Whether you eat alone is a good predictor of happiness

By MILLIE MUROI, Economics Writer

If you’re sharing a meal with someone this Easter, chances are you’re happier.

In fact, it’s as strong an indicator of how happy you are as the amount of money you’re raking in and whether you’re holding down a job.

That’s according to this year’s World Happiness Report, which examined data from a survey across 142 countries and 150,000 people, finding the link between meal-sharing and happiness holds regardless of age, gender, country or culture.

There are well-established links between income, employment and happiness: someone holding down a job is more likely to be happy than someone who is unemployed. And the more money a person makes (at least until a certain point), the happier they tend to be.

You won’t see the rate of meal-sharing cited by many politicians or economists, but it’s a great indicator of happiness – and in some ways, more so than income.

How much you’re paid and whether you have a job is a stronger indicator of the level of negative emotions you experience, but how often you share meals has a stronger link both to the level of positive emotions you experience and how highly you rank your life satisfaction.

It’s the places where residents share more meals that tend to report greater average life satisfaction.

And while Latin America and the Caribbean are the global leaders in meal-sharing frequency, the link to happiness is stronger in Australia, North America and New Zealand than for any other region in the world. Starting to share most of our meals – meaning eight or more a week – can boost our wellbeing by the same amount as doubling our income.

We’re also a lot more likely to eat dinner with other people than we are to share lunches in Australia, sitting around the dining table with others for five dinners a week on average. Levels of meal-sharing generally are low in south and east Asian countries such as Japan, India and South Korea, where people share less than one meal out of three on average.

But wherever you look, it’s the places where residents share more meals that tend to report greater average life satisfaction.

Part of what makes the rate of meal-sharing such a good measure is that it’s relatively objective. It’s easy to ask and answer, it’s not something people are likely to hide or lie about (like they might for income), and it can be easily compared across countries, cultures, individuals and across time.

Of course, it has its limitations. For instance, how do we know whether sharing meals makes people happier, or if people share more meals when they’re happy to begin with?

We can’t say for certain, but chances are it goes both ways, at least to some extent.

Other factors can muddy the water. For example, are people more likely to share a meal if they have the money to go out and meet people at a restaurant?

These factors, at least, can be accounted for, and researchers found the relationship between meal-sharing and happiness held even after considering income, education, employment and a buffet of other indicators. The more meals you share, the happier you tend to be.

Those who shared 13 meals with others in the previous week reported the highest average life satisfaction. That tumbles the fewer meals respondents shared in the past week. But the biggest jump is between those who ate all meals alone and those who ate at least one meal with someone else.

While the relationship holds across demographics, there are some differences in the ways meal-sharing tendencies affect different cohorts.

Both men and women who eat more frequently with others report higher life satisfaction and feeling more positive emotions, but when we look at the negative impact of dining alone, it tends to hit women harder.

By age, both young and old people report higher levels of negative emotions if they dine alone. But there are much bigger gaps in life satisfaction and the level of positive emotions reported for young people dining alone compared with older adults. The good news is that young people tend to share more meals than their elders.

One strong explanation for why meal-sharing might be linked with happiness is that eating with other people is a way of strengthening social connections.

Decades of research has shown social connectedness is key to our happiness, mental and physical health. People with stronger social connections are also more likely to be promoted, less likely to commit crimes and tend to live longer lives, while those who are socially isolated or lonely tend to experience more negative life outcomes.

This is good news for policymakers who might be looking for new, cost-effective and practical ways to boost happiness. Funding for initiatives or new programs centred around meal-sharing could be a realistic way to help strengthen social ties and well-being.

As a bonus, the research also found that sharing meals was linked to higher enjoyment of the food consumed or prepared. Put simply, eating your food with other people probably makes your food taste better.

While the findings certainly have implications for high-up decision-makers, it’s also something which individuals can think about in their everyday lives. If sharing meals is linked to higher life satisfaction and happiness, it could be worth finding ways to increase the number of meals you share with those around you.

So when your parents drag you to the table for dinner, or when you’re deciding whether to go eat your lunch alone or with colleagues, there’s a good argument for why you should step away from your room or desk and break bread together. It could just make you happier.

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There's a good case for cutting interest rates ASAP

What a difference a number makes. For weeks, the money market’s macho men had been telling us interest rates needed to rise yet further to ensure inflation would keep falling. But last week, their case went up in smoke and now almost no one thinks the Reserve Bank board will do anything at its two-day meeting starting today.

The weeks of idle speculation came to an end when finally we saw the consumer price index for the June quarter. It showed underlying inflation falling to 3.9 per cent.

So, sighs of relief all round. But why had we allowed these misguided souls to cause us so much angst? Why had their intimations of death and destruction been given so much air time?

Short answer: because we find bad news more interesting than good news. But as last week’s abrupt turnaround reminds us, the bad news ain’t necessarily so. So maybe we should give a hearing to those urging the Reserve to do something nice rather than nasty.

Let me tell you about a briefing note from the economists at the Australian Council of Social Service, who remind the Reserve that its much-remarked “narrow path” to lower inflation without triggering a recession and high unemployment is narrow “because it’s rare for interest rate hikes of this scale and intensity not to trigger a serious economic downturn”.

