Executive Summary What can economics learn from social science? Essay

A lot; says Richard Layard in his Lionel Robbins Memorial Lectures from March 2003. By stressing the ability to habituate as well as the liability to rivalry as two main characteristics of human beings, the British economist formulates a deliberate and profound critique of the dominant thinking about public economics, which bases in particular on the theories of James Meade, Amartya Sen, Tony Atkinson as well as James Mirrlees.

In view of the remarkable finding that average happiness in Western societies has not increased in the last 50 years, despite huge increases in living standards, Layard concludes that income is a bad approximation for happiness, and economics alone is a hopeless insufficient instrument in the pursuit of happiness of a society.

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Therefore, instead of focusing solely on economic concepts and variables, such as the GDP or income, he also builds his theoretical framework on new evidence from neuro-science. Since new evidence in neuro-science support Bentham’s perception of “happiness” as a single variable and prove its measurability, Layard identifies tremendous potential of social science as guidance for people concerned with policy, as it possibly allows them to rationally maximize the sum of human well-being.

Layard claims that the two mechanisms “habituation” and “rivalry” in combination with our actual model characterized by a dominant economic mindset penetrating all spheres of life, leave us stuck in the “hedonic treadmill” and all our efforts to become richer are so largely self-defeating in terms of the overall happiness of the society. As we easily habituate to higher income levels, our idea of a sufficient income grows with our income. Since we fail to anticipate that mechanism, we will invest more time for work than is good for our happiness.

Crux of the story lies in the fallacy of consumer sovereignty, also. Thinking of consumers and producers as different, as Layard puts it. Since people compare their income, but do not so with their leisure time, the actual model creates a distortion of our life towards work and away from other pursuits. People sacrifice leisure time both to increase consumption as well as to achieve rank. However, the total of rank is fixed and the race for it turns out to be a zero-sum game.

Layard refers to empirical evidence showing that beyond the threshold of $15’000 per head p. a. people rather focus on the relative value of their income than on its absolute value. Economic growth per se can therefore not increase the happiness of an individual, except the individual relatively gains more than the members of its reference group. Relative gains in income make people happier, the happiness of those being worse off, however, decreases despite a higher income in absolute terms. The economist specifies this phenomenon by citing empirical evidence that a relative gain in income of one individual provokes a loss of happiness to everybody else of around 30% of that gain.

Treating the triggered decrease of happiness as a kind of pollution, Layard suggests a simple instrument may overcome it: A simple corrective tax of 30 % on all additional earnings. In doing so, the “polluter” would be forced to pay for the disbenefit he causes. Just as taxation on smoking this additional income tax should also reduce the incentive for the “polluter” to work more and engage itself in the self-defeating race for income and rank. Different to the bulk of economists, Layard does not see any inefficient elements in taxation.

By stressing the generally neglected impact of “habituation” and “rivalry”, he even acknowledges substantial levels of corrective taxation as an important component of any efficient economy. The only condition required that this assumption holds true is that the level of taxation is in line with the distortion provoked by these two mechanisms. The economist suggests 30% for each of them. However, Layard’s approach – what he calls the Third Way – goes beyond economic measures.

By developing his thoughts further, Layard widens the conception of happiness and defines other factors such as genes, experience and situation which affect happiness and should therefore be considered by evaluating different policy options. Starting from the assumption – which differs from most economic models – that values are not given but changing, he highlights some worrying (and mostly unforeseen) consequences of developments going along with economic growth.

The rapid spread of television for example made it easier for people comparing with each other, but on the other side it intensified rivalry and possibly its negative outcomes, too. In that respect especially advertising towards children seems to be precarious in the eyes of Layard. Characteristically for these findings, Layard quotes other empirical evidence that beside the fact that people on average did not become happier in the last 50 years, the number of crime incidences as well as alcoholism increased.

What has gone wrong? Layard’s explanation points at the negative side effects of a mainly economic centered approach towards life, culminating – enabled by the presence of a moral vacuum – in extensive individualism and throughout selfishness in the society. The economist stresses that many consecutive symptoms of the credo of economic liberalism, such as high geographical mobility of workforce, less job security, higher unemployment rates or a strong liability towards change away from stability, etc. have serious and (often) not foreseen side effects changing the character of the society. Only by tackling these numerous non-income channels too, the variable “happiness” could be maximized.

