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Trans-national Governance of Global Catastrophic Risks

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This post is a summary of an excellent paper (publication upcoming) on the management of global and catastrophic risks, and subsequent thoughts it inspired.


The paper argues that the traditional approach of risk management, with its tendency to focus on risk assessment of individual hazard phenomena – be that natural hazards, acts of malevolence or health hazards – comes short of addressing the decision-making process in the context of risk governance on issues related to sustainable development and management of societal resources from a holistic and long-term perspective.

To account for a perceived disconnect between societal preferences and available knowledge, the paper suggests that risk-informed societal decision-making should be based on a normative procedure whereby risks are quantified and qualified in the sense of loss of expected utility, taking into account cognitive biases associated with the perception of what constitutes risk. This, the author proposes, should be done in two steps: (i) identifying societal preferences and the utilities associated with them and (ii) bearing in mind the uncertainties associated with a given decision problem, estimating the expected value of utility for each decision alternative. Hence, risk management is seen through the prism of “bookkeeping” potential losses by an envisaged  centralized supranational authority tasked with the governance of global catastrophic risks.

Following a discussion of a taxonomy of categories used to classify different risks, the paper identifies three types of risk that would fall under the managing authority of the above supranational institution: (i) Type I: foreseeable large scale averaging events, (ii) Type II: “seepage” events resulting in continuous losses with generally unnoticed (and unforeseeable – my addition) intensities, and (iii) Type III: unforeseeable or low probability high impact events.

Subsequently, the paper examines various challenges associated with the management of each type of risk, including suboptimal public-private cooperation in methodology and the use of tools for the treatment of risks, lack of consensus among experts on basic principles of risk assessment and best practices, insufficient or inappropriate education about risk assessment at the level of decision-making, present ad hoc decision processes regarding prioritization of resources for global life safety risk reduction, and finally insufficient inclusion of issues related to sustainability in normative decision-making processes.

To address these challenges, the paper concludes with a proposal for a framework for risk-informed decision-making, providing a structure for a system representation at a relevant scale to the decision problem, a systematic approach to information and knowledge management, a method for resource allocation for the reduction of life safety risks using the Life Quality Index (LQI), and the establishment of a global risk governance institute for the purpose of research and governance of risks of global concern.

How do events of natural hazards affect societies locally and globally? Thoughts on scale

With the Westphalian state now in long-term decline, both the relative and absolute decline in state power will continue to accelerate, taking us into an environment characterized on one hand by disorder and failed states, and on the other by the rise of (mega) cities as concentrations of economic and political power – a world order not unlike the one dominating the Middle Ages when cities, not nations, were the building blocks of social, economic and political structures. With global politics characterized by fragmented political authority, the state is simply one of many agents of governance, and not the most effective one at that. In particular, the inability of (weak) states to meet the needs of their citizens not only in times of natural disasters or conflict but also in times of relative stability, urbanization and the rise of megacities as alternatively governed spaces, redefinition of geopolitical borders along physical geographic and regional boundaries as well as resource scarcity are all factors that are likely to interact in a manner where simple local vs. global issues of governance, resource management and security and disaster management would have to be addressed on a different scale than the local-global polarity.

Looking at urbanization and the rapid growth of megacities for a model of governance that retains both local and global socio-economic and juridical elements could turn out to be not only a viable alternative but also crucial to the understanding of emergent multi-polar, non-state actor global power system comprised of city hubs, mega corporations, regional politico-economic alliances such as the Shanghai Cooperation Organisation (SCO) and the Association of Southeast Asian Nations (ASEAN) or symbolic power blocs of the BRIC type (Brazil, Russia, India, China). In a world dominated by multi-polar power structures, an organization of the UN type promoting values of multilateralism among nation states at best and being grossly inefficient under the weight of its bureaucracy at worst, lacks the capacity to deal with issues related to the global governance of risks affecting society as a whole such as climate change, trade liberalization, etc. The failure to reach consensus and implement actionable plans at the 2009 Copenhagen summit or the stalled Doha rounds are a clear indication that new and more agile bodies will inevitably come to replace it.

Where the UN lacks fitness and is showing clear signs of political fatigue, new entrepreneurial frameworks, based on urban, regional and geopolitical interests and relations, including transnational organized crime networks, are quickly filling the gap. However, while they offer the attraction of economic growth and wealth, they also potentially endanger public welfare in a number of ways from creating an even larger gap in wealth distribution to increasing the exposure and vulnerability of an ever increasing number of urban dwellers to a host of natural and man-made and health-related hazards. Thus, while the author of the paper “Critical Issues in the Management of Catastrophic Risks” correctly identifies a serious shortcoming in the focus of traditional risk assessment and risk management approaches treating risks as localized phenomena, characterized by their particular physical properties rather than by their inter-related impacts, his proposed solution for a centralized global governing body fails to account that power (economic and political) distribution as witnessed in the decline of nation states and the rise of jurisdictionally overlapping spaces (of which cities are an example) seem to be defying a linear concept of time, of which the industrial 19th century was so fond of, and taking us “back to the future” toward a Middle Age Renaissance  of urban power centers. This brave new world is unlikely to be one of a global village utopia, rather a dystopia of a network of different ones.

According to the 2010 Global Cities Index (a collaboration between Foreign Policy magazine, management consulting firm A.T.Kearney and the Chicago Council on Global Affairs), the seats of traditional political power aren’t necessarily the most global, with only four of the top 10 cities being national capitals (London, Tokyo, Paris and Seoul) and two being laws unto themselves (Hong Kong and Singapore). To define “global”, the Index uses indicators such as business activity, human capital, information exchange, cultural experience and political engagement. In an article for the September/October 2010 edition of Foreign Policy, Parag Khana puts forth the argument that in the advent of global megacities, we need to reassess whether state sovereignty or economic might is the prerequisite for being seen a relevant actor in global diplomacy. While he doesn’t discount the individual importance of either, he points out that eroding state sovereignty is offering cities a competitive advantage on the market for global influence. In this context he also sees the UN as “an even more inadequate symbol of universal membership in our global polity” and proposes that the World Economic Forum (WEF) of Davos offers a much more suitable framework to fit the present environment in that its structure and membership is better representative of society at large in the present multi-polar power distribution. In his words, “(WEF) brings together anyone who’s someone: prime ministers, governors, mayors, CEOs, heads of NGOs, labor union chiefs, prominent academics, and influential celebrities. Each of these players knows better than to rely on some ethereal “system” to provide global stability – they move around obstacles and do what works.”

The warning sounded off in  Faber’s paper on the need to adjust current approaches and practices of risk management to the 21st century reality is salient and timely. To borrow from military parlance, tactical success does not necessarily translate into strategic success. Applied to the field of risk management, this wisdom confirms Faber’s observation that the preference for assessment and management of Type I risks, whose localized treatment is analogous to tactical operations at the battlefield rather than the more strategic, long-term Type II “seepage “risks or potentially catastrophic black swans of the Type III kind, requires a re-evaluation of present governance structures for the management of global (catastrophic) risks.

A new, non-state-centered option may seem heretic but would better represent the rapidly evolving multi-polar reality, characterized by urban power hubs. Failure to recognize the decline of the state as an institution will bring equally severe consequences for military and civil actors involved in the management of security threats and natural hazard risks. The notion of the New Middle Ages or Neomedievalism, as popularized by journalist Robert D. Kaplan and scholars such as Philip Cerny and Jorg Friedrichs, is particularly salient when considering alternative governance structures for the management of global risks.

Mass urbanization is furthermore distorting another clear demarcation of the past: the societal gap in consequences of natural hazard events as they are experienced in rich and poor countries – a development ripe with consequences not only for the management of natural hazard risks but for the very philosophy on which the humanitarian aid sector is based. Mass urbanization should force development and aid institutions to reconsider their mission: are they going to help poor countries or poor people?

It is a fairly common “urban myth” that urbanization spurs economic growth, creates wealth, broadens socio-cultural opportunities and fosters a climate for innovation and creative growth. This may well be (partly) true for the artificial “knowledge cities” springing up in the Arabian desert, the Asia-Pacific financial hubs such as Hong Kong, Seoul, Shanghai, Sydney and Tokyo, or cultural capitals such as New York, London and Paris. For the millions of urban squatters pouring into the megacities, life quality is little other than a doomed existence in squalor, high exposure to health and direct and indirect consequences of natural hazard events, chronic unemployment, and threats from organized crime gangs as well as random acts of violence. It is interesting to note that alongside the mass urbanization trend, the socio-economic problems remain virtually the same. In that respect, the only visible difference is the lexical exchange between developed – developing country and city – slum dweller. The economic inequality in urban areas is manifest in myriad directions, not least what I would like to call the “vertical divide”, i.e. the penthouse executive suites at the tops of high-rise buildings vs. the slums below. So the assumption that scale and growth positively correlate would hardly be a representative opinion of those unfortunate slum dwellers in cities like Mumbai or Cairo or the townships of South Africa, where poverty, crime, precarious sanitary conditions and lack of basic passive and/or active protection measures against natural hazards of all types run rampant.