The peak welfare organisation says the process of reducing demand and lowering inflation is already well under way and, since increases in official interest rates take up to two years to flow through to inflation and unemployment, it has called for the Reserve to start reducing interest rates immediately.

Those who focus on the slowdown in the fall of the inflation rate and conclude there’s a need for further tightening have failed to see how sharply job opportunities and living standards have fallen, even without a recession.

The council examines the data for the two years since the Reserve began increasing interest rates, from June 2022 to June 2024, and it finds a lot more evidence of downturn and pain than you may realise.

For a start, the number of vacancies for entry-level jobs has declined by almost a third. There are an additional 100,000 people unemployed, and almost as many extra people suffering underemployment (unable to find as many hours of work as they want).

If you know employment is still growing, get this: this has occurred only because of stronger growth in publicly funded jobs (particularly under the National Disability Insurance Scheme). The annual number of publicly funded jobs has grown from 210,000 to 326,000, whereas jobs growth in the market sector has collapsed from 321,000 a year to 6000 a year.

If interest rates stay high, jobs in the market sector are likely to decline, but the present growth in publicly funded jobs won’t last.

We have avoided a recession – an economy that’s getting smaller – so far only because of the surprisingly strong bounce-back in immigration since the reopening of our borders. This won’t continue.

But the real value of goods and services produced per person has been falling, meaning that living standards have been falling. Over the two years, average real income per person has fallen by 8 per cent, or about $5000 a year.

According to the council’s calculations, the stage 3 tax cuts, the energy rebate and increased rent allowance for people on pensions or benefits announced in the May budget will restore only about a fifth of this loss of real income to households.

So the macho men’s fear that the budget measures will add to inflation pressure is laughable. And the council doesn’t miss the opportunity to remind us that JobSeeker unemployment benefits remain a miserly $55 a day.

As for the macho men’s fear that a “price-wage spiral” could take off at any moment, the council says average wages have fallen by 2 per cent since June 2022, after adjusting for inflation.

Wages have started rising a fraction faster than inflation, but it will take many moons to make up that gap. Meanwhile, the collapse in consumer spending has been “precipitous”: a fall of 10 per cent in real spending per person since June 2022.

If the Reserve’s renewed commitment to maintaining full employment is to have any meaning, it will need to start cutting the official interest rate ASAP.

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Consumerism and social status keep our noses to the grindstone

What better time to think about whether we’re working too hard than while we’re enjoying a Monday off, thanks to a public holiday? Wouldn’t it be nice if every weekend could be a long weekend?

Actually, almost 100 years ago, the greatest economist of the 20th century, John Maynard Keynes, pretty much predicted that’s the way we’d be living by now.

In his essay Economic Possibilities for our Grandchildren, written in 1930, he envisaged that by now, we’d be able to live comfortably while having to work only 15 hours a week. We could work just three hours each weekday, or clock up our 15 hours in just a few days – say, three five-hour days.

Really? What a duffer. How could anyone so smart be so disastrously wrong?

Well, not quite. What Keynes was saying was that, technological advance – the invention of ever-better labour-saving machines – would increase the productivity of our labour to such an extent that, by now, we wouldn’t need to work very hard to be able to live comfortably.

His point was that, as we’re able to produce more goods and services per hour of work, we become better off. We can take that benefit either as enjoying an unchanged material standard of living while working fewer hours a week, or as higher monetary income – thus allowing us to buy more stuff – while working the same number of hours.

As Jan Behringer and other economists from Germany’s University of Duisburg-Essen have written, in the years since Keynes made that prediction the productivity of labour in the developed economies has improved by more than he expected.

So, we could have been working a 15-hour week had we chosen to but, in fact, we chose to take the money and the extra stuff rather than the extra leisure. Working hours have fallen since the 1930s, but not by all that much.

Behringer and colleagues say the “obstacles to more leisure time are primarily sociopolitical in nature” – by which they mean it’s not purely economic reasons, the shortage of resources, that require us to work more.

I’ve no doubt it has suited the rich and powerful to have us working and spending rather than devoting four days a week to developing our hobbies. That way, the rich and powerful get more so.

But, by the same token, I think the rest of us have been easily seduced by the lure of the materialist, consumer culture. We love buying things that are new, shinier and do better tricks.

In Australia – and in Europe, but less so in America – pretty much all the reductions in working hours, the increases in annual leave and sick leave, and the introduction of that strange animal, long service leave, have happened because union-backed governments have imposed them on unwilling employers.

And every time they have, the employers and their political parties have predicted the death and destruction of the economy.

But, even so, how long since you’ve seen a union telling its bosses they should go easy on the pay rise, but cut working hours? No, I have no doubt that the workers have preferred more bangles and baubles.

Behringer and colleagues, however, have a different take. Their study of developments in the US and Europe over the decades leads them to two conclusions.

First, since the 1980s, average working hours have fallen more slowly as inequality – the gap between high and low incomes – has increased.

Second, in countries with high inequality, employees earning higher hourly wage rates tend to work longer hours than those on lower hourly wage rates.

Both these findings are striking because they contradict economists’ earlier finding that people with higher incomes chose to increase their leisure time.

