Interview with Avner Oer

The Challenge of Afuence

Interview with Avner Offer
Why do rising incomes not make people happier? Some argue that it is because we quickly become accustomed to our new acquisitions. Others would say that it is because relative status is the goal, not the material acquisitions themselves. But Avner Offer opines it is because we have a difcult time postponing gratication. This is an intriguing notion, one of many in his new book.

Let me begin with the title of your book, The Challenge of Afuence. What is the challenge of afuence? A. The primary challenge of afuence arises out of accumulating observations that the increasing ow of economic resourcesa rising standard of livingdoes not improve peoples feelings about themselves. It does not improve their subjective well-being. So that is the challenge. This is also known as the Easterlin Paradox after the economist who rst pointed it out. By the way, the effect of a rising standard of living on objective measures of well-being, such as health, education, housing, and social security, also declines strongly with afuence. There is a substantial eld of social-science research that we might think of as happiness studies. It is an inventory approach that surveys determinants of peoples expression of
AVNER OFFER is Chichele Professor of Economic History, Oxford University, and Fellow of All Souls College. His most recent publication is The Challenge of Afuence: Self-Control and Well-Being in the United States and Britain Since 1950 (New York: Oxford University Press, 2006).
Challenge, vol. 50, no. 1, March/April 2007, pp. 619. 2007 M.E. Sharpe, Inc. All rights reserved. ISSN 05775132 / 2007 $9.50 + 0.00. DOI: 10.2753/05775132500101

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The Challenge of Auence satisfaction and its socioeconomic determinants. My approach is somewhat different. Q. First, what is an example or two of their determinants? A. The strongest determinant of low life satisfaction is absence of social connection, particularly unemployment and separation, which can include family separation, divorce, and widowhood. But there are also some other factors. Q. And they look at these to determine exactly what? A. I admit the dependent variable might seem a little daft. It consists of survey responses to questions such as, how are you feeling, and what is your state of mind? You are invited to rank these on a scale of one to ve or one to seven or one to ten. On the face of it, I know, this is not very persuasive. But the reason we should take it seriously is that the determinants are very robust. That is to say, these questions have been asked millions of times now all over the globe, and they produce consistent results. Q. You mean the basic happiness surveys. A. Yes. Because they are robust, we can predict with a high level of reliability what the subjective sense of well-being will be if we know their demographics. In that respect, this is quite a persuasive research program. But my approach is different. I take a dynamic approach in that I say that well-being is not how much you have of the good things or how little you have of the bad things, it is about managing your life over time. In particular, I argue that well-being arises from nding a balance between the desires of the present and the rewards of the future. In economics there is a standard procedure for doing this, which is called exponential discounting. It allows you to calculate what the optimal choice is over time. What I argueand this is based on a great deal of research in psychology, also in animal behavior, and increasingly now in economicsis that human beings do not evaluate the future in these terms. They have a strong short-term or myopic bias. The consequence of this in economics is that our choice is time-inconsistent. We do not maintain the same ranking of our preferences over time. We change our minds as time passes. And, as I said, there is a strong short-term bias, so we value immediate salient

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Interview with Avner Oer rewards disproportionately more than delayed ones, even though the delayed rewards may be much more valuable.

Based on this, you nd that afuence itself has not made us more contentthat the happiness surveys do not show greater contentment. A. The question is, why is that the case? One important explanationwhich I think has a large element of truth in itis habituation. Satiation dulls the edge of satisfaction. We become satised, we derive less and less pleasure from what we havethat is, we get used to the good things. Another explanation has to do with relativities rather than absolutes. We attach great weight to status as a reward. One of the most valuable things for us is recognition of other people, the approbation of other people. And so we value status, but status is in limited supply. Room at the top is always scarce. Q. Yes, by denition. Status depends on having something that, in the eyes of others, they do not have. A. These are the conventional explanations among economists: habituation and the greater importance of relative over absolute income. My explanation is somewhat different. It is not an alternative to these explanations, but complementary to them. It goes back to this problem that choice is inconsistent; that if, in fact, we have this myopic bias, it is impossible to say what is the best choice. There is no algorithm to calculate the best choice because our choices are inconsistent as time passes. Let us go on from there. Consistency is one of the requirements of rationality. Conventional neoclassical economics is built on it. That does not mean we do not choose or we cannot choose. It means that we cannot calculate the best choice. What we do instead is to fall back on conventions and preexisting institutions. We look to see what other people do, and other people do what experience has shown them to be a good thing. The problem that arises due to this natural myopia comes when we need to sacrice something now for the sake of something better later, which I call the commitment problem.