Finally, another apparent difference when looking at the highly skewed wealth distribution in knowledge city utopias vs. slums is that the former are in a position to better mobilize emergency response to disasters, which in turn helps to limit consequences (though not entirely, of course) to direct consequences, for which the wealthier part of society has relatively well-developed technological solutions both in terms of prevention and mitigation. In contrast, poverty-stricken dwellings, in developed and developing countries, are where the massive blows of direct consequences in the form of human lives and economic losses are plagued in addition with a host of indirect consequences, resulting in  relentless, chronic impoverishment. Before people in these dwellings have had time to recover from one disaster, the next one is looming at the corner. As the saying goes, when it rains, it pours. Finding a way to limit hubristic grand visions of urban planners in developing countries who seem set on winning the race of who’s going to top the indicator for population density while disregarding the susceptibility of people to disasters due to overcrowding, is the most immediate challenge to risk governance as well as finding the appropriate scale at which regulation should be executed.


Written by wholenotwhole

April 7, 2011 at 9:18 am

Indices: Life Quality Index (LQI) Part II

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Applying the LQI for the supra-national allocation of resources for health and environmental risks

Consequences to human health as a result of natural or man-made disasters encompass a range of direct and indirect impacts on mortality and morbidity. For the most part, disasters caused by natural hazards events tend to be geographically limited and managed by local, regional or national resources. Public health and health infrastructure resources in the context of health emergencies are correspondingly planned and administered through national budgets, with the exception of large scale disasters in developing countries, where the inability of national authorities to meet protection and recovery needs, are usually supplemented with humanitarian aid by international organizations and NGOs. Current research on global health and life safety management acknowledges a gap in systematic rationale for the allocation and prioritization of societal resources for health services and infrastructure for risks impacting societies not merely at nation scale but for risks whose borders defy national borders and affect society regionally and globally.

To fill this gap, a recent paper by Faber and Virguez-Rodriguez, proposes the application of the Life Quality Index (LQI) as a possible decision support tool in the allocation of resources for mitigation and relief allocation affecting health and life safety at a supra-national level. Following an outline of the theoretical basis of the LQI as a societal risk acceptance indicator based on revealed preferences and marginal life saving costs, they assess the demographic statistics required for the formulation of the LQI from the perspective of a global Earth population. Using data collected by the World Health Organization (WHO) for the compilation of cohort life tables for its 193 member countries for the years 1990, 2000 and 2008, first the mortality rates are weighed in accordance with the size of the population in each nation relative to the population of the Earth. Then, data pairs for GDP and life expectancy at birth from different countries between 1960 and 2008 are compared with regard to their coherence with the LQI by using least squares regression. The correlation coefficients from these regressions indicate that 71 countries, or 70% of the global population, comply with the LQI. Based on this finding, the authors argue that the LQI could be considered as a viable decision support tool for supra-national allocation of economic resources in the context of health and life safety (including effects of climate change) as well as international regulation of nuclear power, aviation and marine traffic activities.

The application of cost-benefit and marginal costs approaches, of which the LQI is an example, for the management of public risks are not without controversy. Pressure for efficiency in public spending, however, has revived interest in the theory of welfare economics and “marginalist” microeconomic theory. This renewed interest has resulted in a fusion of what is essentially cost-benefit analysis based on ordinal utility principals and more practice-oriented contingent valuation through stated preference approaches (the newly minted happiness index comes to mind in this respect). According to the theoretical foundations of cost-benefit analysis, benefits are defined as increases in human wellbeing (utility) and costs – as reductions in human wellbeing.

For a policy to be approved on cost-benefit terms, the social benefits must exceed the social costs. Niels Lind, one of the founders of the LQI, argues that an acceptability criteria for life risk concerning society as a whole should be based on a time principle whereby a fair price for an increased life expectancy is the value of the work it consumes. This, in turn, would allow for a comparative assessment of risk reduction interventions on a systematic and rational basis. Some social indices, notably the LQI and the Human Development Index (HDI), are a suitable alternative to the time principle according to Lind, since they allow “a cross-comparison in the management of all public risks to life and health, within a nation and between nations.”

If we define society simply as the sum of all individuals, the boundary conditions for the time principle, cost-benefit analysis or risk acceptability criteria derived from social indicators can be extended beyond national borders to encompass global society. One way of doing this would be to sum up the values for the societal willingness to pay (SWTP) and the societal willingness to accept (SWTA) from different nations regardless of the circumstances of beneficiaries or losers. Another way, which would accommodate for variations in marginal utilities of income between developed and developing courtiers, would require that higher weights be given to benefits and costs accruing to low income and disadvantaged groups.

The problem for policy is to decide whether the benefits in terms of intervention are at least as large as the costs of the policy regardless whether operating in a national or supra-national context. The issue is further complicated by the choice of an appropriate discount rate, surmounting ethical zero-sum arguments about the value of human life and health, and adhering to principles of equity and distributive justice. Moreover, there is no clear deterministic answer with regard to the nature and extent of uncertainty of both the costs and benefits that support the analytic argument for a given policy. Communicating information to the public that is wrought with uncertainty opens a Pandora box of cognitive biases in how this information is perceived, evaluated and acted upon. In the case of risks with large environmental impacts such as climate change or a nuclear catastrophe, the issue of irreversibility further compounds the difficulties in both decision-making and risk communication.


According to a WHO manual on cost-benefit analysis for the health sector, “discounting is the process of converting future values – e.g. costs or health effects – to their present values to reflect the belief that, in general, society prefers to receive benefits sooner rather than later, and pay costs later rather than sooner. Discounting rests on the assumption that the value of a unit of consumption to individuals and society decreases over time.” Possible explanations for this behavior include: (i) that death or some catastrophe will prevent the individual to enjoy a future benefit; (ii) preferences for immediate consumption rather than one in the future, and (iii) that with expected increase in income, marginal benefit for a unit of consumption in the future decreases.

In the context of large impact health and environmental risks, which may involve very long time horizons, the choice of setting a discount rate is especially problematic. In turn, a long time horizon adds to a higher degree of uncertainty over policy efficacy. Setting up the “right” discount rate is, thus, a rather controversial issue.  There are various arguments for how the societal discount rate should be determined. One (not particularly popular) method derives it from the market in which individuals trade future for present consumption according to an interest rate.  Others have argued that the discount rate for health benefits should be lower than the discount rate for health costs, citing disease eradication through scientific and technological progress as a noteworthy justification. The authors of the WHO manual believe that discounting using lower rates for benefits than for costs would result in indefinite policy indecision with regard to health spending, and suggest instead using 3% as the base case for costs in combination with a sensitivity test of the results to a rate of 6%.

Regardless of what discount rate is selected and how, the ethical dilemma of discounting the life and health of future generations according to the interests of the present one will likely remain a perpetual open sore. The ethical question of discounting in this sense is a modern take on the concept of hereditary curse that haunts Greek tragedy and its later Christian reformulation of the doctrine of sin. When it comes to communicating discount rate policies to the public, a war between a scientific and a theological argument seems practically inescapable as the following explication by climate change skeptic analyst Caroline May of the National Center for Public Policy Research in the US writes: “Faith is belief without verifiable evidence. This unquestioned adherence to the theory of Global Warming bears all the markings of what traditionally would be recognized as a religion. Complete with sin (the emitting of carbon dioxide), scriptures (Intergovernmental Panel on Climate Change assessment reports), commandments (drive a Prius, use Compact Florescent Light bulbs, do not eat meat etc.), indulgences (carbon offsets), proselytism, prophets (Al Gore), priests (scientists), prophecy and apocalypse (floods, hurricanes, dead polar bears), infidels (Warming skeptics), and salvation (the halting of carbon emitting industrial progress) the religion of Global Warming fits the mold.”

This is the type of public discourse that we can expect to see in the context of communicating the impact of risk from events characterized by epistemic uncertainty and long time horizons. In public discourse, the concept of irreversibility (which is directly linked with uncertainty and discounting the future, and to which I shall return later) together with attributes such as catastrophic, abrupt, tipping point, point of no return, etc. is used as a rhetorical device to express a sense of urgency and to stimulate the advance of particular policies. It is, in effect, a risk communication strategy that aims to transform public perception of the long term processes of climate change (usually equivalent to low risk perception) into signaling immediate danger and consequently increasing public risk perception and influencing behavior. In scientific discourse, while rapidity and abruptness of change is acknowledged in events such as glacier retreat or melting Arctic ice, irreversibility is emphasized as likely but not considered definitive.

Not all public discourse is unanimous when it comes to the message of irreversibility for the purpose of defining a threshold for danger. Proponent arguments maintain that there is a lack of suitable sense of urgency in public opinion on the issue of climate change, which leads to a dangerous false sense of security. Those who argue against the so called alarmist rhetoric of irreversibility claim that it leads to fatalism and cynicism, manufacturing anxiety over the possibility that climate change could pose problems outside human control or incapable of human solution. This, in turn, has been used to justify a comparison between the proponents camp and an un-scientific, religious “cultification “of the climate change debate as witnessed in May’s colorful analogy.