So, what’s going on? The authors’ explanation is that rising inequality of incomes leads to more “upward status comparisons”. Like most social animals, we are conscious of our social status – where we fit in the pecking order.

And, particularly where there’s a big difference between the top and the bottom, we seek to improve our position.

“The upper middle class emulates the consumption norms of the rich, and sacrifices leisure time to do so. Because the rich also increase their spending on status goods such as housing, education, etc as their incomes rise, the middle class feels pressure to keep up,” they say.

“After all, what constitutes ‘a good place to live’ or ‘a good education’ is essentially defined in comparison to the standards that the upper income groups largely determine.”

Another of their findings is that working hours are more likely to be shorter when wage bargaining is centralised and government social benefits in kind (but not in cash) are more adequate.

One possible explanation, they say, is that centralised wage bargaining reduces status conflict because workers can decide collectively to avoid a “positional arms race” to allow shorter working hours and more leisure.

They find that social benefits in kind rather than cash are associated with lower hours of work. This may be because the direct provision of goods and services by governments reduces the need for status-oriented private spending on goods and services.

Education has many dimensions. It broadens the mind, it helps you get a better-paying job, and it’s a “positional good” – it helps people judge your social status.

"The extent to which the education sector is organised through private markets is found to be associated with longer working hours among workers who themselves have high levels of education,” the authors say.

Get it? If governments provided better healthcare and public schools, more people would be content to use the publicly provided services along with everyone else, and fewer people would feel the need to work longer to afford private hospitals and schools.

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Yes, money does buy happiness* *terms and conditions apply

 Years ago, when our kids were young, we used to stay at a guesthouse in the mountains in the same week of January every year, as did various other families. When we met up with people we knew quite well, but hadn’t seen for 12 months, the greeting was always the same: D’ya have a good year?

So, has 2022 been a good year for you? Something similar is asked by the Australian Unity Wellbeing Index. Each year since 2001, researchers from Deakin University ask 2000 people how they’re doing. Are they satisfied with their standard of living, their relationships, purpose in life, community connectedness, safety, health and future security?

The index combines the answers to those questions into a single rating of our “subjective wellbeing”, somewhere between zero and 100. It’s too soon to have results for this year, of course, but the researchers do have them for the first two years of the pandemic – “the worst economic crisis in a generation, and the worst health crisis in a century”.

Guess what? The index actually rose from a low of 74.4 in 2019 to a high of 76.4 in 2020, before falling back a bit to 75.7 in 2021.

But don’t take those tiny changes literally. Allow for sampling error and the best conclusion is: no change. Indeed, in the survey’s 20 years, there’s been only minor variance around an average of about 75.4.

So I can tell you now that our wellbeing in 2022 will have been much the same as it always is, just as almost everyone at the guesthouse gave the same answer every year: “Not bad, not bad”.

The index’s stability from year to year – which is true of similar indexes in other rich countries – confirms a point its founder, Professor Bob Cummins, has been trying to convince me of since I first took an interest in the study of happiness.

Measures of satisfaction with life reflect both biological factors and situational factors. At the biological level, it seems humans have evolved to maintain a relatively optimistic and happy mood. This is controlled by “homeostatic” mechanisms similar to the one that keeps our body temperature stable – unless some situation (such as getting COVID) causes it to go off range.

The researchers say the situational factors most likely to adversely affect a person’s wellbeing equilibrium are insufficient levels of three key resources: money, connection with others, and sense of purpose.

A nationwide average bundles together those people whose wellbeing is reduced by such deficits with a greater number of people who are doing well.

So nothing in this finding denies that many people did it tough during the pandemic, whether monetarily or in their physical or mental health. It’s just that more of us stayed happy enough.

Remember, too, that the media almost always tells us about people with problems, not those doing OK. Similarly, medicos rightly focus on the unwell, not the well. But if you’re not careful, you can get an exaggerated impression of the world’s problems.

And when you look further than the average, you do see the pandemic making its presence felt. The index always shows people living alone, those in share houses and single parents having the least satisfaction with their lot.

But get this: those living alone and single parents enjoyed a big increase in perceived wellbeing. Why? Keep reading.

When the survey divides people according to their work status – unemployed, home duties, study, employed or retired – it always finds the unemployed far less satisfied than everyone else.

In the first year of the pandemic, however, the satisfaction of the unemployed leapt by 9 percentage points. Why? Maybe because the composition of the unemployed had changed a lot. Or maybe because, with many more people becoming unemployed, the stigma of being without a job was reduced.

But a much more obvious explanation is that, early in the pandemic, the rate of the JobSeeker unemployment benefit was temporarily doubled. Suddenly, it went from being below the poverty line to well above it. And wellbeing went up.

Trouble is, when the payment was cut back heavily in the second year, the satisfaction of the unemployed fell below what it was in the first place.

This supports a finding of “behavioural” economics: people suffer from “loss aversion” – we feel losses more deeply than we enjoy gains of the same size.

And it’s borne out by the survey’s finding that the satisfaction of all those people whose household income had fallen was more than 3 percentage points lower than that of those whose income was unchanged.

But. The satisfaction of those people whose income had risen was no higher than that of those whose income didn’t change.