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The Challenge of Auence Fortunately, society provides us with a way to solve such problems. It provides us with commitment devices, for example, education. We accept that it is good to get out of bed in the morning and go to school, even though it may not satisfy at the moment. We know it will over time. Or marriage, which we can also think of as a commitment device. To take this one step further, as I see it, afuence creates a problem for us because it generates new rewards for which we do not have commitment devices available. A good example of this is smoking. Smoking becomes popular around 1900 because cigarettes are now cheap and it seems to be a good thing. By mid-century, in Britain at any rate, something like 70 percent of men are smoking. In the meantime, it turns out that smoking is bad for your health, that it kills you early, a rather painful death. First, the scientists nd this out and describe it, then over time they persuade government, and then the middle classes are persuaded. Finally this understanding percolates lower down in the socioeconomic system. We eventually develop new laws about advertising and second-hand smoke, in addition to medical and government-sponsored persuasion. It takes a very long time to develop a commitment culture that helps avoid smoking. In the meantime, the ow of new rewards due to afuence generates new temptations that we do not really have the means to evaluate and that impart a short-term bias to our consumption. Prudence has built up afuence, but afuence undermines prudence. An example is fast food. It is highly palatable, but leaves us with jaded appetites and bigger bellies. This undermines our sense of well-being, but we consume it anyway. So this is a complementary view to those other two that I mentioned beforerelativities and habituation. Q. The natural question somebody would ask is whether the alternativeless afuenceis preferable. A. I do not really see that it follows. I think the policy issue that it raises is how high a priority should be given to economic growth in afuent societies. A good example of this is the debate around the minimum wage. We are told that the minimum wage is bad because it reduces competitiveness, it reduces efciency, it makes the market

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Interview with Avner Oer less exible, and consequently we are going to achieve less economic growth. The assumption is that economic growth is the highest good. Now, I am not saying that economic growth is bad, and some people would like to misunderstand me that way. All I am saying is that it is not the highest good and we have to look carefully at what we wish to sacrice to increase economic growth. Should we allow some people to make very low wages, which are not adequate for a minimally decent life? I should also qualify this by emphasizing that economic growth in poorer societies is generally associated with a rising sense of well-being and a variety of other positive social indicators, and that the benets of afuence diminish only as society becomes wealthier. Q. So, of course, generally economic growth has been historically benecial. A. The one response to my argument, which I do not take seriously, is Do you want us to go back to the eighteenth century? We are in a different world. The world of satiation is different from the world of indigence and requires different types of responses.

Is there a way in your mind to measure welfare bettersome companion measures to GDP? A. I am not strongly committed to this particular project. There are some projects aroundand I have done a survey of them in chapter 2 of my bookthat attempt to measure welfare differently than the standard national accounts approach. There is one point that I would like to stress, however, and here again I am a little at odds with the happiness agenda. The implication of the happiness agenda is that we can devise policies for truly increasing well-being. There are proposals of this kind around, of which the most important is probably a graduated consumption tax. This is mostly directed at the relative income or status issue, the issue that we derive most of our satisfaction from being better off than others. Q. The point of that is to tax higher incomes because people simply push up the cost of status. By taxing them, we will just keep

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The Challenge of Auence the cost down and not reduce their status. To go one step further, they may buy an ever more expensive car or an ever bigger yacht or airplane and really get no greater satisfaction from it. So why not tax them? A. That is exactly the idea. Now, if you look at my charts in the book, you will see that in afuent societies, subjective well-beingthe well-being schoolis not very responsive to income. It is very difcult to nudge it upward, and therefore it would be a mistake to target the average level of well-being as the objective of policy. This is a rhetorical error on the part of those who advocate happiness as an objective. They would gain more mileage by turning it upside down and say, let us target unhappiness. Unhappiness is much more limited. Usually in afuent societies, 8590 percent report themselves as being either happy or very happy. For those who are notusually these are people with poor social connection, or in poverty, or suffering from mental disorderthere are effective interventions. Some of the happiness people are proposing such interventions. The principle is that we can do a great deal of good by targeting those who are worst off. To turn Tolstoys famous statement around, I think that all the unhappy people are unhappy in a similar way. There are many ways to happiness, but pain is always the same. Reducing unhappiness is something that we can achieve.