Equity and Distribution Effects

Another important consideration for policy at a national and supra-national level is the issue of equity and distribution effects of costs and benefits. This would imply, in the first place, identifying, and then possibly weighing the costs and benefits to social groups or whole nations on the basis of differences in some characteristic of interest, such as wealth for example, to avoid accruing more benefits to those who already enjoy a greater amount of benefits due to their higher income. This is hard enough to achieve on a national scale, let alone a global one. In the context of global environmental risks, this problem is exacerbated by significant epistemic uncertainty with regard to what constitutes benefits and costs from a geopolitical perspective. A global climate change policy should thus take into account that a predicted increase in temperature by 2.5◦C by 2050 is likely to be beneficial for some countries and regions such as Russia, Canada and Greenland; harmful to others – for example, Southeast Asia; while having small net impact on others such as the United States and large parts of Europe.

A global policy framework on environmental risks with slow onset, distant time horizons and a large amount of epistemic uncertainty and natural variability would be extremely difficult to reach a global consensus on based on cost-benefit principles. And, even in the unlikely event of a global consensus, public communication and compliance with regulation imposed by a global elite of economists and natural scientists is not likely to transition well from a conceptual into an implementation stage. On the other hand, a cost-benefit approach might be well suited to policy considerations in the context of health risks, where Protagoras’ dictum “man is the measure of all things” holds a universally more unifying promise for health regulation. Risks associated with nuclear power exploitation can be seen as having direct or indirect impact on human health, and could potentially be treated as proxies within a health regulatory framework. Furthermore, unlike environmental risks, risks to human health are less ambiguous with regard to how we perceive benefits. For the most part, we have a common agreement on, say, what constitutes healthy weight, and follow prescriptions on how to avoid unhealthy obesity or anorexia. There is no such universally shared value system when it comes to environmental risks due to a large extent to the fact that we simply don’t know much about their consequences.


Uncertainty looms large in conducting cost-benefit assessments. For policy-makers, it is important to understand what type of uncertainties are included in cost-benefit studies be that in the context of human health, environmental or nuclear risk planning and management, as well as the type of analysis and underlying assumptions informing the final assessment. A public communication strategy consequently, must be able to “translate” uncertainty by reformulating the highly formalized lexicon of statistical and probabilistic analyses to fit target audiences appropriately.

The WHO identifies three types of uncertainty associated with cost-benefit analysis in the context of health risk intervention. The first – parameter uncertainty – is due to sample variation around estimates of variables such as costs or efficacy of an intervention. Parameter uncertainty also surrounds the choice of discount rate, which is based on unquantifiable value judgments. The second type of uncertainty relates to the model used to estimate a particular parameter and the variables to be included. Finally, a third type of uncertainty arises from extrapolation, where the tested sample may not be representative of the whole population. Here the WHO gives an example of conducting clinical trials for the cost-effectiveness of a pharmaceutical product among low-risk patients, which may not be applicable for the general population.

Policy-makers need to know the threshold value of the parameter at which the intervention will no longer be cost-effective. This value can be identified by conducting a one-way or a multi-way sensitivity analysis by varying either each random variable or two or more at the same time to study the effect on outcomes. Another method for testing the robustness of the key assumptions underlying an assessment is to conduct an “analysis of extremes”, where only the tail values of the distribution are tested in a sensitivity analysis. The WHO manual recommends using probabilistic uncertainty analysis for measurable parameters with known probability distribution, and sensitivity analysis for immeasurable parameters with no probability distribution, such as the discount rate.

In the context of environmental risks, uncertainty poses even greater problems for both policy regulation and public communication due to the fact that there is greater epistemic uncertainty surrounding the physical processes and their interaction with and impact on the economy, the environment and technology. In a highly informative article on uncertainty in environmental economics, Robert S. Pindyck of MIT argues that there are three specific complications arising from uncertainty that characterize the difficulties of public policy in managing environmental risks. The first problem he identifies is the high non-linearity of environmental cost-benefit functions and the lack of knowledge with regard to the precise probability distributions, which in turn, hinders our ability to identify a threshold value or “tipping point” at which the impact becomes extremely severe. Writes Pindyck: “…the damage likely to be caused by air or water pollution or by GHG emissions does not increase linearly with the level of pollution or emissions. Instead, the damage might be barely noticeable for low levels of pollution and then become severe or even catastrophic once some (uncertain) threshold is reached… Furthermore, the precise shapes of the functions are unknown. This is particularly important if we believe that there is a threshold or “tipping point” at which the impact of a pollutant becomes extremely severe, but we do not know where that point is.”

The second problem Pindyck identifies is the interaction between irreversibilities and uncertainty, resulting in a sunk cost vs. sunk benefit stalemate for policy (and public communication as we saw above). The sunk cost approach to reducing environmental risk creates “an opportunity cost of adopting the policy” says Pindyck, but adopting a policy now, creates a sunk benefit with a negative opportunity cost, which results in a bias against policy adoption.

Finally, the problem of the very long time horizons upon which the costs and benefits of environmental risk management are projected contributes to the uncertainty over policy efficacy and brings us full circle to the difficulty of establishing an appropriate discount rate.

Concluding remarks

In the haze of all these known and unknown unknowns about the far future, we could conclude that cost-benefit methods, of which the LQI approach discussed in the beginning is one of the latest incarnations of utility theory application for the management of risk, are viable methodologies for decision support and planning of risk reduction of relatively well-known risks within short to medium time spans. Public health consequences – direct and indirect – can have significant and far-reaching impacts, but are predictable, and therefore, manageable. There are certainly challenges in translating mechanisms of health risk management from a national to a supra-national framework, but they are not insurmountable. As current research shows, there is sufficient data collected by international health organizations and academia to allow for trans-national assessments for the management of health risks. Experimental studies such as that of Faber and Virguez-Rodriguez further indicate that the LQI, originally developed for health and life safety risk management at national scales, could be used to analyze the earth societal willingness to pay (ESWTP) through the lens of a global Earth society. In this respect, the main challenge appears to be not a methodological one but rather one of political will in testing the assumption that the sum of societies comprising the global Earth society shares the qualitative judgment that health is a utility worth paying for.

For environmental risks with projections into the far future, a more radical evaluation may be necessary than a cost-benefit function, in which the environment is seen through an utilitarian lens as a natural resource, over which the human race has proclaimed the right to exploit or optimize for its consumption. Such a radical evaluation will involve nothing short of questioning our assumption that we hold a “right” over natural resources and looking at the environment as a space, a habitat in which we are embedded and which we embody not by some divine or human laws or rights, but likely through fortuitous coincidence.

When contemplating our judgments, decisions and actions in the arena of public life and shared human responsibilities, Hannah Arendt’s seminal work, entitled The Human Condition has a plethora of insights to guide our thoughts on the interaction between uncertainty, the irreversibility of action and the unpredictability of consequences. “The reason why we are never able to foretell with certainty the outcome and end of any action is simply that action has no end,” says Arendt. In other words, every time we act, we trigger a chain of reactions, which have literally no end. This is because action “though it may proceed from nowhere, so to speak, acts into a medium where every action becomes a chain reaction and where every process is the cause of new processes…the smallest act in the most limited circumstances bears the seed of the same boundlessness, because one deed, and sometimes one word, suffices to change every constellation.” Actions, unlike artifacts, Arendt argues cannot be undone since they exist in a chain of actions engendered by each preceding one. Hence, the consequences of our actions are not only unpredictable but irreversible. In the face of unpredictability of consequences and a fear of the irreversibility of our actions, indecision and lack of determination to act might be a predictable outcome, and I would argue is, indeed, what characterizes the lack of our political will to tackle global environmental risks (and other, whose consequences may have potential catastrophic impacts) in a resolute manner. Abstaining from action – a Platonic and later a Christian “policy” proposal is a depressing prospect of what Christopher Hitchens  aptly called in a recent point – counter point debate on the role of religion in modern society “voluntary surrender of our reasoning faculty”. For Arendt, the backward-looking action of “forgiving” and the forward-looking one of “promising” is the preferred alternative to inactive contemplation. The act of “forgiving” the past has the potential to absolve us from the burden of irreversibility of consequences, while “promising” allows us to look at the future with less fear of uncertainty: “Without being forgiven, released from the consequences of what we have done, our capacity to act would, as it were, be confined to one single deed from which we could never recover; we would remain the victims of its consequences forever… without being bound to the fulfillment of promises, we would never be able to keep our identities; we would be condemned to wander helplessly and without direction in the darkness of each man’s lonely heart”.