The survey shows that people on the lowest incomes were much less satisfied than those on the next rung up. But it also confirms economists’ belief in “diminishing marginal returns”. The higher incomes rise, the smaller the increase in people’s satisfaction with their lives.

So, unless you’re really poor, don’t kid yourself that more money will make you a lot happier.

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One small step for the wellbeing budget, giant leap yet to come

Hey, wasn’t this budget supposed to be Australia’s first “wellbeing” budget? Whatever happened to that? Well, it happened – sort of – but it turned out to be ... underwhelming. Didn’t arouse much interest from the media.

It met the expectations of neither the sceptics nor the true believers. Treasurer Jim Chalmers began talking it up long before he got the job. The treasurer at the time, Josh Frydenberg, thought it was a great joke.

He pictured Chalmers “fresh from his ashram deep in the Himalayas, barefoot, robes flowing, incense burning, beads in one hand, wellbeing budget in the other”.

No robes on budget night. But nor did we see Chalmers make a ringing denunciation of the great god GDP.

No quoting of Bobby Kennedy’s famous words that such measures count “air pollution and cigarette advertising, and ambulances to clear our highways of carnage ... special locks for our doors and the jails for the people who break them [and] the destruction of the redwood and the loss of our natural wonder in chaotic sprawl”.

In short, Kennedy said, “It measures everything except that which makes life worthwhile.”

No, none of that. Nor any condemnation of economic growth or attack on the materialism of our age.

What we got was what Chalmers promised on the day he became treasurer: “It is really important that we measure what matters in our economy in addition to all of the traditional measures. Not instead of, but in addition to. I do want to have better ways to measure progress, and to measure the intergenerational consequences of our policies.”

What we got on budget night was a start to just that. Not a wellbeing budget, but a normal budget with a chapter headed Measuring What Matters.

It kicked off with some stirring rhetoric about how traditional macroeconomic indicators don’t provide a “complete or holistic view of the community’s wellbeing. A broader range of social and environmental factors need to be considered to broaden the conversation about quality of life.”

Then followed a lot of earnest discussion of “frameworks” and other high-level stuff that’s deeply meaningful to bureaucrats, but not the rest of us. It’s not a long chapter, but I had trouble keeping awake – though I may just have been tired at the time.

But don’t get me wrong. Though none of this stuff gets the blood racing, Chalmers is on the right track. It’s just that he’s got a lot further to go before we see anything likely to make much difference.

Let’s start with GDP – gross domestic product. Everything Kennedy said about it is true. Those who say it’s a bad measure of progress or prosperity or wellbeing are right.

But, as every economist will tell you, it was never intended to be. It’s a measure of the value of all the goods and services produced and consumed in Australia over a period, which means it’s also a measure of the total income Australians earn from producing those goods and services.

It counts the cost of the ambulances and tow trucks that attend road accidents, not because accidents are a good thing, but because all the workers involved earn their income by turning up and helping.

If you’d like everyone who wants a job to be able to get one – meaning unemployment is kept low – the managers of the economy need to know what’s happening to GDP to help them achieve that goal.

GDP doesn’t count “the health of our children or the joy of their play” because, apart from the doctors and nurses, the income we earn from that is “psychic”, not something you can bank or spend.

What economists are more reluctant to admit is that their obsession with the ups and downs of GDP – with the purely material aspect of our lives; with getting and spending – has led them to revere GDP as though it measured our wellbeing.

The rest of us have caught the bug from them. This suits the rich and powerful, whose main objective is to get richer and more powerful. They are focused on the purely material, and it makes it easier for them if the rest of us are too.

It doesn’t suit them to have us asking awkward questions about what economic activity is doing to the natural environment – or the climate – why it’s better for so many jobs to be insecure and badly paid, and whether the pace of economic life is extracting an (unmeasured) price from us in stress, anxiety and depression.

So, Chalmers is right. There’s much more to life – to our wellbeing - than just working and spending. If that’s all governments are doing for us, they’re not doing nearly enough.

We put much effort into measuring and thinking about GDP, but need to put a lot more effort into measuring all the other things that affect our lives and how much joy we’re getting.

Business people say that what gets measured gets managed. True – provided politicians take account of those numbers in the decisions they make. Chalmers’ wellbeing budget is still a long way off.

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The housing dream that became a nightmare - and isn't over yet

If you think the rich are getting richer, you’re right – but maybe not for the reason you think. It’s mainly the rising price of housing, which is steadily reshaping our society, and not for the better.

We know how unaffordable home ownership has become, but that’s just the bit you can see, as the Grattan Institute’s Brendan Coates outlined in the annual Henry George lecture this week, “The Great Australian Nightmare”, a magisterial survey of housing and its many implications.

But first, let’s be clear what we mean by “the rich”. Is it those who have the most annual income, or those who have the most wealth – assets less debts and other liabilities? The two are related, but not the same. It’s possible to be “asset rich, but income poor” – particularly if you’re living in your main asset, as many oldies are.

The Productivity Commission argues that the distribution of income hasn’t got much more unequal in the past couple of decades, though Bureau of Statistics’ figures for the growth in household disposable income over the 16 years to 2019-20 seem pretty unequal to me.