Let us talk a little about some of the many interesting things you discuss in the book. One of them is what you call the regard economy or the economy of regard. Explain what you mean by that, because it does not t easily into any neoclassical notion of economics or rational economic man. A. Not market exchange but reciprocal interpersonal exchange. The basic premise is that our ultimate objective is to feel good about ourselves. How do we get to feel good about ourselves? By getting others to feel good about us. In other words, we want their authentic approbation, their uncoerced admiration. It turns out that the most effective way of doing that is for us to feel good about them. What we

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Interview with Avner Oer have here is a reciprocal relationship in which we feel good about other people, and they feel good about us. This is what I call the economy of regard. You might wonder, well, why is the market economy not able to provide this kind of relationship? Q. The normal reaction in my country would be, if you want to be well regarded, make money. A. Right. You should be rich. But the market economy cannot provide regard because, to be effective, the approbation of other people needs to be authentic. If you pay them for it, so to speak, it is not authentic. What you get in that case is something different. It is esteem, which is a different attitude altogether. It lacks the warm glow of regard, it lacks the authenticity that is necessary to underpin our own self-esteem and our relations with friends, spouses, children. There is little basis for this in neoclassical economics, but what is quite interesting is that Adam Smith has a similar notion in his book, The Theory of Moral Sentiments. The concept of regard was suggested to me by reading Adam Smith. So the idea I began work on some ten years ago is that this exchange of approbation has benets that incorporate and exceed the gains from trade. A related line of research is now emerging, reported in a recent volume edited by Herbert Gintis and others, Moral Sentiments and Material Interests. Q. You go on to show it can work efciently like a market. A. What I do showand again I do not place too much weight on itis that in analytical terms, the system of reciprocity has efciency attributes. In some aspects, it is as efcient as the market, and the important point is that a great deal of productive activity takes place in this form. Most important is the production of children; without children, the whole economy would grind to a halt. Yet we do not buy children in the market, we produce them within the economy of regard. There are many other areas where we actually prefer not to buy things. The public sector, by the way, is one example of this, and I did not get this chapter into the book but published it earlier as a separate pamphlet. So even in the most advanced market economies, I argue, we actually get the majority of our satisfaction in shadow dollar terms from outside the market.

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The Challenge of Auence

Does the emphasis on economic growth interfere with the economy of regard? A. Sometimes it does. A good example of this is incentive systems. There are leading economists who have pointed out that by identifying a certain set of performance measures to reward, you typically neglect all the other dimensions of performance. When there are many dimensions of quality, you are quite likely to get more productivity from a reliance on regard motivation than by setting up a competition among workers as to who will perform best. Q. To change subjects a bit, let us talk about advertisings role in the economy. Advertising may indeed promote a lot of economic growth. It may indeed, as you say, make life livelier for some people. But what is your ultimate sense of advertisings role in our lives and our well-being? A. I am not an across-the-board critic of advertising. I think advertising adds stimulation, color, and richness to our lives. It is a substantial economic activity in its own right in the United States, where it approaches 3 percent of GDP. That is about half the level of expenditure on education, by the way. But my critique of advertising, such as it is, is that it exploits a common resource, a public good, and that public good is truthfulness or trust. Advertising tends to be misleading. Even if the majority of advertisers are inclined to stick to the truth, the more they are truthful, the more it pays for individual companies to break ranks and be untruthful. And we have a phenomenon, a tragedy of the commons, as it is known in economics, in which no one can afford to actually say the truth. In other words, you must, let us say, dissimulate, just to keep up with the others. Thus, we degrade the quality of discourse in society in general. Respect for the truth is necessary for cooperation, and if we cannot trust what other people are saying, it will be increasingly difcult to forge the cooperative links that underpin both efciency and social satisfaction. Advertising targets the emotions. It is very difcult not to respond, for example, when you see a smile. When you see a smile, your impulse is to smile back. And this generates a

