The Happiness Economy

Last year, 2014, was a bit of a struggle. Can't say this piece is one of my better ones as I basically revisited the Gross Happiness Index that I wrote about in 2010. Good idea at the time but there are probably repetitions. I called it the Happiness Economy this time:


Dec 2014

By Lim Yin Foong

With the year-end feasting and festivities all but over, this is usually the time when most people would take stock of their lives and make resolutions for a better and happier year ahead.

These days however, we're not the only ones interested in our state of happiness. Governments and policymakers also want to know what makes us happy and contented, and are now including happiness and wellbeing into national and even global agendas.

In end-2010 when I first wrote about the UK's plans to measure national wellbeing, it was but one of a few post-financial crisis initiatives to find an alternative to the Gross Domestic Product (GDP) to assess a nation's success and progress, in part inspired by Bhutan's Gross National Happiness (GNH) measure.

In the four years since then, the United Nations (UN) General Assembly has called on its member countries to measure its people's happiness and wellbeing, and to use this to guide their paublic policies. It has also declared an International Day of Happiness on March 20, in recognition of ' the relevance of happiness and wellbeing as universal goals and aspirations in the lives of human beings around the world and the importance of their recognition in public policy objectives.'

Today, there are a multitude of national efforts looking to measure happiness and wellbeing, such as the UK's Measuring National Wellbeing programme and Canada's Index of Wellbeing. The UN-backed World Happiness Report, considered to be the world's first global happiness survey, was first released in April 2012. This was just ahead of a high-level meeting of governments, initiated and chaired by Bhutan, to debate on what UN Secretary General Ban Ki-moon termed the 'new economic paradigm' - one that links between happiness, wellbeing and prosperity.

The Organization for Economic Cooperation and Development (OECD) has introduced guidelines to measure wellbeing, while the World Economic Forum has also begun producing its own annual happiness reports, calling wellbeing the 'new concept of progress'. And UK-based policy think-tank Legatum Institute's Prosperity Index, first produced in 2007, now receives much attention as reportedly the only global index that looks at both wealth and wellbeing in measuring national prosperity.

All these endeavours stem from a realisation that the GDP is a narrow and insufficient measure of a nation's progress, hence leading to the search for more holistic models that can help redefine national prosperity beyond looking at material wealth as the sole determinant of success and wellbeing.

Academics and researchers are calling for the formalisation of what's been termed as 'Beyond GDP' measurements that take into consideration social and environmental indicators when measuring a nation's success and wellbeing. These can range from the availability of cheap eyeglasses and the number of teenage girls attending school, to the average hours of sleep and level of random of acts of kindness in a society.

And it's about time. For far too long, the use of monetary benchmarks, like income and wealth as represented by the GDP, to measure and compare national progress has fuelled the relentless pursuit for even more economic growth at the expense of social and environmental factors that contribute to our quality of life and wellbeing.

Undoubtedly, we all need a certain level of financial income to achieve a decent life standard, but does money necessarily buy happiness? Not so after a certain point, say some researchers in happiness economics, who cite the Easterlin paradox. In the 1970s, American economics professor Richard Easterlin wrote about what how once basic needs have been met, more national wealth does not does not necessarily translate to a happier nation.

This view has been further corroborated by researchers from Warwick University and the University of Minnesota, whose recent study found that while national happiness rises as a country's GDP per capita goes up, life satisfaction levels peak at an annual income per head of US$36,000, before dipping slightly.

Warwick University economist Eugenio Proto attributes this to the fact that while higher GDP levels lead to higher aspiration, the resulting aspiration gap – the difference between actual income and the income we would like – begins to erode life satisfaction levels. In other words, greater wealth can lead to greater inequality and unhappiness as a result.

Little surprise then, that proponents of happiness economics like economist Lord Richard Layard believe that happiness is a more realistic measure of success than income. Layard, who's been called the 'father of happiness science', feels that government needs to do more to ensure the happiness of its people and that public policy should focus on helping them achieve a better work-life balance and mental health.

Indeed, economic growth in the West has come with increasing loneliness and depression, suggesting that a materialistic-only philosophy is not in accord with human nature, writes Reuters editor-at-large Hugh Dixon. In fact, he posits that the economy should serve society in providing the conditions that allow people to lead good lives.

Economic growth is important, but should not be the end-goal in itself. A change in mindset is therefore necessary if we want a more sustainable and conducive environment to achieve better quality of life for everyone.

Measuring wellbeing and taking a more holistic approach to assessing progress is a laudable first step towards this path. The next challenge though would be to see how the collected and analysed wellbeing data can be effectively applied in government policy-making as well as decision-making by businesses, communities and individuals.