They show the real income of the bottom quintile (20 per cent block) grew by 26 per cent, which wasn’t much less than for the middle three quintiles, but a lot less than the 47 per cent growth for the top quintile.

Two points. One, the top one percentile – the chief executive class – probably had increases far greater than 47 per cent, which pushed up the average increase for the next 19 percentiles.

It’s CEO pay rises that get publicised and leave many people convinced the rich are getting richer – which they are.

The other point is Coates’: if you take real household disposable income after allowing for housing costs, you see a much clearer gradient running from the lowest quintile to the highest.

The increase in the bottom quintile’s income drops from 26 per cent to 12 per cent, whereas the top quintile’s growth drops only from 47 per cent to 43 per cent.

Get it? The rising cost of housing – whether mortgage payments or payments of rent – takes a much bigger bite out of low incomes than high incomes.

“People on low incomes – increasingly, renters – are spending more of their income on housing,” Coates says.

But it’s when you turn from income to wealth that you really see the rich getting richer. Whereas the net wealth of the poorest quintile of households rose by less than 10 per cent, the richest quintile rose by almost 60 per cent.

And here’s the kicker: almost all of that huge increase came from rising property values.

Other figures show that, before the pandemic, the total wealth of all Australian households was $14.9 trillion. Within that, the value of housing accounted for nearly $10 trillion.

Over the past 50 years, average full-time wages have doubled in real terms. But house prices have quadrupled – with most of that growth over the past 25 years.

Be clear on this: research confirms that the huge increases in home prices relative to incomes in advanced economies in the post-World War II period has mainly been driven by rising land values, accounting for about 80 per cent of growth since the 1950s, on average, with construction and replacement costs increasing only at the rate of inflation.

Coates reminds us that, within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home. These days, plenty of people even on middle incomes can’t manage it.

It’s obvious that the better-off can afford bigger and better homes than the rest of us. Many probably also have an investment property or three.

But it’s worse than that. Coates says the growing divide between those who make it to home ownership and those who don’t risks becoming entrenched as wealth is passed on to the next generation.

An increasing share of our wealth is in the hands of the Baby Boomers and older generations. The swelling of our national household wealth to $14.9 trillion – largely concentrated among older groups – means there's an awfully big pot of wealth to be passed on, he says.

“Big inheritances boost the jackpot from the birth lottery. Richer parents tend to have richer children. Among those who received an inheritance over the past decade, the wealthiest 20 per cent received, on average, three times as much as the poorest 20 per cent.”

In fact, one recent study estimates that 10 per cent of all inheritances will account for as much as half the value of bequests from today’s retirees, he says.

“And inheritances are increasingly coming later in life. As the miracles of modern medicine have extended life expectancy, the age at which children inherit has increased.

“The most common age to receive an inheritance is late-50s or early-60s – much later than the money is needed to ease the mid-life squeeze of housing and children.”

Coates says large intergenerational wealth transfers can change the shape of society. They mean that a person’s economic position can relate more to who their parents are than their own talent or hard work.

Coates argues that the ever-growing unaffordability of housing caused by present policies – which politicians on both sides keep promising to fix, but never do – is not just making our society increasingly divided between rich and poor, it’s also making the economy less efficient.

In modern, service-based and information-dependent economies, “economies of agglomeration” – benefits from firms and people living and working close together – mean productivity, innovation and wages are greatest in big cities.

But if we don’t pack in enough housing, and so cause house prices to go sky high, we don’t get all the benefits. Long commutes make it harder for both parents to work. The economy becomes less “dynamic”, and productivity is slow to improve. Not smart.

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We've got more than we've ever had, but are we better off?

It probably won’t surprise you that the Productivity Commission is always writing reports about … productivity. Its latest is a glittering advertisement for the manifold benefits of capitalism which, we’re told, holds The Key to Prosperity.

Which is? Glad you asked. Among all the ways to co-ordinate a nation’s economic activity, capitalism – which the commission prefers to call the “market” economy – is by far the best at raising our material standard of living by continuously improving our … productivity.

Productivity is capitalist magic. It means producing more outputs of goods and services with the same or fewer inputs of raw materials, labour and physical capital. This involves not working harder or longer, but working smarter – using new ideas to reduce the cost of the goods and services we produce, to improve their quality and even to invent new goods and services.

Find that hard to believe? Keep watching the ad.

We’re told that sustained productivity improvement has happened only over about the past 200 years, since the Industrial Revolution. Then, 90 per cent of the world’s population lived in extreme poverty, compared with less than 10 per cent today.

Technological developments and inventions – including vaccines, antibiotics and statins – have driven huge increases in the length of our lives and years of good health.

In Australia, output of goods and services per person – a simple measure of prosperity – is about seven times higher than it was 120 years ago at Federation. This means people today have access to an array of goods and services that were unimaginable in the past.

For every 10,000 newborn babies in 1901, more than 1000 died before their first birthday; today it’s just three. For those who survived childbirth, life expectancy was about 60 years, compared with more than 80 today.

During their 60 years, the average Australian worked much longer hours than today, with little paid leave. The 48-hour week wasn’t introduced until 1916 and paid annual leave didn’t become the norm until 1935. Workplaces were far more dangerous.