However, economics alone has obviously limited power to resolve such policy issues on its own. Layard identifies serious inadequacies in the Smithian argument of the “invisible hand” as a way to individual happiness. Even worse: “In fact the doctrine that your main aim must be self-advancement is a formula for producing anxiety! What else is needed to make a society happier? Layard proposes a comprehensive approach, considering economic measures as well as extensive evidence from social science, and always aiming at the greatest happiness for all. The economist considers such an approach just as the logical consequence and accentuation of some innately human characteristics such as the need for social contacts, the inbuilt sense of fairness, the natural tendency towards cooperation, or the capability to rationally assess complex problems.

Against this background, Layard acknowledges the Bentham’s utilitarian view of life – most happiness for all – as the most suitable overarching moral principle and guidance in the pursuit of happiness. B. Evaluation By combining Bentham’s approach with an economic mindset and undermining its rightness by referring to new evidence from social science, Layard presents a coherent and mainly convincing approach to public economics. In doing so, Layard is not restricted in the dominant economic thinking and challenges central assumptions of the actual approach to public economics.

He demonstrates in a plausible way the “incompatibility” of the present doctrine with some natural characteristics of human beings, leading to a self-defeating rat race. In this regard, Layard has a knack of associating surprising findings of neuro-science with established economic concepts. Turning his back on purely economic approaches to happiness, such as GDP, he presents an attractive alternative to the present model. In doing so, the economist is certainly right to call for the removal of taboos in the context of dealing with mental illnesses and to stress the potential of social science in the pursuit of happiness.

However, some conclusions of Layard’s “all-inclusive”-approach can (and should) be challenged: Not satisfied with the idea of the “invisible hand” of the market, he presents a solution with a pro-active government responsible for intervening in markets in order to protect people of self-defeating behavior and dedicated in establishing most happiness for all. Not just from a liberal point of view, this postulation seems to be worrying. Is such behavior not overzealous paternalism of the government towards its citizens?

Should an individual not be self-responsible for its own faith and master over its own behavior? Let us assume, Layard was right and the government should protect people from the self-defeating behavior patterns. Would it be a good advice to the government to base its decisions mainly on evidences from social science, as postulated by Layard? The economists approach to stress on the potential of social science as guidance in policy-making is certainly right.

However, the strength of empirical social research, namely its focus on particulars, is probably also one of its main weaknesses in the context of politics. Imagine decision-makers who are usually facing complex problems and are required to render decisions under time pressure for unknown phenomena with possibly far-reaching consequences. One may agree that in such cases social science as guidance has limited power. Instead, what becomes important is a set of universal principles of actions – ways to judge actions without knowing their consequences.

Without disagreeing with Layard about the huge potential of social science in most of the cases, I want to make a point that due to the huge complexity of the world and the limited capabilities of human beings, the utilitarian concept of happiness to all probably fails in its attempt of being an all-inclusive principle. However – in fact not being opposed to the aim of happiness to all – elements of deontological ethics should be valued equally. Furthermore, Layard’s approach bases on a rather positive image of humanity.

The economist breaks with concepts of ethical egoism and attributes a set of inherently social qualities to human beings. Justified or not, building his theory around this central, but shaky assumption constitutes a weak point in his approach. Looking back in history, one may find a wide range of situation in which people behaved egoistic rather than cooperative. Finally, one could argue that Layard’s conception of the “Third Way” has another serious flaw, namely its practical implementation. In order to do so, let us recall Ringen’s1 approach to political economy.

Ringen establishes a class pattern in which the upper class holds the economic power, the middle class holds the political power and the under class is economically unfree. Being successful in convincing the middle class by “rational”2 arguments, the outnumbered upper class is able to heavily influence the decision-making process and largely enforce its own interests. Such a reality would bring the idea of corrective taxes on additional income in a conceivable bad position. How easy would it be to win chain smokers over to corrective taxes on smoking? C. Recommendation

Presented in 2003, Layard’s statements are still of great relevance for a wide audience, including (first and foremost) present or future policy-makers, economic and spiritual leaders, but also common citizens and employees – politically active or not. Layard’s comprehensive approach has something for everyone. Especially today: the ongoing turbulences in the financial markets concomitant with a phase of growing disillusionment and scruples about the “rightness” of the neo-liberal model as well as the glorious return of government intervention, constitute a fertile ground for Layard’s approach.

To all of us the economist gives reasonable and profound explanations for pressing phenomena omnipresent in our daily life, but widely neglected and mostly tabooed. The verdict that money alone isn’t a guarantee to happiness might be a commonplace. But do we not fail to respect this finding in our daily life? Did we understand the mechanisms at work before reading Layard? Even if Layard’s ideas might appear not realizable at present, the economist sets us thinking and guides us a possible the way for future approaches to public economics, and (hopefully) an escape from the rat race. Now it is time to take matters in our own hands.

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