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Interview with Avner Oer warm glow, which in itself is . . . deceitful. It exploits your capacity to trust. When advertising makes use of trust, it also uses it up. Now I would even say that in the commercial spherealthough I think this has some negative side effectswe could live with it by regulating it further. We could nd a balance between information and stimulation, on the one hand, and truthfulness. Where I think it becomes pernicious is when it spills over into politics. Q. Can you explain that a bit more? A. In the 1970s, politics increasingly began to adopt the technologies of marketing, with its reliance on pressing emotional buttons. One of the consequences of this is that the managers of political communication have a fairly good notion of what people will fall for, and the result of this is the culture of spin in which you cannot truly believe anything. It is a political culture in which virtually every political activity is designed for its short-term response. This returns us to the myopic model we discussed earlier. What really counts is this salient immediate response rather than some assessment of long-term value. So I think that is where the biggest damage has been imposed by advertising and the sorry state of politics today. The low regard in which politics is held almost universally is largely a consequence of this effect. Q. Let me return to our earlier discussion then. The classic example of the time dynamic you are talking about may be what we eat and the consequences of what we eat. With afuence has come some dangerous eating habits. A. One phenomenon of the past thirty or forty years has been a large increase in body weight and the spread of obesity. Some economists say that if that is a consumers choice, there is nothing for us to worry about. And in general I accept this position, with the caveat that I think that choice is fallible. We cannot rely on ourselves to choose what we would prefer if we were slightly more detached from the choice. Eating is a good example of this because we spend a lot of money on reversing our eating choices; we spend a lot of money on dieting. I have actually calculated that what we spend on dieting and treating the medical results of obesity comes to something like 15 percent of what we spend on food.

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The Challenge of Auence To counter this argument that consumers are sovereign, I fall back on convention again and say that the two conventions of health norms and appearance norms are quite compelling in ordinary life. In terms of both health norms and appearance norms, the rise in body weight is a bad thing. The question, then, is, why does it happen? The reason it happens is an availability shock. In the 1950s, if you wanted to eat a square meal, you had to go home two times a day, possibly three times a day, where your wife would cook you a meal to the best of her ability, though she was by denition no more than an average cook. You would not have much to eat between meals. From the 1960s and 1970s on, we have had a ood of ready-made food available either in the supermarkets or at sidewalk outlets, and we simply do not have the commitment devices to resist it. Q. What kind of commitment device would deter that behavior? A. One example would be a resolution not to eat between mealsto eat only at mealtimes. Q. Many people make that resolution but do not abide by it. Is there a better commitment? A. If, for example, you were ned for eating between meals, that would be a more effective commitment device. And we see that with respect to narcotic drugs, where people are actually imprisoned for ingesting things that society deems dangerous or inappropriate. In standard economics, choices are made costlessly. We choose what is best for ourselves and that has no cost. My argument is that commitment is costly, and therefore those who are better off have more of it; they have better access to commitment than those who are poor. And that is one reason that food availability has actually hit the poor harder than it has the better off. By the way, some neoclassical economists have come to the same conclusion. Q. The rich, for example, might be able to afford a personal trainer or a health club. A. Or health food. Q. Health food is almost invariably much more expensive than fast food. A. That is right. So commitment is costly, and for the better-off the

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Interview with Avner Oer cost of not committing is heavier, because they have more to lose. So this is quite a good example that we are growing wealthier but do not have the capacity to resist the dangers. This growing availability of goodsa putative rise in the standard of living actually reduces our well-being.

