The equation of money and happiness

Economists are driven to quantify everything. But happiness frustrates their enduring effort to equate it with money.

Ben Bernanke, the chairman of the US Federal Reserve, said economists must challenge an assumption at the heart of their profession - that wealth means happiness.

According to Michael Carroll, a 27-year-old job hunter, there is no finer way of earning a living than collecting rubbish. "It's the best job going," he told a reporter last week. "You're outside, having a laugh with people." It is a view which will strike many as distinctly odd - all the more so coming from someone who won almost £10 million (Dh53m at current rates) in Britain's National Lottery in 2002. He was just 19 at the time, blew the lot on fast cars, women and alcohol - and ended up with nothing to show for it but a drug habit. But now he has recovered from his addiction and is convinced that he can find true happiness among the waste bins of his native Norfolk, England.

Crazy as such sentiments might seem, a growing number of economists are starting to see sense behind them - among them no less a figure than Ben Bernanke, the chairman of the US Federal Reserve. This month, Mr Bernanke gave an address at the University of South Carolina on one of the hottest subjects in his field - hedonics, or the economics of happiness. As one might expect, Mr Bernanke put up a robust defence of the role of economics and the Federal Reserve, insisting that it had helped to provide the foundations of a happy life, such as a stable economy and maximum employment.

Some might quibble about the success of economists in providing either of those of late. But many would agree with Mr Bernanke's view that economists must challenge an assumption at the heart of their profession - that wealth means happiness. As he pointed out, there is now plenty of evidence, most of which goes back decades, that the two are not synonymous. In the mid-1970s, Richard Easterlin, then at the University of Pennsylvania, identified what has become known as the Easterlin Paradox, according to which happiness is not clearly correlated with wealth. Above a certain level of income at which basic needs are met, happiness remains pretty flat.

According to Mr Bernanke, the paradox has been blighting his homeland for decades: "Although today most Americans surveyed will tell you they are happy with their lives, the fraction of those who say that they are happy is not any higher than it was 40 years ago, when average incomes in the United States were considerably lower and few could even imagine developments like mobile phones or the internet".

None of this would have surprised Thomas Jefferson, the principal author of America's Declaration of Independence. Its most famous line is based on the works of the economist Adam Smith, which talk of the importance of "life, liberty and the pursuit of property" - but Jefferson changed the last word to "happiness". Having been born into a family of great wealth, seen it all vanish through the vicissitudes of life and yet remain cheerily optimistic, Jefferson was perfectly well aware that one could be happy but broke.

Somewhere along the line, economists clearly took a wrong turn, and began building their field on dubious foundations. So where did it start to go off the rails? A new book claims to have identified the turning point, and ascribes it to a particularly nasty outbreak of "physics envy". Of all intellectual disciplines, few are more intimidating or have more cachet than physics. And small wonder - its often impenetrable equations have shaped the modern world. This success has sparked attempts to bring the same level of mathematical rigour to "softer" fields - regardless of whether such treatment is merited. A glaring example is the field of economics, says David Orrell, the author of Economyths: Ten Ways That Economics Gets it Wrong, published this week.

According to Orrell, himself a former theoretical physicist, the 19th-century founders of economics - William Stanley Jevons, Leon Walras, Vilfredo Pareto among others - convinced themselves that it was possible to develop a "physics of happiness". In their model of economic reality, consumers and businesses formed the basic "atoms", behaving according to certain "laws" of economics such as supply and demand. This model was then to be used to find ways to maximise happiness for the most people - and, in the absence of anything more obvious, to use wealth as its proxy.

Yet as Orrell points out, it is an analogy with some pretty egregious flaws. Most obviously, people and firms are not like atoms, whose properties are fixed for all time. We all change with time and circumstances, and not always in predictable ways - why, for example, do people leave tips in restaurants they know they'll never visit again - but feel happy to cheat the taxman? Then there is the problem that wealth does not scale like happiness. If the amount of money you have doubles, your wealth also doubles - but your happiness is unlikely to do the same. Indeed, you may well start fretting about what might happen if you lost it. None of this stopped economists elaborating their model, and embellishing it with ever more impressive-looking mathematics. Yet right from the outset, genuine physicists had their doubts about this attempt to quantify the unquantifiable.

Henri Poincaré, the distinguished 19th-century French mathematician, wrote to Walras of his concern that the unrealistic assumptions underlying the theory would render any conclusions "devoid of all interest". Later, in the 1960s, the American mathematician Norbert Wiener, who pioneered feedback theory, condemned the penchant of economists to create ever more byzantine theories as "a sham and a waste of time".

So what should economists be doing? Orrell believes they should be spending less time with their differential equations and more time learning about real humans in real situations - and about phenomena like feedback and uncertainty. "Instead of seeing the economy as an efficient, deterministic machine running on automatic", he says, we should see it "as a living thing that we can consciously influence, for better or worse".

Perhaps the current financial crisis will prompt such a rethink. As things stand, economists look set to give all too many of us the chance to confirm Mr Carroll's belief that true happiness lies in buddies, not bank balances. Robert Matthews is Visiting Reader in Science at Aston University, Birmingham, England