In Search of a Responsible Economy

Then in 2013 I was inspired by Patagonia, the company, and what they call the 'responsible economy'. This resulted in the following environmental-related piece, which also touched on collaborative consumption or the sharing economy.

Dec 2013

"Don't buy this jacket."

This is the last thing you would expect a clothing company to tell consumers on one of the busiest days in the year for retailers, but this is precisely what adventure apparel brand Patagonia did two years ago. This headline appeared on its Black Friday ads, which also explained the environmental impact of producing the jackets.

The ads were part of Patagonia's ongoing campaign to encourage consumers to buy less and to recycle, repair and reuse instead. The company also offers a clothing repair service, and recently started accepting trade-ins of used Patagonia apparel, which are then reconditioned and resold at some of its stores as 'Worn Wear'.

Such a campaign seems counter-productive to the accepted business model of selling more products and services to achieve company growth and profits.  So why would Patagonia tell us to not to buy more of its products?

The answer: to encourage us to reduce our environmental footprint. And Patagonia, well-known for its environmentalism as well as for making high-quality (and expensive) outdoor gear, is keen to push the sustainability agenda further with its latest campaign, known as The Responsible Economy.

Launched recently in September, this two-year campaign aims to encourage discussion about the need for new business and economic practices that are not solely based on growth-based capitalism and what Patagonia founder Yvon Chouinard calls 'insatiable consumerism'.

Since the onset of the global economic recession, more and more people have become disillusioned with the conventional understanding that relentless growth -- at the expense of everything else -- is necessary for business and economic prosperity. And Patagonia's Responsible Economy campaign is the latest in efforts to seek out alternative business and economic models, which has also given rise to the sharing economy or collaborative consumption.

In 2011, when Freelancers Union founder Sara Horowitz wrote in The Atlantic about the sharing economy, she described it as being driven by millions of Americans who recognised that 'endless and thoughtless consumption' was unsustainable both from an ecological as well as financial standpoint. Recession-hit consumers realised that they could no longer afford prop up their economy by continuing to spend relentlessly, to the point of getting themselves into serious debt.

Enter the sharing economy, which is based on the sharing of resources through online peer-to-peer marketplaces. Mobile and online technology has made it cheaper and easier for individuals to share underused assets by renting them, and this in turn is changing the way people think about the need to own goods. In other words, think access, not ownership. 

For instance, why own a car that you use only once a month, when you can affordably rent a car or a ride? This was the premise for car/ride-sharing businesses like RelayRides and Lyft. Have an extra bedroom in your home? Convert that into income by renting it out to tourists via peer-to-peer rental sites like Airbnb or HomeAway.  

By encouraging more efficient use of resources, collaborative consumption contributes to environmental and financial sustainability. It also fosters greater collaboration and community spirit as individuals come together to find viable, affordable solutions to their needs.  The sharing economy relies on shared needs, trust and the belief that the group is stronger than the individual, Horowitz writes.

This alternate economic model, what The Economist calls 'a post-crisis antidote to materialism and overconsumption', has undeniably struck a chord among consumers. Today, the sharing economy is said to have expanded to an estimated value of US$110 billion. But a sure sign of its potential for further growth is the fact that regulators as well as large corporations are now paying much closer attention to collaborative businesses.

Big companies are beginning to embrace these disruptions to their business by joining in. Automotive giant Daimler has introduced its Car2Go car-sharing service, while General Motors has invested in RelayRides. Rental business Avis has acquired Zipcar, a forerunner in the car sharing business. And the success of online textbook rental service Chegg.com has spurred established book retailers like Barnes and Noble and Amazon to offer similar services.

It is encouraging to see the effect of the sharing economy on incumbent businesses, as it can only spur the growth of more innovative, collaborative and resource-friendly business models. Yet, the quest for alternative business and economic models that can balance growth with the need for sustainability as well as social benefit is not an easy one.

Even Patagonia faces this challenge; despite spending the past two years persuading consumers to buy less, its annual sales have increased by almost 38% in the same period.  Patagonia vice president of environmental affairs Rick Ridgeway recently told BusinessWeek that the company's growth is overshadowing the benefits it is producing from sustainability initiatives.

Back in 1968, ecologist Garett Hardin wrote about the 'tragedy of the commons', a situation where shared limited resources are depleted by individuals acting independently based on their self-interest, in contrary to the long-term best interests of the group.

According the Global Footprint Network, humanity has been overspending ecologically since the 1970s and we are now utilising resources equivalent to 1.5 planets.  And given the world's current population and consumption trends, we will need the equivalent of two Earths to support us by the 2030s.