Most people died before becoming eligible for the age pension (introduced in 1909) and the average wage bought far fewer goods and services, with a steak costing 5 per cent of the weekly wage.

Homes were more crowded – about five people per home, which were much smaller. We had outside toilets until the 1950s and washing machines and dishwashers didn’t become common until at least the 1970s.

By making goods and services cheaper and better, productivity improvement has increased the typical worker’s purchasing power. That is, it has reduced the number of hours of work required to achieve any particular level of material living standards.

For instance, the cost of a double bed, mattress, blanket and pillows has fallen from 185 hours of work in 1901 to 18 hours today. The cost of a loaf of bread has fallen from 18 minutes to four minutes.

More recently, the cost of a new car has fallen from 17 months in 1990 to five. The cost of a smartphone has fallen from 60 hours in 2010 to 16.

End of advertisement.

When you think about it, this is amazing. Objectively, there’s no doubt we’re hugely more prosperous than our forebears. Our lives are longer and healthier, with less pain, less physical exertion, less work per week, bigger and better homes, more education, more comfort, more convenience, more entertainment, more holidays and travel, more ready contact with family and friends, and greater access to the rest of the world.

We’re not just better off than our great-grandparents, we’re clearly better off than we were 20 years ago. Oldies like me can’t begin to tell our offspring how much clunkier the world was before computers and the internet.

And yet … the trouble with the higher material living standard we strive for – and economists devote their careers to helping us achieve – is that we so quickly take it for granted. It’s always the next step on the prosperity ladder that will finally make us happy.

We’re undoubtedly better off in 100 ways, but do we feel much better about it?

I suspect our lives are like a Top 40 chart – when one tune falls back, another always takes its place. There’s always one tune that sold most copies this week – even if this week’s winner sold far fewer than last week’s.

Whether they’re life-threatening or just annoying, there’s always a set of worries that mar our sense of wellbeing. Makes you wonder whether there might be more to life than prosperity. Human relationships, for instance.

Then there’s the possibility – beyond the purview of most economists – that prosperity comes at a price. Maybe the world we’ve created in our pursuit of prosperity comes at the price of more stress, anxiety, depression and loneliness.

And maybe the natural world is about to present us with a belated bill for all our prosperity: more droughts, bushfires, cyclones, flooding and higher sea levels. All of it in a despoiled environment.

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You'd be surprised what's propping up our living standard

It’s the last lazy long weekend before the year really gets started, making it a good time to ponder a question that’s trickier than it seems: where has our wealth come from?

The question comes from a reader.

“Australia has been without a recession for 25 or more years, the economy seems booming to me, just by looking around: employment, housing prices, explosive building in major capitals, etc. Where is the wealth coming from? Mining? Other exports? Because the resources have to come from somewhere,” he writes.

That’s the first thing he’s got right: it’s not money that matters (the central bank can create as much of that stuff as it sees fit) it’s what money is used to buy: access to “real resources” – which economists summarise as land (including minerals and other raw materials), labour and (physical) capital.

But here’s the first surprise: of those three, when you trace it right back, probably the most important resource is labour – all the work we do.

The first complication, however, is the word “wealth”, which can mean different things. It’s best used to refer to the value of the community’s assets: its housing, other land and works of art, the equipment, structures and intellectual property owned by businesses (part of which is represented by capitalised value of shares on the stock exchange), plus publicly owned infrastructure (railways, roads, bridges and so forth) and structures.

To get net wealth you subtract any debts or other liabilities acquired in the process of amassing the wealth. In the case of a national economy, the debts we owe each other cancel out, leaving what we owe to foreigners. (According to our national balance sheet, as calculated by the Australian Bureau of Statistics, at June last year our assets totalled $15.4 trillion, less net liabilities to the rest of the world of $3.5 trillion.)

But often the word wealth is used to refer to our annual income, the total value of goods and services produced in the market during a year, as measured by gross domestic product (which in the year to June was $1.8 trillion).

The people in an economy generate income by applying their labour to land and physical capital, to produce myriad goods and services. Most of these they sell to each other, but some of which they sell to foreigners. Why? So they can buy other countries’ exports of goods and services.

Only about 20 per cent of our income comes from selling stuff to foreigners and only 20 per cent or so of the stuff we buy comes from foreigners. This exchange leaves us better off when we sell the stuff we’re better at producing than they are, and buy the stuff they’re better at than we are.

Much of what we sell to foreigners is minerals and energy we pull from the ground and food and fibres we grow in the ground. So it’s true that a fair bit of our wealth is explained by what economists call our “natural endowment”, though it’s also true that we’re much more skilled at doing the mining and farming than most other countries are.

Speaking of skills, the more skilled our workers are – the better educated and trained – the greater our income and wealth. Economists call this “human capital” – and it’s worth big bucks to us.

How do the people in an economy add a bit more to their wealth each year? Mainly by saving some of their income rather than consuming it all. We save not just through bank accounts, but by slowly paying off our mortgages and putting 9.5 per cent of our wages into superannuation.