Arendt, Hannah, The Human Condition, University of Chicago Press, 1958, 190, 233, 237
Faber, M. H. and Virguez-Rodriguez, E., Supporting Decisions on Global Health and Life Safety Investments, International Conference on Applied Statistics and Probability, August 2011
Lind, Niels, Social and economic criteria of acceptable risk, Reliability Engineering and System Safety 78 (2002), 21-25
Pindyck, Robert S., Uncertainty in Environmental Economics, Review of Environmental Economics and Policy, vol.1, issue 1, winter 2007, 45-65
OECD, Cost-Benefit Analysis and the Environment: Recent Developments, 2006, 16-27
WHO, Guide to Cost-Effectiveness Analysis, 2003, 67-83

Indices: Life Quality Index (LQI) Part I

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I am going to dedicate several posts to indices in the context of cognitive and social aspects of selection, organization and description of information as decision support tools. In their essence, indices are communication tools. How an index means depends not so much on the encoder of information but on the decoder, which opens a wide door for controversy with regard to the application of indices. In form, indices are representations that may function as signals by means of direct association with an observed state or phenomenon.

This first post on indices will focus on the fairly new Life Quality Index or LQI (not to be confused with the Quality of Life Index!), developed by researchers at the Institute for Risk Research at the University of Waterloo, Canada in the 90s as a public policy decision aid. What makes the LQI particularly worthy of attention is the potential versatility of its application from developing structural safety standards and design optimization to wider health and safety policy regulation.

This post will address specifically the basic assumptions underlying the LQI and the parameters needed for its application. It will briefly outline some pro and con arguments for the application of the LQI as a means of providing equity in the allocation of societal resources. I will also discuss how the societal value of a statistical life (SVSL) and the societal willingness to pay (SWTP) enter into the decision-making process concerning investments into life safety.

A subsequent post will look at the potential application of the LQI for global resource allocation in decisions concerning global health and global regulation of nuclear power exploitation.

Whenever there is danger, watch out for all ripe discharges that flow from every part of the body at their due times and for favorable and critical abscess formation. Ripeness shows that the crisis is at hand and that recovery is certain. On the other hand, what is raw and immature, as well as unfavorable abscess formation, denotes the failure to reach a crisis, pain, prolongation of the malady, death or relapse. To decide which course is likely you must consider other things too. Consider what has gone before, recognize the signs before your eyes and then make your prognosis. Study these principles. Practise two things in your dealings with disease: either help or do not harm the patient. There are three factors in the practice of medicine: the disease, the patient and the physician. The physician is the servant of the science, and the patient must do what he can to fight the disease with the assistance of the physician.

Hippocratic Corpus, Epidemics, Book I, Section 11, ca. 430-330 B.C.

The above excerpt from the Hippocratic Corpus, and in particular, the principle “First, do no harm” (also known as the Hippocratic Oath doctors are asked to take upon receiving their professional qualification) is the general ethical principle of biomedical ethics. Biomedical ethics combines the fields of medical science, ethical philosophy and law for the purpose of protecting human life and enhancing its quality through health. In the context of risk, the example drawn from bioethics provides some useful analogies in setting up a mental model of how to think about risk assessment and management in the context of reducing life safety risk and the roles and actors involved in the decision-making and regulatory processes, namely the experts tasked with providing an objective risk assessment (diagnosis and prognosis), the lay public who are the beneficiary of the proposed prescriptive measures (the patient), and the policy makers, who are tasked with establishing regulatory procedures that balance prescriptive measures with public preferences in such a way as not to infringe upon personal rights and freedoms, at least in societies based on democratic governance principles.

The idea that the state should take responsibility for the protection of the lives and social well-being of its citizens as opposed to individuals assuming their own responsibility is a relatively modern one. It is a natural extension of the development of state institutions, the rise of civil society and scientific progress since the Enlightenment. Prior to the 20th century, philanthropy was the main basis for the provision of social goods and services, which took either of two forms: individual and collective. The former is associated with the provision of capital of one individual for the creation of a particular social benefit, i.e. a hospital, a school, etc., where control over the newly established institution was at the hand of the benefactor, whose name it usually carried.  The latter is based on the pulling together of resources by like-minded philanthropists, where control would be shared among them.  Outside the scope of this paper, but an interesting point to consider would be the renewed upsurge of philanthropy over the past few decades, such as the Bill and Melinda Gates foundation and how ethical issues are dealt with in public-private partnerships.

The ‘welfare state’ – a term coined in Great Britain during World War II – commonly refers to programs of social protection against the major risks to income in a market economy. Through the welfare state governments provide health care, social housing, education, public pensions, unemployment insurance, and various forms of financial assistance and subsidies for events resulting from natural hazards.
In Canada, the country hit hardest during the Great Depression after the U.S., the need for a welfare state was subsequently pursued by successive liberal and conservative governments, entrenching the notion so deep into the Canadian psyche that since the 1960s virtually all Canadians were covered under the scheme. This development has played a major role in shaping Canadian national identity. I will return to this point when I discuss the notion of trust in public institutions, public perceptions of legitimacy and the ability of institutions to successfully implement social policy strategies.

If we look at life safety as a particular kind of a social benefit that a welfare state would like to provide for its citizens, it is unsurprising that it was upon the recommendation of the Government of Canada’s Regulatory Policy, requiring comprehensive social and economic impact analysis for setting regulatory standards, that the LQI was developed in the 1990s (Pandey, Nathwani, 2004). The goals of this policy were to ensure that the benefits of regulatory interventions outweigh the costs to the average Canadian tax-payer. This applies to policies directly related to safety and risk reduction activities as well as others. In this context, the LQI was designed as a tool to incorporate the management of public life safety risks into social policy. It fits well with the concept of good governance and the democratic principles on which the Canadian constitution is based. As its authors point out, since the basic goal of managing risk is to serve public interest first, four fundamental principles underline this objective: (i) The Accountability Principle : Decisions for the public in regard to health and safety must be open, quantified, defensible, consistent and apply across the complete range of hazards to life; (ii) The Principle of Maximum Net Benefit : Risks shall be managed to maximise the total expected net benefit to society; (iii) The Kaldor-Hicks Compensation Principle: A policy is to be judged socially beneficial if the gainers receive enough benefits that they can compensate the losers fully and still have some net gain left over; and (iv) The Life Measure Principle: The measure of health and safety benefit is the expectancy of life in good health.

It is also interesting and worthwhile to note the title of the paper with the original formulation of the LQI – “Affordable Safety by Choice: The Life Quality Method”. ‘Safety by choice’ is an extraordinarily successful semantic formulation in the Canadian cultural context in that it emphasizes the importance of the individual and his/her freedom to choose freely – principles underlying both liberalism and democracy.  This raises an issue for the application of the LQI as a methodology in cases where ‘choice’ is anything but a shared value or a possibility. I will return to this point when I discuss some of the shortcomings of the LQI principle.

The LQI is a compound social indicator that reflects the expected length of life in good health and the quality of life enhanced by wealth. As a risk management tool, it provides the means for assessing the rationale and effectiveness of decisions affecting the management of risk to life, health and safety. Social indicators are statistics that quantify some aspect of the quality of life in a society. In the case of the LQI, the social indicators used – the Gross Domestic Product (GDP) per capita and the life expectancy (LE) – are well known social indicators, which have been used in socio-economic research and the compilation of other indices (most notably the Human Development Index) to express the health and wealth of a nation. A distinct advantage of using these indicators is the wide availability of data across countries.

The LQI consists of three components/parameters: (i) the creation of wealth, (ii) the duration of life and (iii) the time available to enjoy life in good health. The basic principle underlying the LQI is that only leisure time and consumption provide utility and that available time and wealth are exchangeable. This implies that a trade-off must be made between consumption and life expectancy as investment in risk reduction will impact GDP negatively and life expectancy positively. Given the assumption that production equals consumption, the trade-off is between increase in life expectancy and increase in work time needed to pay for risk reduction.

Proponents of the use of the LQI methodology have argued that one of its chief advantages lies in its cross-sectoral application (e.g. societal sectors, industry, engineering, etc.) covering both individual and collective risks since the criteria derived from the LQI holds for all people (Faber, Maes, 2009). Further, it has been suggested that through the use of the LQI or the marginal life safety cost principle, the focus falls not on the acceptability of risk itself but on the conformity of the decision with societal preferences for investment into life safety, thus circumventing the “zero risk” ethical dilemma (Faber, Maes, 2009).

The LQI has also been seen as a complement to another non-behavioral valuation method for the loss of life, based on an individual’s economic production or the so called macro-economic valuation. To calculate the societal willingness to pay for a change in life expectancy, this method uses the following parameters: (i) population size, (ii) present value of net national product per capita averaged over the age distribution of the national population, (iii) change in life expectancy averaged over the age-distribution of the national population, and (iv) life expectancy averaged over the age-distribution of the national population (Jongejan, et al.). A shortcoming of this method is that people are seen simply as factors of production without accounting for life quality. By explicitly taking life quality into account as well as production, the LQI is seen as an improved modification of macro-economic valuation.

