Positive psychology and the end of economics


I have recently been studying positive psychology, a branch of psychology founded by Martin Seligman and Mihaly Csikszentmihalyi in 1998.[1] I had previously been prejudiced against a subject described as ‘the science of happiness’, my view being that the pursuit of happiness is a fruitless undertaking; you will always be trying to attain the next happiness ‘hit’.

Personally, I believe in developing your own meaning in life and I agree with Aristotle about the importance of cultivating one’s own virtue. 

My motivation for investigating positive psychology was purely instrumental. I feel my personal performance could be enhanced by improving my mental health; the modern word contains a great deal of pathologies for mental health and it’s a necessity to build mental resilience to avoid the negative consequences to wellbeing.

The findings from positive psychology are useful in this respect, in that they recommend a series of practices and attitudes which have subjectively improved my well-being and resilience; particularly helpful in the time of Covid. My prejudice against the subject proved unfounded: the findings of positive psychology concur with my own intuitions about meaning and well-being.

However, in studying positive psychology I was struck by its implications for the economics profession and the economy, which is the subject of this essay.

To cut to the chase (and a big spoiler alert) positive psychology has found that these are the kind of things that are important for ‘happiness’ (loosely defined): Sleep, exercise, social relations, meditation, acts of kindness, savouring, gratitude, flow activities.[2] None of this will come as a surprise to non-economists, being in line with ancient wisdoms from most traditions.

In contrast, what doesn’t make you happy are things like money, a good job, a good body, material possessions and good school grades.2 This might be more of a surprise; surely, having a good job or money makes you happy? Positive psychology argues that you start with a base level of happiness; good fortune, such as landing your dream job, getting married or winning the lottery, will give you an instant boost of happiness, but then, surprisingly quickly, you return to your base level.

The same is also true of bad fortune; there is an immediate lowering of happiness, but it also returns to the base level.

There is an important proviso, happiness does increase with income up to a certain threshold and then it flattens off. Above the threshold level you get a treadmill of desire – people with income of $100,000 think they’ll be happy if they had an income of, say, $200,000; people with $1m think they’ll be happy with $2m, etc.

A lot of this is because people tend to hang out with other people of similar income levels, which forms their reference group.

Why do people think they want money, a great body, a good job, etc, when they don’t make you happy? This is because of mis-wanting – we think things will make us happy that don’t – often because they give us an immediate happiness hit which soon fades, so then we have to search for the next hit.[3] Advertising works to emphasise this mis-wanting.

Also, a lot of our actions are motivated by reasons other than happiness; generally, to conform to social norms or because of habit and learned behaviour. Social media takes our unhappiness to a whole new realm for a host of different reasons – for example fear of missing out (FOMO), being forced to compare ourselves to a reference group who are curating their lives, echo chambers and the anonymous bile of personal attacks.  

I want to emphasise here that positive psychology is a science – notwithstanding the replication crisis afflicting social science – in that it tests hypotheses and draws conclusions form empirical data. The science has developed quantitative and qualitative tools to measure well-being; typically introducing behavioural interventions, and measuring well-being levels before, after and through time.  

There is another science of happiness; it is called economics. The economics version of happiness is utility, generally economic models assume that consuming goods and services increases utility, expressed by our willingness to pay. 

The basic micro-economic model that I was taught in micro-economics 101 is that starting with two goods (in my day, pizzas and DVDs) and a budget set, the model solves to optimise purchases to maximise utility levels. More of each good gives you more utility, subject with diminishing utility returns.

The assumptions in this basic model are wrong; if we equate utility to well-being then people would maximise their utility by performing acts of kindness or feeling gratitude. But simply substituting pizzas and DVDs with acts of kindness and gratitude does not work.

Obviously, acts of kindness do not need to cost anything, so you can’t put monetary value and form a budget set. An economist might argue that time is your budget. But that won’t work either, kindness or gratitude are more states of mind than activities, the assumption about diminishing marginal utilities would not hold; squeezing in that extra unit of gratitude every waking hour will not increase my well-being.

I think this is neatly encapsulated by the Chinese concept Wu Wei – trying without trying;[4] antithetic to an optimising utility framework.

Economists would argue that what I have described is a Mickey Mouse economics model taught to first year undergrads, all real economists loosen these assumptions – like Newton’s laws of motion; they approximately apply (this is the exact analogy my economics 101 professor used).

Except it’s not; the whole edifice of economics is built on this Mickey Mouse model – markets efficiently allocate goods and services when rational agents maximise their utility.  A lot of the work done by economists involves investigating what happens when you loosen these assumptions, for example modelling markets where prices are “sticky” or agents that are not rational. 