It’s the role of the financial sector to lend our savings to people wanting to invest in the assets we count as wealth: homes, business structures and equipment and public infrastructure. So if most of our annual income comes from wages, most of our savings come from wage income and our savings finance much of the investment in additional assets.

But because our natural endowment and human capital give us more investment opportunities that can be financed from our savings, we long have called on the savings of foreigners to allow us to invest more in new productive assets each year than we could without their participation.

Some of the foreigners’ savings come as “equity investment” – their ownership of Australian businesses and a bit of our real estate – but much of it is just borrowed. These days, however, our companies’ (and super funds’) ownership of businesses or shares in businesses in other countries is worth roughly as much as foreigners’ equity investments in Oz, meaning all our net liability to the rest of the world is debt.

Naturally, the foreigners have to be rewarded for the savings they’ve sunk into our economy. We pay them about $60 billion a year in interest and dividends, on top of the interest and dividends they pay us.

The main thing we get in return for this foreign investment in our economy is more jobs (and thus wage income) than we’d otherwise have, plus the taxes the foreigners pay.

People worry we can’t go on forever getting wealthy by digging up our minerals and flogging them off to foreigners. It’s true we may one day run out of stuff to sell, but our reserves – proved and yet to be proved – are so huge that day is maybe a century away (and the world will have stopped buying our coal long before we run out).

A bigger worry is the damage we’re doing to our natural environment in the meantime, which should be counted as reducing our wealth, but isn’t.

But mining activity accounts for a smaller part of our high standard of living than most people imagine – only about 8 per cent of our annual income.

Most of our prosperity – our wealth, if you like – derives from the skill, enterprise and technology-enhanced hard work of our people.

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Economics and wellbeing: beyond GDP

Economic Society, Sydney, Tuesday, December 11, 2012

We had been hoping to have a speaker willing to argue that GDP was good enough to guide our policy decisions without need for modification or supplementation, but he’s unable to attend - which is a pity because I would have been interested to hear his arguments. In the absence of someone in the audience willing to argue that position, I think there’s a lot we can agree on. Where we’re likely to differ is in our degree of enthusiasm for the beyond-GDP project and how exactly we should go about developing a supplementary measure or range of measures.

Starting with the ‘agreed facts’, as the lawyers say, I doubt there are many if any economists who need to be lectured by greenies or lefties on the various reasons why GDP is an inappropriate measure of wellbeing or social progress. We all know about defensive expenditures and so forth. Further, we all know GDP was never intended or designed to be such a measure.

And I think all of us here tonight can agree that GDP is a reasonable measure of what it was designed to measure - production and income - and that the continued calculation of GDP is vitally important as an aid to the management of the macro economy. So no one here wants to abolish GDP.

It’s worth noting, however, that the 2009 report of President Sarkozy’s Commission on Economic Performance and Social Progress - the Stiglitz, Sen, Fitoussi report - did offer some significant criticisms of GDP just from a quite conventional, narrow, material wellbeing perspective. It noted that GDP had given Americans in particular an exaggerated impression of how well they were doing in the years leading up to the GFC, with company profits overstated because they were based on asset values inflated by a bubble and with a lot of the growth built on consumers and governments spending money they’d borrowed rather than earnt. It argued that in measuring material wellbeing, the focus should be shifted from production (GDP) to real household income and consumption, since household income can grow at a different rate to GDP. It further argued that income and consumption should be judged in conjunction with households’ net wealth, and that focusing on median income rather than average income is a better, easy way to take at least some account of the distribution of income.

A lot of the report’s criticisms can be met merely by switching from GDP to another aggregate published each quarter in the national accounts (but given almost no attention): real net national disposable income - ‘rinndi’. This measure switches from production to disposable income, takes account of the depreciation of manmade capital, the effect of movements in our terms of trade and the truth that, particularly for an economy with a huge net income deficit like ours, national product is a more appropriate measure than domestic product.

As you may know, I’ve been banging on about the limitations of GDP, and the need for it to be supplemented by a better, broader measure of wellbeing for some time. I was greatly reinforced in this view by the report of such luminaries as Stiglitz and Sen. For more than a year now, Fairfax Media has commissioned Nicholas Gruen to prepare such a broader measure, the Herald-Age Lateral Economics wellbeing index, for publication a few days after the quarterly national accounts.

The HALE index starts by turning GDP into real net national disposable income - rinndi - but then it adds adjustments for as many wider aspects of wellbeing as Nicholas could find decent measures of: the value of the net depletion of natural resources (after allowing for new discoveries), the estimated cost of future climate change, the gain in human capital from all levels of education and training, changes in income inequality, the gain or loss from various measures of the nation’s health and the state of employment-related satisfaction.

If you’re interested in getting your teeth into what a beyond-GDP measure of wellbeing might look like, we’re happy to explain and defend the HALE index. I asked Nicholas to come up from Melbourne tonight for that purpose. We don’t make any claim the index is a complete measure of every dimension of wellbeing, we don’t claim there’s nothing about its methodology that’s open to debate, but we do claim it’s an honest attempt to measure broader wellbeing - welfare, if you like - not some lefty attempt to think of as many negatives as possible to subtract from GDP.