Critics of the LQI approach, on the other hand, have pointed out that social, psychological and other effects not quantifiable through the LQI, should also be considered in the optimization of operational and strategic life safety management. This criticism underlines basically the two different schools of thought with regard to the economic valuation of loss of life: behavioral and non-behavioral. One such criticism concerns the assumption the LQI makes regarding a trade-off between working and leisure time for individuals. Proske et al. have pointed out that this might be true for some people but that it has been found that most people enjoy working if the work conditions and the work content fits with the personal preferences of the individual.

Another criticism has been that the LQI considers economy as a system which functions regardless of circumstances, e.g. in a case of a major disaster killing millions of people, the LQI would assume that the economy still functions as before (Proske, et al. 2007). The LQI is based on the method of revealed preference, estimating the actual economic costs people pay versus the benefits they receive for various activities, assuming that what is true in the past will also be true in the future. Social anthropologists Wildavsky and Douglas have pointed out that experiments reveal significant differences between revealed preferences, the actual cost people are ready to incur, and expressed or stated preference, what they say they prefer. To address this problem, they argue that the idea of bounded rationality introduced by Herbert Simon  and Kahneman and Tversky’s Prospect theory  would be an indispensable component to any revealed preferences method as they would “allow scope for social pressures to be systematically included in decision-making analysis.”

Finally, the LQI might well be a viable method for countries where social conditions motivate people to produce wealth; where the trust in social state institutions is entrenched in their psyche (e.g. Canada, most Scandinavian countries, etc.); and where optimization of life safety management is typically in the hands of (competent and uncorrupted) experts. In countries where the social conditions motivate people to take advantage of others instead of producing wealth themselves; where trust in social systems is virtually non-existent, the lack of trust negatively impacts the successful development of the economy, which depends on a positive correlation between specialization and cooperation. In such a setting, the LQI may not be a relevant indicator (Conchie and Donald 2006).

Weighing the pros and cons of applying the LQI for the optimization of operational and strategic life safety management seems a fairer method than the two ethical extremes between which it lies: the “eye for an eye” option and the zero risk criteria. And while no approach is likely to provide maximum equity, applying the LQI with consideration of the above shortcomings and coupled with the Precautionary principle should help our collective conscience sleep better at night.

The main objective of policy regulations with regards to investments into life safety is to reduce, not eliminate the risk of mortality. In Economics, the monetary value of reducing mortality risk is referred to as the “value of life”. The ambiguity of this term creates an opportunity for misunderstanding as it might signal to those uninitiated into the economics jargon that it refers to a qualitative value judgment on human life. In practice, there is little or no controversy involved as the expression “value of life” (itself a short form of “the value of statistical life (VSL) denotes the monetary value of mortality risk reduction that would save one statistical life. One way of understanding the difference between a statistical and an identified life would be in the context of life saving operation, such as an emergency response operation where specific individual lives are at stake, and life safety regulations to reduce mortality risks. For example, in a city with a population of 100,000, an investment project is proposed that would result, in a statistical sense, in one fewer death from a particular risk each year. If each person is willing to pay CHF20 a year for the reduction in mortality risks for the particular hazard, the willingness to pay (WTP) is CHF 2 million for an annual risk reduction that would save one statistical life. In this case, the VSL is CHF 2 million.

The standard approach to estimate benefits from reduced mortality is based on individuals’ WTP, which assumes that individuals’ preferences are the basis for economic welfare (Andersson, Treich). It could be argued that the WTP is less a reflection of how much people are willing to pay for their lives but rather, the degree to which they have trust in their social regulatory institutions. Therefore, WTP principles should be complemented by considerations that take into account perception of legitimacy of governing authorities as well as perceptions of different types of risk, the cultural differences in perception and risk behavior.

SVL has been shown to vary significantly between rich and poor countries. While there could be various factors contributing to this disparity, income is one that clearly stands out, implying a linear relationship between income and safety. Indeed, differences in income within a single society would give disproportionate weight to wealthier individuals in terms of the WTP.

Finally, another issue for policy consideration should be the question of discounting, which takes us back to muddy ethical waters since discount rates define how much the policy maker values a life in the future in terms of present lives. This will be addressed in part 2 post on LQI and global health.

Andersson Henrik, Treich Nicholas, The Value of a Statistical Life, LERNA, France
Douglas Mary, Wildavsky Aaron, Risk and Culture, University of California Press, England, 1983
Conchie, S.M. , Donald, I.J.: The relative importance of cognition-based and effect based trust in safety. In: Safety and Reliability for Managing Risks – Guedes Soares & Zio (Eds.) Taylor and Francis Group, London 2006, pp. 301-308
Faber, Michael H., Maes, Marc A., Sustainable Strategic and Operational Management of Life Safety, Fourth IFED Forum, Japan, May 2009
Jongejan R. B., Jonkman S. N., Vrijling J. K., Methods for the economic valuation of loss of life, Delft University of Technology, the Netherlands
Nathwani J.C., Lind N.C., Pandey M. D., Affordable Safety by Choice: The Life Quality Method, Waterloo, Ontario, Canada, July 1997
Pandey M. D., Nathwani J. C., Life quality index for the estimation of societal willingness-to-pay for safety, Structural Safety 26 (2004) 181–199
Proske Dirk, van Gelder Pieter, Vrijling Han, Perceived safety with regards to optimal safety of structures, 5th International Probabilistic Workshop – Taerwe & Proske (eds), Ghent, 2007

Written by wholenotwhole

February 4, 2011 at 12:04 pm

The Emperor’s New Clothes: Happiness Economics Revealed

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The newly minted discipline of happiness economics is at worst an aberration of the ethical inquiry into what is good for humankind; at a second worse – rhetorical manipulation of what social engineering policies are best distributors of happiness; and at a third neutrally platitudinous – statistical aids for making sense of vast quantities of data collected on socio-economic indicators, populating a plethora of indices, which are claimed to have the capacity to “measure” happiness.

This essay will present a concise review of the literature, validation and applications of happiness data and discuss the attributes of happiness according to economic analysis. It will argue that if the purported purpose of happiness economics is to arrive at a causal understanding of happiness, it is, at least in its present research, focusing on the wrong indicators. A more modest pursuit – optimization of utility – is better suited to the means and purposes of socio-economics, the overarching field where happiness economics properly resides. Adjusting the ambitions and expectations scale should be accompanied by adjustments in the lexicon of happiness as befitting its domain, starting with replacing ‘happiness’ with ‘utility’.

The second part of the essay will discuss happiness from the perspective of ethics and political philosophy and outline several visions of happiness as well as the type of political institutions that support the alternatives from ancient primary sources to the birth of utility theory in late 18th century England. It will conclude that the present socio-economic research on happiness has little to contribute to either the causal or consequential analysis of happiness, and that the relative policy community will be well advised to draw their insights from the respective fields of economics and philosophy independently, without the unnecessary ambiguity of stylized coinages such as happiness economics. No strategy for a “happy” society will be proposed as the author believes that all strategies directed toward the social engineering of a happy society are, as history attests, one man’s utopia and another’s dystopia.

In a commencement address to the 2010 cohort of graduates at the University of South Carolina, the Chairman of the Board of Governors of the Federal Reserve System of the United States, Ben S. Bernanke, delivers an inspirational  (albeit ironic, given the state of the US economy) speech about personal happiness, economic policymaking and choices open to the new graduates. Why, apart from the circumstance of the happy occasion, does the Chairman choose to talk about happiness? To those uninitiated in the rhetorical arts taught in the shrinking-into-oblivion subjects we label Humanities, the Chairman’s justification will likely resonate with a bravado of positivism as it is no doubt intended: “Why talk about happiness? Well, it’s right there in the mission statement of the United States, the Declaration of Independence: The inalienable rights of Americans are “Life, Liberty and the pursuit of Happiness.” If Thomas Jefferson thought it was important to facilitate the pursuit of happiness, maybe we should think a bit about what that means in practice.”

Think we should indeed. Why this statement raises a red flag is not that we might not consider the inquiry into the Pursuit of happiness a legitimate and important task (quite aside from what Jefferson actually refers to as happiness, to which we shall return later), but rather the Chairman’s use of the rhetorical device known as the appeal to authority fallacy – a fallacy because it is not a logical statement, but one designed to appeal to the audience’s emotions for the purpose of persuasion. From the lips of the Chairman – a largely political function – the use of persuasion rhetoric can, if not be accepted, at least be understandable and more or less expected. From the lips of scientists (to whose lot, the author generously includes social scientists), such an appeal would simply disqualify the statement as unscientific. Yet, there is hardly a paper on the subject of happiness economics that fails to omit mentioning the importance of its topic as attested by the number of publications (numbers being the substitute for name-dropping in scientific disciplines) on happiness since the turn of the century. Kahneman and Krueger inform us that “From 2001 to 2005, more than 100 papers were written analyzing data on self-reported life satisfaction or happiness, according to a tabulation of EconLit, up from just four in 1991-1995. According to Helen Johns and Paul Ormerod, writing in 2008, “Happiness economics has generated an entire new academic industry. Over 10,000 articles have now been published on the concept of happiness, or subjective well-being…”

If you’re happy and you know it, clap your hands…

If you’re happy and you know it, stomp your feet…

[A brief pause to reflect on what had us clapping and stomping our feet over the past year while the number of publications and citations on happiness soared, according to the Web of Science.