Let me ask you to talk about what you call a retreat from commitment in our society and then about some of the policy implications. First, retreat from commitment, what do you mean? A. This is possibly the most controversial issue in the book, and it is about what has been happening in the family. I have a measure of status in which women on average do as well as or even better than men. My argument is that women do this not by getting better jobs but by avoiding the worst jobs because motherhood offers them a more satisfactory type of activity than the lowest-paid and most unpleasant types of employment. Hence employed women have average status scores equal to or higher than mens. At the upper end, the argument is that motherhood and workplace satisfaction are both sources of regard and to some extent substitutes for each other. So you nd that at the top end of the labor market, women are much more likely to be childless because the high-quality jobs are to some extent a substitute for motherhood. Not so at the lower end. And while women in high-status jobs are more likely childless, men in similar positions, on average, have comparatively more children. The argument, then, is that education has increased the choice that people have, and overall I would strongly argue that this has enhanced peoples well-being. It has given them more freedomfor example, not to stay in oppressive partnerships. The trouble with this is that it has affected the third party, the children. The children did not ask to be part of the contract; they are not voluntary participants. And to some extent they are victims of this greater freedom of their parents. Some attachment theories posit that the basis of a successful adulthood is a good parental attachment in childhood. The increasing autonomy that people have to change their circumstances has affected the qual-

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The Challenge of Auence ity of attachment. A good deal of personal dislocation arises from or is associated with family breakdown or family disorder of one kind or another. Family breakdown does not guarantee harm to children, but it just makes it more likely. I think one has to choose words very carefully here, and I tried to do that in the written text. So this is an area in which once again the rise of afuence, while it has supercially raised well-being, has had negative consequences as well. Q. Some would argue that earlier relationships in which there was no freedom were just as bad or worse for children. A. Bad parenting is harmful within the family as well. But social psychologists who have studied this issue, like Paul Amato, have been able to show that the independent effect of family breakdown was large and signicant over the past three decades. The social psychologist Jean Twenge has studied changes in anxiety over the past fty years, when the diagnostic instruments have not changed much. She has found that, over fty years, both in schoolchildren and college students, the incidence of anxiety has risen by more than one standard deviation. Children who are now regarded as normal would have been referred for specialist treatment in 1950. There are various other measures of mental disorder. The general impression is that mental disorder has been increasing with afuence.

Talk about the policy implications of your ideas and research. Early in our interview you said the best policy may be to try to reduce unhappiness of a decided minority who are more or less unambiguously unhappy. What kind of policy proposals would occur to you along those lines? A. To begin with, I am decidedly modest about myself as a policy person. It is not necessarily true that these issues raise simple policy interventions, so I am feeling a little uneasy about coming out with policy recommendations. I will give you an example of someone elses proposal. We said that 85 to 90 percent of people describe themselves as happy or very happy. Now, who are the unhappy? The unhappy

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Interview with Avner Oer are the unemployed, for example. That suggests making the reduction of unemployment a high priority. At the margin, if reducing unemployment has an economic cost, we have to think carefully as to whether the increment in happiness for those who are most miserable in society is not worth the sacrice of some increment in economic growth. More specically, the incidence of mental ill health is very substantial. My own hunch is that most of those who describe themselves as unhappy or very unhappy also suffer from mental disorders. The epidemiology is staggering. In the United States, quite serious studies recently showed an incidence of mental disorder in 20 to 25 percent of the population. And effective interventions are available, which would increase well-being very substantially. Q. Are we talking about pharmaceutical interventions? A. Not necessarily. There are certain types of talk therapies. One can argue about the precise details, but in my mind there is a serious disproportion between the very heavy investments we are making in the last period of life in terms of acute therapies, which absorbs a substantial part of our health outlays, and the neglect of mental health, which affects enormous numbers earlier in life. I think we may neglect mental health for myopic reasons. If it does not affect us or someone close to us, then we cannot imagine that it is real.

You devote a lot of time to the consequences of inequality. Should addressing inequality be one of our policy considerations? A. Denitely. But this is really a much larger political economy question, which I am addressing in what may be my next work. I ask myself why some societies have committed themselves to policies that seem to be indifferent to rising inequalities whereas other societies, which have been as successful economicallyindeed more successfulhave given a high priority to the reduction of inequality. It is manifest that inequality is harmful. I believe that the poor U.S. performance in health measures, in well-being measures, and in longevity measures arises largely out of inequalitythings like the level

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The Challenge of Auence of incarceration, or infant mortality. But how do you get from A to B? These are large political economy questions, and there are no simple policy interventions. This is more an issue of normative change, and it raises the issue of the persistence of normative beliefs in different types of societies. Is it a question of individualism? A more mutually responsive, mutually responsible kind of society versus and individualistic one? Such problems do not respond to narrow interventions. This is one of the issues I am trying to explore in my current work.

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