If we are to achieve a responsible economy, we need responsible companies and policymakers who are not just focused on growth at all costs, but who recognise the importance of balancing social, ecological and economic goals. We also need to become more responsible consumers ourselves, to be more reflective and thoughtful about what we buy, how and why we spend, and consider the impact of our consumption decisions.

If we are to circumvent the tragedy of the commons on our finite planet, we must remember that we're all in this together. We need to move out of our self-interested individual selves, and come together and work collectively for our long-term sustainability.

Lim Yin Foong does not own any Patagonia stocks or clothing, but would be happy to share with anyone who does. Now based in the UK, Yin Foong was the founding editor of Personal Money, a Malaysian personal finance magazine published by The Edge Communications.

Ends…

Putting Purpose Ahead of Profits

I liked this piece from 2012. It was about profit maximisation vs purpose maximisation, inspired by Daniel H Pink's book In  Drive: The Surprising Truth About What Motivates Us. It also tapped on the current disatisfaction about MNCs avoiding tax for the purpose of profit maximisation.

Dec 2012

I was in a bit of a dilemma recently.

Amazon was offering a 20% discount off the Kindle Fire and I thought it would make a great Christmas gift for my husband. The thing is though, I’ve been trying my best not to shop with Amazon this Christmas.

It’s not an easy thing to do, as I love shopping with Amazon and not just for books, music and film; I’ve even bought a TV and laptop from Amazon.  Aside from the convenience, it also offers some of the best prices that the stores can’t beat, and it throws in free shipping.

So why stop shopping with Amazon? Well, the online retailer has recently come under fire for reportedly not paying any corporation tax in the UK despite making over £7.6 billion in UK sales in the past three years. By channelling its sales through its Luxembourg operations, the online retailer has been paying a 5.3% average tax rate on its overseas income over the past five years, less than 25% of the average rate across its major foreign markets, Reuters reports.

Amazon is not the only multi-national who has been in the news for not paying its fair share of taxes in the UK. Starbucks, Google, and now Microsoft are also under scrutiny for their tax accounting practices aimed at minimising their taxes. Director of OECD Centre for Tax Policy and Administration Pascal Saint-Amans told the Observer that there appears to be a “large and growing gap” between where companies conduct their business – in higher tax jurisdictions – and where they record their profits – in lower tax jurisdictions.

Undoubtedly, what these companies have done is not illegal and in fact, it’s been going on for years. Cash-strapped governments are however not putting up with it anymore, as these arrangements have deprived them of hefty tax income at a crucial time when the funds are much needed for public budgets and to help save their floundering economies. Amazon has reportedly been under scrutiny from tax departments in countries including the US, UK, Germany and France over the past six years.

More crucially, consumers particularly here in Britain, are having none of it either. There have been calls to boycott these companies and on Dec 8, tax avoidance campaigners targeted over 40 UK Starbuck outlets to protest the fact that the global coffee chain reportedly paid only £8.6 million in tax over 13 years, despite recording sales of £3.1 billion in the same period. Buckling under public pressure, Starbacks has announced that it will review its tax accounting practices and pay up to £20 million more in corporation tax over the next two years.

There’s been plenty of debate over the issue and to be fair, one cannot lay the blame entirely on the companies who are after all doing what they are meant to do; maximise profits and shareholder gains. And they will use whatever means possible to stay competitive and secure the most gains for their bottom line.

Similarly as an investor and consumer, I should naturally put myself – and my bottom line – first. It’s the first instinct of homo economicus or economic human, to act rationally and with self-interest, hence my dilemma with Amazon where I find myself wrestling between my conscience and my inner bargain hunter. And boundless rationality and self-interest is at the core of capitalism, which encourages keen competition and survival of the fittest.

Meanwhile, the European Union is strongly encouraging European governments to work together to root out tax avoidance which is apparently costing them around 1 trillion euros annually. In the UK, the ‘tax gap’ between what the government expects to receive and what it actually collects is a whopping £32 billion, an amount equal to public spending on education alone.

With this huge shortfall, it is little wonder there is so much anger and frustration about these multi-nationals’ tax minimisation practices. Often overlooked when times were good, the widespread use of these practices are now being considered from a moral perspective, and corporations are being censured for not doing the right thing even as the man on the street suffers the effects of recession-hit economies.

Since the onset of the financial crisis, which many attribute to the relentless pursuit of profit maximisation, many have questioned the capitalist mantra of survival of the fittest as a measure of economic success. So is this the right approach to take if it means that underpaid taxes deprive many – particularly the weak and the underprivileged – of public services, and small local companies are being put out of business when they can’t compete with their more ‘tax-efficient’ multi-national counterparts? 