High levels of public debt in the euro zone escalated into full-blown crisis, necessitating Greece’s and Ireland’s bail out by the IMF. Strikes and riots against austerity measures to tackle budget deficits took place in Greece, France and the UK while in the US tea-partiers rallied about deficits and “jobless recovery”. An earthquake in Haiti killed at least 230,000, leaving 1 million homeless, and was followed by a deadly outbreak of cholera. In addition to continuous terrorist attacks and high profile assassinations in Pakistan, millions of people lost their lives and homes after heavy monsoon rains and flooding. Suicide bombers killed scores of people in Russia as the hottest summer in recorded Russian history caused a public-health crisis and panic over food security and the prices of cereals. An explosion at a BP well in the Gulf of Mexico caused the biggest civilian oil spill to date. North and South Korea ended the year at their throats. Ethic rioting in Kyrgyzstan threatened to turn into a civil war…]

With so much felicity in the air, happiness economics is set on a mission to answer the perennial question: what makes us happy?

Happiness economics is an off-shoot of economics and psychology, which aims to provide a quantitative assessment of happiness/(subjective) well-being/welfare. It is intended to fill a gap left by conventional utility economics, based on ordinal concepts of utility or, in the parlance of economics, revealed preferences by including cardinal utility (stated preferences) in its measurements and analysis. Further, it caters to the notion now prevalent in most fields of academic inquiry from decision theory to psychology, to neuroscience to philosophy that individuals do not always act rationally when making decisions with regard to utility or to what is good for them. The exclusive reliance on an objective approach by standard economic theory has thus in recent decades come under attack and given impetus to various non-objectivist theoretical projects in economics, including an individual’s emotional state (Hermalin & Isen 1999), altruism (Altonji et al. 1997), and fairness (Rabin 1997). Happiness economics is the new kid on the block.

Most researchers engaged in the topic of happiness economics see it as a complementary approach to that of decision utility rather than its substitute, though the case of Bhutan, which recently replaced GDP with GNH, i.e. Gross National Happiness index as the principal tool in the policy planning process gets quoted by academics and journalists ad nauseam.  Its salient characteristic is said to be its breadth in contrast to the narrow, income-based measures of happiness economics. It includes what is termed ‘experienced’ utility (an individual’s experiences of consumption or life events in the past) together with ‘procedural’ utility (utility derived from engaging in an activity preferred by an individual). (Powdthavee 2007). The ghastly use of vocabulary aside, it makes a distinction between short and long-term experience and consequences of a utility, in a way not unlike a teleological view of happiness as the ultimate goal of human life.

In its mission statement then, happiness economics reveals a closer resemblance to ethical theory than pecuniary economics. The ambiguities, however, emerge when we look at the indicators selected, or in other words, the characteristics that happiness economics designates as constituents contributing to the Higher Good as well as the methods used to “measure” happiness.

Indicators used in the measurement of happiness fall into three categories (Frey, Stutzer 2000) though not all are always simultaneously used. To the first category belong personality and demographic factors. These include age, gender, citizenship (i.e. national or foreigner), extent of formal education, family setting, and employment status. To the second category belong economic variables, such as individual unemployment and income situation of the household after taxes. A third category used in some research deals with political institutions. Variables here include an index for direct democratic rights and an index for the extent of local autonomy.

These indicators then are used in large-scale surveys, across countries and over periods of time with the hope to understand how they affect or contribute to happiness. The approach, which relies on stated preferences rather than on revealed choices, employs single or multiple-item questions on how an individual perceives his/her state of happiness. A typical single-item question asks: “Taken all together, how happy would you say you are: very happy, quite happy, not very happy, not at all happy?” Each response then scores one to four points, from the lowest (1 – not at all happy) to the highest (4 – very happy).

An example of a multi-item scale question can be found in the General Health Questionnaire (GHQ) in the British Household Panel Survey, which assesses positive and negative affects of happiness through the following set of questions:

“Have you recently…

been able to concentrate on what you’re doing lost much sleep over worry
felt that you were playing a useful part in things felt constantly under strain
felt capable of making decisions about things felt you could not overcome your difficulties
been able to enjoy your normal day-to-day activities been feeling unhappy or depressed
been able to face up to problems been losing confidence in yourself
been feeling reasonably happy, all things considered been thinking of yourself as a worthless person


Armed with the type of data such surveys might be expected to produce, it is hardly surprising that Chairman Bernanke feels he ought to evoke the authority of one of the Founding Fathers to justify interest in it. Undeniably, the data collected from the GHQ might prove useful in the medical research on depression or emotional imbalances, but does it really tell us anything about happiness – the end pursuit of human good? Happiness, as perceived by Thomas Jefferson, refers to an objective good: the natural Rights of American citizens as those proclaimed in the American Declaration of Independence and the French Declaration of the Rights of Man and Citizen. It belongs thus to a class of goods closer in essence to spiritual satisfaction rather than material social improvements. Better food, better health and sanitary conditions, better education and greater equality of opportunity are obvious external conditions that facilitate man’s Quest for happiness. In the tradition of American republicanism (I use this word in its historical rather than present-day political context), the pursuit of happiness is the opportunity to realize man’s full potential, according to merit, succinctly expressed by the Americanism “Be all that you can be!”

This paper does not argue that the study of social and economic indicators of well-being cannot bring valuable insight to aid social and economic policy, rather it calls for a distinction between short and long-term material improvements in life quality, for which decision utility coupled with behavioral analysis should form, and indeed does form, sufficient basis for policy, and, on the other hand, an inquiry into happiness, based on ethical and political considerations, which cannot and should not be quantified. If we are really honest with ourselves, we will admit that excellence and merit are not to be found in large numbers. Consequently, socio-economic methods and statistics are not suitable methodologies for the inquiry on happiness.

To be fair, there has been some recent research in the sphere of happiness economics, which does attempt to differentiate between different “levels” of happiness and adapt measurements accordingly. Kahneman and Deaton, for example, distinguish between emotional well-being and life evaluation: “Emotional well-being (sometimes called hedonic well-being or experienced happiness) refers to the emotional quality of an individual’s everyday experience – the frequency and intensity of experiences of joy, fascination, anxiety, sadness, anger, and affection that make one’s life pleasant or unpleasant. Life evaluation refers to a person’s thoughts about his or her life.” (Kahneman & Deaton 2010).  A temporal and a substantive distinction of this type is a better approximation of the constituents of happiness and its life cycles. The indicators chosen can reflect the extent to which particular emotional characteristic is further away or closer on a scale, whose center balance is happiness. Aristotle used the same “measurement scheme”, which is known as the “golden mean”. According to his formal definition, excellence or virtue is a disposition involving intentional choice and directed toward observance of a mean between extremes. A more detailed discussion of Aristotle’s notion of happiness will follow. For now, it will suffice to point out just a single example, i.e. the discussion in the Nichomachean Ethics on the virtue of courage, which is treated as a happiness indicator (NE 3.6-9). The courageous man is said to be one who habitually, i.e. consistently, chooses the mean between cowardice and rashness. The specific context of the treatment of virtue is the risk of sudden death in battle. An important distinction is made between the man who acts courageously in pursuit of the reward of honor by his fellow citizens and the man who acts courageously for the sake of courage, i.e. out of principle. It is the latter who knows the true excellence of virtue. The former, acting according to the principles of utility, is described as a good man or a political man.  If utility is the essence of economics, then the true virtue or purpose of economics is achieving the maximum utility. Happiness economics is nothing but utility and happiness gone awry: it detracts from the purpose of economics, without contributing anything to that ethics.

Back to Kahneman and Deaton, who despite their laudable attempt to introduce indicators more relevant to the inquiry of happiness than the socio-economic ones mentioned earlier, subsequently disappoint with a discussion on the measurement methodology and the results, expressing yet another platitude hardly worth the generous support of the Gallup Organization and the grant provided by the National Institute on Aging they duly acknowledge. We read that “Emotional well-being is assessed by questions about the presence of various emotions in the experience of yesterday (e.g. enjoyment, happiness, anger, sadness, stress, worry). Life evaluation is measured using Cantril’s Self-Anchoring Scale, which has the respondent rate his or her current life on a ladder scale in which ‘0’ is “the worst possible life for you” and 10 is “the best possible life for you”. We find that emotional well-being and life evaluation have different correlates in the circumstances of people’s lives. In particular, we observe striking differences in the relationship of these aspects of well-being to income.”

The gleaming conclusions resulting from this study are that:

1.      More money does not necessarily buy more happiness, but less money is associated with emotional pain.


2.      Income is more strongly related to satisfaction than to happiness (which might potentially serve as policy guide to the goal of reducing suffering rather than maximizing happiness.

If the reader has failed to gain any insight into the nature of happiness and what makes humans happy from this research, it is because there is no such insight to be found. What is to be found, however, is an attempt to de-mystify the so called Easterlin paradox by means of Weber’s Law and a generous back up of statistical proofs.