The insight from behavioural economics have been incorporated into mainstream economics: behavioural economics notes that people are not rational; and subject to a number of biases, so they do not optimise their utility.[5] This is fundamentally different to the insights from positive psychology; which is that utility itself is not a valid concept.

If economics is so fundamentally wrong, why does it work? Economics is a broad church, and many of its flaws have been oft pointed out[6] – but using economic tools draws many valid inferences about the real world, which can be validated by data. And the concept of utility does seem a fair approximation to reality.

The insight from positive psychology is the concept of “mis-wanting”.[7] Utility is a fairly close approximation with mis-wanting; people think they want more goods and services, and having more stuff displays diminishing marginal returns.

If economics works, why is there a problem? After all, capitalism has made us rich and we have access to all the stuff we might want (at least some of us have). It is problematic for the normative aspects of economics. Markets are allocatively efficient – they optimise the output of goods and services.

That is, if they work properly, they optimise mis-wanting. Our economies may have ended up affluent, but we have magicked up an economy which satisfies our mis-wants. These mis-wants have created a great deal of pathologies – mental health epidemics, our vulnerability to a viral epidemic, obscene levels of inequality, the destruction of the natural world to produce consumer goods to satisfy our-mis-wanting, and so on. None of this makes us happy, which was the point of the exercise. 

The non-correspondence between income and happiness has been long discussed in the economic literature starting with Easterling (1974),[8] which formulates the “Easterlin Paradox” that happiness does not rise with income over long periods of time even though they are correlated at any given time.

Subsequent cross-country studies have shown that life satisfaction increases with a country’s GDP sharply up to a level of a GDP per capita of about $15,000 and then quickly flatten.[9] In the light of positive psychology, this is not a paradox at all; when your income increases you get a happiness hit, which goes away with time.

The increase in happiness with income for the very poor does imply that poor countries will make people unambiguously better off by satisfying the material needs of their people (although very poor countries also have co-morbidities with poverty which also add to a lack of well-being, such as very high corruption levels, civil unrest and war, oppressive governments, and so on).

The lessons I am discussing essentially apply to societies which have reached an income threshold, although $15,000 per capita income is actually quite a low threshold. Also, conventional economics often breaks down in very poor countries, many of the assumptions inherent in economics textbooks are premised on there being a functioning society.

Five of the top 10 happiest countries in the world are the Scandinavian social democracies.[10] These are all affluent countries (the equally affluent USA is only 18th) but they also share common economic landscape – they are egalitarian societies with high levels of taxes, strong and well-run social services, excellent education systems and public transport, long parental leave etc.

I cannot help but notice in the USA, all of these policies are decried as being “socialist” accompanied by a rhetoric that If the USA pursues these policies it would end up like Cuba and Venezuela. Perhaps if it were pointed out that Denmark or Sweden are more realistic destination this might entice people to not be so scared of social democracy.  

Yet i did not want this article to be a paean to social democracy. Instead, what is new to the debate brought by positive psychology? After all, the ideas of what make us happy have been around for time immemorial, economists have perpetually been criticised for making unrealistic assumptions, and capitalism itself has since its inception been criticised for immiserating people[11] and causing the destruction of the environment.

As I have explained above, the reason conventional economics actually works (as does the economy that has been forged in its image). Our economy is very good at meeting our mis-wants; which means that the world we have created reflects these mis-wants.

This is a differing view from its advocates (who claim that it meets our wants) and its critics (who claim it doesn’t work at all). And these mis-wants inevitably result in many social pathologies. One of these pathologies is to train people into becoming (unhappy) maximising self-interested consumers, in line with economic models.

Positive psychology also provides an escape. Yale University’s online course on Science of Well-being by Professor Laurie Santos[12] is by far Coursera and Yale’s most popular course, demonstrating that people are well-aware of the need for positive psychology to build their mental resilience.

There has been an explosion in the popularity of activities such as mindfulness meditation, yoga, and of the popularity of “flow” and mindful activities – from rock climbing to knitting. Also, younger people tend to be more attracted to the lifestyle and values implied by positive psychology.

Rather than impose a Scandinavian social democratic model on an unreceptive population, there is the potential for a ground-up movement, because improving one’s mental health is entirely in everyone’s self-interest.

