which is assumed to sufficiently and accurately capture an individual’s decision-making framework. This chapter suggests that subjective wellbeing embedded in an Environmental Social Science framework which allows estimation by structural equation methods that can handle latent and observable variables simultaneously, is an alternative to valuation methods based on neoclassical premises.  

In chapter 7 Michael Berlemann et al. present empirical evidence on natural disasters and self-reported well-being, which focuses on extreme rainfall in the UK. This evidence shows that an increase in disaster risk, which is associated with Climate Change, has a direct negative effect on economic costs, but also happiness and life satisfaction. In chapter 8, Benjamin A. Jones, focuses on happiness and forest-attacking invasive alien species, in chapter 9, Arik Levinson analyzes happiness and air pollution, a subject that is also visited by Xin Zhang et al. in chapter 10 with a special empirical focus on China. In chapter 11 Daniel Fujiwarw and Ricky N. Lawton focus on yet another externality, namely noise, and empirically analyze a panel data set that allows estimation of its effects on subjective wellbeing. In chapter 12 David Fujiwara measure the wellbeing and health impacts of sewage odour, while in chapter 15 Peter Howley investigate legacy effects and individual heterogeneity in the relationship between health and wellbeing. In chapter 13 Teresa Ruckelshaub econometrically compares subjective and objective measures of the effect of green areas on life satisfaction, in chapter 14 George MacKerron and Susana Moourato highlight the value of understanding localized patterns in subjective wellbeing both at the individual level and for policy and planning purposes, while in chapter 16 Christian Krekel showcases the estimation of energy infrastructure externalities by using wellbeing and hedonic price data. In chapter 17 Heinz Weilsch investigates the effects of nuclear risks on wellbeing, in chapter 18 Kate Lafffan studies the relationship between pro-environmental behavior and subjective wellbeing. In chapter 19 Heinz Welsch empirically investigates the available evidence on the relationship between green lifestyle and wellbeing, while in chapter 20 Tetsuya Tsurumi et al. empirically show for the case of Japan that although there are no satiation points concerning the consumption-well-being relationship, there are satiation points for people who have the perspectives on environmental ethics concerning “irreversibility” or ‘intergenerational equity”. In chapter 21 Carmen Amelia Coral-Guerrero et al. empirically assess the indigenous “sumac Kawsay” (living well) for people’s subjective well-being, while in chapter 22, Shashi Kant et al. attempt an assessment of Aboriginal wellbeing based not only materials aspects, but also on Aboriginal people’s wellbeing. Finally, in chapter 23, Frey S. Bruno summarizes the remarkable results over the last years of the research on subjective well-being, in short “happiness”, and connects it to important contributions showing the relationship between the natural environment and happiness. This book is a joy to read and a firm basis for navigating through the most exciting areas of economic theory: those that serve the need to understand what makes people happy, that is understand those important factors that increase human well-being. A must read!

1Lancet COVID-19 Commission Statement on the occasion of the 75th session of the UN General Assembly. The Lancet COVID-19 Commissioners, Task Force Chairs, and Commission Secretariat. Lancet 2020; 396: 1102–24 Published Online September 14, 2020 https://doi.org/10.1016/ S0140-6736(20)31927-9
2Lancet COVID-19 2nd Commission Statement: https://covid19commission.org/enhancing-global-cooperation
3Priorities for the COVID-19 pandemic at the start of 2021: statement of the Lancet COVID-19 Commission. The Lancet, February 12, 2021DOI: https://doi.org/10.1016/S0140-6736(21)00388-3
4See for example, Bringing Health and the Environment into Decision-Making: The Natural Capital Approach. Rockefeller Foundation Economic Council on Planetary Health, 2018 https://valuing-nature.net/sites/default/files/images/Bateman%20%20Wheeler%202018%20-%20Rockefeller%20Nat%20Cap-%20website.pdf and http://www.naturalcapital.vn/measuring-natural-capital/

Bringing Health and the Environment into Decision-Making: The Natural Capital Approach. Rockefeller Foundation Economic Council on Planetary Health, 2018 https://valuing-nature.net/sites/default/files/images/Bateman%20%20Wheeler%202018%20-%20Rockefeller%20Nat%20Cap-%20website.pdf

Michael J. Campbell; Vernon L. Smith (2020). "An elementary humanomics approach to boundedly rational quadratic models". Physica A. 562: 125309. doi:10.1016/j.physa.2020.125309.

Vernon L. Smith and Bart J. Wilson (2019). Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century. Cambridge University Press. doi:10.1017/9781108185561ISBN 9781108185561

Kahneman, Daniel (2003). "Maps of Bounded Rationality: Psychology for Behavioral Economics". The American Economic Review. 93 (5): 1449–1475. doi:10.1257/000282803322655392ISSN 0002-8282JSTOR 3132137.

Koundouri, P., Pittis, N., Samartzis, P., 2020. Never Waste a Good Crisis: COVID-19, Macroeconomic Effects and the Way Forward, Perspectives on the Economics of the Environment in the Shadow of Coronavirus Environmental and Resource Economics volume 76, pages 447–517(2020)

Lancet COVID-19 Commission Statement on occasion of the 75th session of the UN General Assembly. The Lancet COVID-19 Commissioners, Task Force Chairs, and Commission Secretariat. Lancet 2020; 396: 1102–24 Published Online September 14, 2020 https://doi.org/10.1016/ S0140-6736(20)31927-9

Natural Capital Accounting http://www.naturalcapital.vn/measuring-natural-capital/

The World Happiness Report, 2020. https://worldhappiness.report/ed/2020/

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