Easterlin’s paradox, named after the founder of happiness economics, refers to the finding that people in rich countries don’t report much greater happiness than those in lower-income countries – even though, in any individual country, the rich say they are happier than the poor do. From Easterlin’s original analysis, published in 1974, has henceforth sprung the discipline of happiness economics, which appears to have made it its mission to explain the above “paradox”.

Easterlin’s own interpretation of this finding is that happiness is relative to a certain threshold, i.e. that an individual’s happiness depends not on some absolute value of wealth, but on the wealth of those around him or her. This explains why rich people are happier than poor people in the same country as well as why happiness levels don’t vary significantly between rich and poor countries.

Following in Easterlin’s footsteps, Kahneman and Deaton argue that “the confusion regarding the effects of income on well-being can be traced to incorrect analysis” (K&D 2010), namely that measures of well-being by psychologists and sociologists plot well-being against income in real dollars. They suggest that the logarithm of income is a better scale, according to which differences are expressed as a percentage of change instead of an absolute amount: “The logarithmic transformation represents a basic fact of perception known as Weber’s Law, which applies generally to quantitative dimensions of perception and judgment (e.g. the intensity of sounds and lights). The rule is that the effective stimulus for the detection and evaluation of changes or differences in such dimensions is the percentage change, not its absolute amount.”

The application of Weber’s Law is basically used in this paper to confirm the “finding” that higher income results in a higher percentage of reported individual’s life-evaluation (i.e. reflective, long-term happiness), even among those who are already well off, and that the relative threshold of reported well-being “satiate fully at an annual income of approximately USD 75,000…a result independent of whether dollars or log dollars are used as a measure of income.

Diplomatically, Kahneman and Deaton abstain from making any policy recommendations based on their findings by stating that “the relevance of subjective well-being as a guide to policy is a contentious issue, on which we do not take a position.” And the reader is once again left to wonder why this research was undertaken if its authors politely refrain from proposing an application for it.

Another widespread interpretation of the Easterlin paradox, which points to the futility of happiness economics comes from the field of psychology, veiling its vacuity in the nebulous term ‘set point theory of happiness’. This simply refers to a phenomenon observed of people winning a lottery, who, after a short period of exaltation, revert to the state of happiness they were in prior to winning the lottery. In its positive manifestation, set theory of happiness can be expressed through the folk saying that a novel situation is a “three day wonder”; in its negative – that “time heals all wounds”. If we assume, in accordance with set theory, that each person has a specific, inborn capacity for happiness to which he or she reverts over time, any policy oriented toward improvement in the individual’s state of well-being becomes meaningless. Perhaps the set point theorists suffered an overdose of Hobbes, to whom we shall return later in our philosophical inquiry of happiness.

A third, more interesting interpretation of the Easterlin paradox, comes from behavioral economics literature, and is known by the fittingly oxymoronic phrase ‘hedonic treadmill’. The hedonic treadmill theory postulates that once basic needs are met, aspirations increase along with income in relative terms. This theory is a variation of the pop saying “the rich get richer while the poor stay poor”, or in other words, our ambitions are proportionate to our expectations. This interpretation has been suggested to be useful for poverty research and aid and development policy in the sense that not aid but the creation of development opportunities is a better sustainable policy for the alleviation of chronic poverty in least developed countries.

Finally, and perhaps the more original research in happiness economics, has focused on exploring the reverse direction of causality (Diener et al. 2003, Graham, Eggers and Sukhtankar 2004). For example, such studies have examined not whether more health contributes to more happiness but whether people with reported higher levels of happiness tend to perform better and, in turn, earn more income. Frey and Stutzer, in studying the relation between happiness, economics and political institutions in Switzerland have concluded in another study that individuals’ participation in the process of direct democracy, and specifically decentralized federalism which offers greater local autonomy, leads to higher levels of happiness. But could it also be that happy people choose direct democratic institutions? The argument is dismissed in their paper, however, merely asking the question opens the topic to debate, which to an inquiring mind is a welcoming change from the linear persuasion rhetoric characteristic of the vast majority of happiness economics publications.

The present essay has thus far presented a summary of what constitutes the topic of happiness economics, the indicators and methods used to measure happiness, and potential applications of happiness research. It has argued that happiness economics does not provide any relevant insight into what makes humans happy, and that, with a small number of exceptions, it is practically irrelevant for policy. It borrows notions from disciplines such as ethics and political philosophy, to which it then applies socio-economic indicators that are at their worst irrelevant and at their best already under consideration by means of conventional decision analysis or indices such as the human development index. If research into human well-being and happiness wants to aspire to benefit public policy or enrich academic scholarship, it should consider a change of direction away from the current format it is using, which is nothing but a self-glorified version of a customer satisfaction survey as used in industry for the purpose of improving advertising campaigns.

The following section will offer brief summaries of the inquiries into happiness from several philosophers. They are presented in chronological order, beginning with Aristotle and ending with Bentham. Later utopian projects to social-engineer happiness such as communism, German national socialism, or Maoist cultural revolutionism are dismissed by this author as fakes. Happiness economics is sadly representative of our modern era of obsessive consumerism. This essay is written with the hope that the hedonistic treadmill interpretation does not become a self-fulfilling prophecy of happy economists.


Aristotle’s major work on ethics, Nicomachean Ethics, is essentially an inquiry into the nature of the common good for humanity, which is often translated as “happiness” (in Greek, eudaimonia, literally a good demon). Ordinary people may disagree among themselves what the constituents of happiness are, and ordinary people’s opinions most certainly diverge from the opinions of the wise (i.e. the philosophers) on the notion of happiness. Aristotle, most certainly is not interested in the subjectivism of the crowds since he maintains that only the wise can know true happiness. To arrive at a definition of happiness, Aristotle proceeds by listing the three ways of life that humans may follow in the pursuit of happiness: the life of pleasure, the political life and the philosophical or theoretical life. Most people pursue the life of pleasure (i.e. unreflective pursuit of material and/or short-term pleasures) while the more “refined” ones choose to pursue virtue or excellence in the form of political action. They are described as the ‘good’ (Gk. agathos). Finally, there are those few who pursue and attain happiness from pure intellectual activity. They are not merely good, but ‘noble’ (Gk. kalosagathos). It is the good and the noble who inform the argument on the nature of happiness.

Aristotle proceeds to elaborate on the nature of man and his function (Gk. ergon), known as the “function argument” in ethics, which is the premise for his argument on happiness as rational excellence. Starting from the premise that what distinguishes man from other living creatures is his rational soul, he argues that man’s proper function is exercising his faculty of the soul in accordance with reason and excellence or virtue (Gk. arete). For Aristotle then, happiness is a function with the following logical order:

1.      For everything that has a function or a characteristic activity, the good is thought to reside in the function.

2.      As naturally functioning beings, humans must have a function.

3.      Their function must be whatever is distinctive about them.

4.      The distinctive activity of human beings is “activity of the soul which follows or implies a rational principle”.

5.      This is the function of human beings.

6.      Human good is “activity of soul exhibiting excellence or virtue, and if there are more than one excellences, in accordance with the best and most complete.

He arrives thus at a definition of happiness or the highest human good as an activity of the soul, expressed in rational deliberation. This activity is “measured” in accordance with virtue, and if there is more than one virtue, in accordance with the best one (NE 1.6.1097b22 -98a18).

For Aristotle, even if happiness is an intangible good manifested through excellence of rational thought, there are, nevertheless, some tangible, external goods, which not only facilitate but may be necessary requirements, i.e. basic conditions for the ability of man to realize his potential. These include a certain amount of wealth, friends, political power, children, good birth and good physical appearance (NE 1.8.1099b3-6). Moreover, he acknowledges that even in the presence of both tangible and intangible goods such as wealth or good looks, happiness is the plaything of fortune or a gift of the gods as attested by the word eudaimonia (NE 1.9.1099b9-1100a9).

There are two sides to virtue or excellence: intellectual – based on reason, and ethical – based on character. The rational part of the soul belongs to the intellectual virtues which are acquired through language and teaching while the part of the soul where the emotions reside belong to the ethical virtues (from the Greek ethos, ‘character’). Neither of these are purely intrinsic to the human condition. Though man carries a natural potential for them, they can be fully realized only through “habituation” in the way that an art or a skill (Gk. techne) is acquired, i.e as a carpenter learns his trade by practicing it (NE 1.13-2.1).

Finally, while moral virtue is not possible without reason, it is not something essentially rational. Moral action is rational to the extent to which it is a result of choice, but arriving at a choice is hardly the rational calculation of the costs and benefits of acting morally. Rather, moral action is excellent or virtuous only when it is performed for its own sake, and not for the sake of its consequences. This is the fundamental divide between Aristotle’s concept of happiness as an a priori essence and subsequent utilitarian schools of thought that see happiness in terms of posteriori utility.