There is justification for public policy interventions on health grounds which should be fairly uncontroversial. The negative health impact from advertising and social media are multiple and as acute as tobacco and hence a similar response is justified. As there has been a history of policy interventions for smoking and other activities harmful to human health, there is a playbook of how to reduce these activities:

  • Public health campaign: the government promotes well-being activities, such as social interaction, meditation, the importance of sleep and exercise. Schools should incorporate well-being in the way they are run (some are already doing this).
  • Health warnings: adverts and social media should carry health warnings such as: “excessive use of social media can damage your health”; “consumption does not bring you fulfilment and destroys the environment.”
  • Restriction of social media for young and vulnerable, bans on adverts aimed at children.
  • Tax: most countries have some form of sales and use tax, which is often higher on “bads” such a cigarettes and alcohol. This could be reformed, for example increasing the tax on luxury good, maybe distributing this directly as a citizen’s income. Social media could also be taxed, this could be in the form of payment to users for use of their data and for co-creation of content. 

There is already a secular trend for less consumption, with twin drivers of an ageing population and younger people becoming more environmentally conscious. If this were accelerated, the ironic result would be that our consumption-based market economies would collapse.

But the point of a free market is that it delivers to people what they want. If people want to spend more time being kind and socially interacting and less time buying stuff, then the market is supposed to deliver on this. If it can’t, well, then we need a new economy.

Finally, I would like to end on a note of hope – I very much enjoyed the HBO TV Series Game of Thrones. This portrays a world of perpetual violence, with a view of human nature that people are cruel and brutal and hence always fighting.

And to some extent I used to think this was true; unfortunately, watching the aftermath of the US presidential elections would appear to confirm this. But positive psychology contradicts this view; people are actually nice; we enjoy nothing more than being kind, social interaction and felling gratitude.

Surely, if this could be channelled, then solving societies’ problems should be easy.

This post first appeared in thesolutionsjournal.com.

[1] Seligman, M., Csikszentmihalyi, M. (2000) Positive psychology: An introduction. American Psychologist. 55 (1): 5–14 

[2] Santos, L. (2020) The Science of Well-Being. Yale UniversityCoursera MOOC

[3] Gilbert, D. T., & Ebert, J. E. J. (2002) Decisions and revisions: The affective forecasting of changeable outcomes. Journal of Personality and Social Psychology, 82, 503-514.

[4] Slingerland, E. (2007) Effortless Action: Wu-Wei as Conceptual Metaphor and Spiritual Ideal. Oxford University Press

[5] Heukelom, F. (2007) Kahneman and Tversky and the Origin of Behavioral Economics.  Tinbergen Institute Discussion Paper No. 07-003/1, Available at SSRN: https://ssrn.com/abstract=956887 or http://dx.doi.org/10.2139/ssrn.956887

[6] Keen, S. (2011) Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned?Zed Books Limited

[7] Gilbert, D. T., & Ebert, J. E. J. (2002) Decisions and revisions: The affective forecasting of changeable outcomes. Journal of Personality and Social Psychology, 82, 503-514.

[8] Easterlin, R.A. (1974) Does economic growth improve the human lot? Some

empirical evidence. From: David, P.A., Reder, M.W. (Eds.), Nations and Households

in Economic Growth. Academic Press, pp. 89e125. Retrieved From: https://doi.org/10.1016/


[9] Fanning, A. O’Neill, D. (2019) The Wellbeing Consumption paradox: Happiness, health, income,and carbon emissions in growing versus non-growing economies. Journal of Cleaner Production 212 (2019) 810e821

[10] Helliwell, J., Layard, R.. Sachs, J., and De Neve, J., eds. (2020) World Happiness Report 2020. New York: Sustainable Development Solutions Network. Retrieved from: https://worldhappiness.report/ed/2020/#read

[11] For example, Marx, K (reprinted 2011) Das Kapital Createspace Independent Publishing Platform

[12] Yale University (2020) The Science of Well-Being Coursera.

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Radix is the radical centre think tank. We welcome all contributions which promote system change, challenge established notions and re-imagine our societies. The views expressed here are those of the individual contributor and not necessarily shared by Radix.


  1. 38Red says

    Some interesting points (I’ve signed up for the Yale/Coursera MOOC on your recommendation) but I think you’re being unduly harsh on economics. Even at the econ 101 level, it’s not too hard to encompass self-interest vs altruism in a utility model. It’s not much more advanced to embrace expected versus realised utility and imperfect information. You don’t need positive psychology to explain that utility is a function of both absolute and relative consumption. Economics and psychology are complementary and overlapping disciplines; you don’t need to reject one in order to embrace the other.

  2. Corrado Poli says

    Hi Nick! I really enjoyed your analysis and conclusions. I’m quite reserved about the possible solution of more public policy intervention to… make people happier. There is a trend toward a collective acceptance of a positive psychology approach which is already going on

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