The most obviously debatable part of the methodology is the decision to produce a single, modified-GDP figure for wellbeing. We know Stiglitz and Sen opted for the ‘dashboard’ approach - produce a range of relevant indicators of the various dimensions of wellbeing - rather than a single magic number. And we know the Bureau of Statistics, with all the effort it has put into its MAP project - Measures of Australia’s Progress - is also very much in the dashboard, they-can’t-be-added-up camp. So what are the reasons to prefer a single measure and, once you’ve decided to go down that track, how on earth do you add them together?

These are questions Nicholas, as the designer of the index, is far better qualified to respond to than I am. But I do want to say something from a more psychological, behavioural economics, political economy perspective. Why is it so many people have fallen into the habit of treating GDP as though it was a measure of social progress, even though it isn’t? The first part of my explanation is that economists, by their behaviour rather than their conceptual understanding, have led the uninitiated - politicians, business people, the media - into assuming GDP is the only indicator that matters because they get so excited about it so often, and don’t get so excited about anything else.

They say that what gets measured gets managed, and what doesn’t get measured doesn’t get managed, so if you accept there’s more to our wellbeing that just GDP (or even rinndi) that’s the first reason for wanting to publish something to sit beside GDP. In terms of human psychology, part of the reason for the great attention GDP gets is that new figures are published so frequently and that they’re always changing to an interesting extent.

Finally, we know from the findings of neuroscience that, contrary to our assumption of rationality, humans have surprisingly limited mental processing power and can’t weight up more than one or two dimensions of a problem at the same time, which - among many other implications - means humans are irresistibly attracted to bottom lines - to ‘net net’, as they say in the markets. People want a bottom line, will probably pick one by default, and GDP looks likes it is one. Dashboards may be more methodologically pure, but in a world of human frailty and limited attention, they just don’t cut it.

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WHAT MAKES A GOOD LIFE?

January, 2012

Mainstream economics is about enabling people to lead a prosperous life; it’s about telling the community how to be more efficient in its use of scarce resources, with the objective of raising our material standard of living. But is a prosperous life a good life? Not necessarily. So what’s the relationship between prosperity and a good life? Or, to put the question in its classic form, does money buy happiness? The answer from the rapidly growing body of research into happiness, by a lot of psychologists and a few economists, is: yes it does - but only up to a point. I guess it must be possible to be poor but happy, but surveys suggest most people living below some minimum level of income aren’t particularly happy. Poverty doesn’t have a lot to recommend it.

But once people in affluent countries such as Australia reach an adequate but reasonably frugal standard of living, the surveys show that the ability of an extra $1000 of annual income to make people happier falls away surprisingly rapidly. For those of us who aren’t poor, acquiring extra money yields progressively less and less value for money.

Why does more money do so little to make us happier? Psychologists offer two main explanations. First, because humans adapt so readily to their changed circumstances. A new car, a new house, a new dress or a promotion does make us happier - as we expected it would - but usually within a few weeks the new thing becomes part of the status quo, leaving us little happier than we were. Second, it seems clear that what makes us happier is not having more money so much as having more money than other people, particularly those people you usually compare yourself with. It’s not absolute increases in our income that matter to us but relative increases. And relative increases are harder to come by, as well as leaving those whose incomes we overtake feeling less happy.

But if acquiring more money is such an ineffective way to improve our happiness, why do so many of us keep pursuing money? Partly because research shows we’re quite bad a predicting the extent to which events we hope for - or events we dread - will make us feel good or bad. We’re like a donkey chasing a carrot - we don’t have much in the way of a learning curve. Some scientists suggest our evolution as a species has programmed us to believe a little more money will finally make us happy because there must have been some point in our evolution where working hard contributed to our survival as a species. Whether or not that’s true, many of us do seem to have an inbuilt tendency to pursue money at the expense of things that actually contribute a lot more to our happiness - our relationships being the prime example - so there is a need for many of us to put more conscious effort into controlling our materialist urges.

We’re supposed to be talking about the good life, but I’ve switched to talking about happiness. Is pursuing happiness - or even achieving happiness - the same as living a good life? That depends on what you take happiness to mean. I usually talk about happiness because, as a journalist, I know it’s an attention-getting word, but it’s quite an ambiguous word. I suspect that much of the debate about whether the modern preoccupation with happiness is a good or bad thing arises from people attaching different meanings to the word.

If by happiness you mean hedonism - the pursuit of pleasure and the avoidance of pain - then, no, happiness is not synonymous with a good life. What I mean by happiness is not the pursuit of pleasure, nor even contentment (except in the sense that we’re content with our present level of material affluence). A word that comes closer to it is fulfilment - living a life we can look back on with a degree of satisfaction, and without too many regrets. To some people’s minds happiness is associated with smugness - I’m alright, Jack. But, to me the highest level of happiness - which I’m happy to label the good life - is a life with a lot of concern for others, starting with our nearest and dearest but going further to the less fortunate. Happiness isn’t a euphemism for selfishness, and preoccupation ourselves and our own needs is a bad way to achieve happiness.

Unless you’re old or bedridden, the good life is active rather than passive. There is plenty of room for ambition and striving in the good life - depending on your motive for all the ambition and striving. A good life will have its share of setbacks and sadness and even anger - not to mention its share of hard work.

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