For us moderns, some possible reflection on Aristotle’s notion of happiness might be whether we would prefer to frame our policies in terms of utilitarian ends or according to principles that may give us the opportunity to realize our full potential. The situation is highly applicable in terms of human capital policies, where a so-called “war for talent” has bifurcated into two distinctly different ways of “investing in people”:  one is the utility-driven provision of competitive benefits, which has us running on the hedonic treadmill of higher compensations and bonuses ad infinitum; another – sadly the less prevalent – offering people to realize their potential through continuous learning on the job.


Alfarabi was the first philosopher who tried to relate western classical political philosophy with Islam as a form of a divine law that establishes social and political institutions as well as rules and principles of conduct. His writings are mostly concerned with political regimes and the attainment of happiness through participation in political life. He set out to establish a paradigm of the “virtuous regime”, whose ultimate purpose is the realization of human happiness or virtue. In the tradition of Plato and Aristotle, he believed that the path to human virtue lies through activities stemming from rational thought, deliberation and choice: “Happiness is the good desired for itself, it is never desired to achieve by it something else, and there is nothing greater beyond it that man can achieve.” (Summa Contra Gentiles, I.4)

Alfarabi distinguishes between noble and base activities on the basis of what is useful for and what obstructs happiness. Like Aristotle, he believed that the formation and habituation of character was what enabled man to perform noble activities: “The forms and states of character from which these [noble] activities emanate are the virtues; they are not goods for their own sake but goods for the sake of happiness.” (In lib. De Divinis Nominibus, Proemium). The attainment of happiness is thus seen as the perfection of man’s faculties of reason, which necessitates the discipline of the lower desires, associated with tangible and immediate satisfaction. Only few are capable of attaining this higher state, hence a virtuous state must divide its citizens into categories according to their share of perfection or happiness as follows: (i) the wise, or the philosophers who know the nature of things by means of demonstrative proofs and by their own insights, (ii) those who follow the philosophers, trust and accept their insights, and (iii) the rest, or the many, who know things by means of similitudes, some to a greater; others to a lesser degree.

The virtuous state operates not the basis of hereditary monarchy, nor on democratic representation. It is a system of governance, in which the best rule, with the sole criterion for the rank of the citizen being the character of the virtue of which he is capable and which he develops through political participation and obeying of the laws of the state. If the state is virtuous, so are its citizens by analogy in that they possess or follow those who possess excellence.

In contrast to the virtuous regime, Alfarabi distinguishes six other regimes, which are guided not by true knowledge and excellence conducive to happiness, but by the pursuit of one or more lower ends:

(1)   The regime of necessity, where the aim of the citizens is confined to the bare necessities of life, i.e. a primitive agrarian utopia of sorts

(2)   The vile regime (oligarchy), where the ultimate aim is wealth and prosperity for their own sake

(3)   The base regime, whose aim is the enjoyment of sensory or imaginary pleasures

(4)   The regime of honor (timocracy), whose citizens aim at being honored, praised and glorified by others

(5)   The regime of domination (tyranny), whose citizens aim at overpowering and subkecting others

(6)   The regime of “corporate association” (democracy), where the main purpose of the citizens is being free to do whatever they wish


In contrast to classical humanism and Aristotle’s dictum that man is a “social animal”, whose happiness depends on shared civic virtues, Hobbes argued that men are by nature a lot more equal both in character and in intellectual capacity and that the equality of their abilities leads them to competition and violence for the sake of self-preservation and the securing of the maximum amount of scarce goods. Consequently, men pursue whatever means possible of securing the way to their future desires, “so that, in the first place, I put for a general inclination of all mankind, a perpetual and restless desire of power after power, that ceaseth only in death.” (Leviathan, ch. xi, pp. 79-80).

Hobbes argues that man is not social by nature; to the contrary – social institutions and civil society are conventions that man sets up by the use of his reasoning faculties to counter fear of death and to cater to his desire for comfort and security. Hobbes’ vision of human affairs is one of a perpetual state of war, where competition, distrust and glory are the root cause of “every man against every man” mentality. In Hobbe’s universe, happiness is inconceivable. His account of man’s inability for happiness is well worth reading, however, as a vivid description of society where anarchy and self-interest are the defining ethics: “ men live without other security, than what their own strength, and their own invention shall furnish them withal. In such conditions there is no place for industry; because the fruit thereof is uncertain: and consequently no culture of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man solitary, poor, nasty, brutish, and short.” (Leviathan, ch. xiii, pp.103-4)


When Bentham called Plato “the master manufacturer of nonsense”, he was primarily driven by his distaste of classical political philosophers who devalued “ordinary” ideas of happiness as vulgar and sought to force an uncritical acceptance of the Highest Good as a quest for something better than pleasure, which in reality did not exist.

Influenced by the spirit of the Enlightenment and the French philosophes, who were closer to his intellectual temperament than his English compatriots, whom he regarded as enveloped in the blind adherence to tradition, Bentham is considered the father of utilitarianism. Utilitarianism holds that right and wrong actions depend on whether they are followed by good or bad consequences, where “good” and “bad” refer to pleasures and pains manifested in the experiences of men. A social reformist trained in law at Oxford, Bentham held the optimistic view of scientific progress that the human condition can be improved by proliferation of knowledge and the provision of information, on which men can base their own rational choices and assume responsibility for maximizing their happiness. He equated ignorance with blind acceptance and conformity to established tradition, which he saw as a barrier to rationality and scientific progress.

Like Hobbes, he believed that it is not possible to make people good or happy, but that it is possible to design improvements in the material conditions which otherwise may detract from their well-being. (Benthanean ethics are at the root of contemporary preferences to give priority to policies designed to alleviate suffering rather than maximize happiness – a proposition with which even Kahneman and Deaton don’t mind sticking a finger into despite their aversion to dirtying their hands with policy.) With that in mind, Bentham set out to establish a general framework for legislative reform based on the principle of the greatest happiness for the greatest number: “that system, the object of which is to rear the fabric of felicity by the hands of reason and of law”, with utility as it raison d’être: “that principle which approves or disapproves of every action whatsoever, according to the tendency with which it appears to have augment or diminish the happiness of the party whose interest is in question…I say of every action whatsoever; and therefore not only of every action of a private individual, but of every measure of government” .

Utility is not sanctioned by an omniscient divine authority, or a superior race of philosopher kings, but belongs to the realm of “nature”, which is at the disposal of all people: “nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do.” With the rejection of divine law, the goal of legislature becomes to ensure the pleasure and security of people whereby all policies must be explicable in terms of the principle of utility. Since this principle is understandable to all, all are eligible to critically assess all policy and change it according to any change in its utility. Bentham’s most enduring legacy is the provision of a rational model for maximizing utility in accordance with law based on the optimistic belief in man’s ability for self-governance, which in turn, would progressively increase well-being through the long-term effects of the conscious application of the principle of utility: “To take an exact account, then, of the general tendency of any act, by which the interests of the community are affected, proceed as follows. Begin with any one person of those whose interests seem most immediately to be affected by it…Sum up all the values of all the pleasures on the one side, and those of all pains on the other…Sum up all the numbers expressive of good tendency, which the act has, with respect to each individual, in regard to whom the tendency of it is good upon the whole…, again with respect to each individual, in regard to whom the tendency of it is bad upon the whole. Take the balance…In all this there is nothing but what the practice of mankind, wheresoever they have a clear view of their own interest, is perfectly comformable to.”

Whether we agree with Bentham and his principle of utility, we must acknowledge the originality and courage of his thought as well as its force multiplying effect on radical historical changes as power passed from the hands of the royal few to the plebian many. In Bentham we see the philosophy behind and the emergence of the concept of human rights, of republican triumph over monarchy, and the beginning of the modern democratic state. A study of the history of ideas on human happiness might help us recognize or remind us that the human rights (and freedoms) we take for granted are neither divine nor natural rights but an evolution of our application of rational thought. Indeed, the history of human inquiry into happiness is a history of our stated and revealed preferences of forms of governance as well as of those human characteristics we would like our governing leaders to aspire to. Henceforth, we divide our world into developed industrial states that take pride in creating opportunities for their citizens to be all that they can be with accordance to merit, ethical principles and the rule of law and failed states of the Hobbesean predilection, where life is “nasty, brutish and short”. Society’s function and Highest  Good as a living organism of political, economic and social institutions should therefore be analogous to Socratic midwifery: the delivery of human potential through intellectual inquiry and pedagogical habituation and discipline to excel at the arts dormant in our nature.

Primary Sources

Alfarabi, Philosophy of Alfarabi, Part II Theoretical Philosophy,  in and in Strauss, L. and Cropsey, J. History of Political Philosophy, Alfarabi

Aristotle, Nichomachean Ethics

The Collected Works of Jeremy Bentham, Deontology, in Deontology together with A Table of the Springs of Action and the Article on Utilitarianism, pp. 134-147

Jeremy Bentham, Introduction to the Principles of Morals and Legislation, includes preface and chapters 1 and 2

Thomas Hobbes, Leviathan

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February 1, 2011 at 8:26 am