Former equity analyst turned journalist Edward Hadas once wrote in his Reuters column that excessive self-interest and destructive conflict cause problems, and that a healthy economy is built by innumerable individuals who work together, strive for excellence and try to avoid bad practices.

I for one, believe that as we work our way out of the current economic troubles, there is a valid call for a mindset change towards purpose – rather than profit – maximisation. In his book Drive: The Surprising Truth About What Motivates Us, Daniel H Pink says that purpose maximisation is becoming more prevalent as a new breed of businessperson seeks purpose with the fervour that traditional economic theory says entrepreneurs seek profit.

There is certainly call for businesses to have some sense of purpose beyond the bottom line, but purpose maximisation is not just for business leaders and decision makers. As investors, we need to demand more than just profits but also purpose from the companies we invest in, and as consumers we need to be more conscientious about who we buy from, to ensure that they operate ethically for the greater good rather than just self-interest.

In his book, Pink also describes how in early 2009 in the aftermath of the financial meltdown, a group of Harvard MBA students pledged to achieve a higher purpose than just the bottom line. He quotes student Max Anderson, who said: “My hope is that at our 25^th reunion our class will not be known for how much money we made or how much money we gave back to the school, but for how the world was made a better place as a result of our leadership.”

Let’s hope that the lessons learnt from the economic debacle of recent years will be enduring ones, and when the good times return, such fervent declarations will not end up being just lip service. 

Lim Yin Foong eventuallly bought her husband gym sessions instead, figuring that he needed them more than he needed the Kindle Fire.

Building a More Meaningful Business Environment Post-Crisis

Then came the piece in 2011. I think this was the year that I was inspired by John Lewis to write about their partnership values and about meaningful business models:

Dec 2011

One of the most popular television ads this holiday season depicts a little boy counting down the days to Christmas. Time just can’t seem to pass by quickly enough for him, and one assumes this is because he can’t wait to open his presents.

However, the final sequence of the ad – where he wakes up on Christmas morning – sees him running past the pile of presents at the foot of his bed to retrieve an awkwardly-wrapped package from his wardrobe. As he presents the gift to his sleepy parents, the tagline appears on the screen: For The Gifts You Can’t Wait to Give. 

This is the sort of feel-good ad that most people have come to expect from John Lewis, the UK’s favourite retailer. Much loved by Middle Britain, the John Lewis brand is often associated with exceptional customer service, reliability and trustworthiness, qualities that have been attributed to its unique business model.

The John Lewis Partnership – which owns the John Lewis departmental stores and Waitrose supermarkets – is an employee-owned company; all permanent staff are ‘partners’ who own a share in the business and participate in its profits. This sense of ownership is seen as a strong incentive for employees to perform well; its executive chairman Charlie Mayfield has been quoted as saying that ‘if we treat our partners well, it will lead to good customer service.’

The global financial crisis and the ensuing economic recession in much of the Western world has given rise to much anger and disillusionment, as demonstrated by the Occupy protest movement against economic and social inequality. And in an effort to restore better accountability, ethics and trustworthiness to business practices, business and government leaders have been prompted to seek alternatives to the current shareholder value model and its short-termist view of profits and share ownership by distant, disengaged shareholders.

As such, the John Lewis model of employee ownership and other similar business models such as co-operatives and mutuals which promote a stronger sense of ownership and greater stakeholder involvement, are increasingly being seen as alternative business models for the future. So much so that the British government is keen to see such models replicated not just in businesses but also in the delivery of public services.  

Research by the Cass Business School show that employee-owned businesses create jobs faster, are significantly more resilient in an economic downturn, deliver far better customer satisfaction, and boast substantially higher value added per employee, The Guardian reports. In the UK, they contribute some £25 billion to the British economy, and according to law firm Field Fisher Waterhouse’s UK Employee Ownership Index, outperform FTSE All-Share companies by an average of 11% annually.

John Lewis’s partnership model has enabled it to weather the current challenging times; despite the downturn, the company saw a 20% jump in pre-tax profits to £367.9 million in the year ended Jan 29, 2011. The business shared £194.5 million in the form of bonuses with its 76,500 partners, equivalent to 18% of their individual annual salary.

Finance mutuals

In the financial services sector, remutualisation is now being seen by some as a way to restore faith in the industry. When the government put up nationalised bank (and ex-building society) Northern Rock for sale, there were many calls for it to be remutualised into a new building society.

Mutuals in the British financial sector are represented mainly by building societies. They are owned by their customers, known as members, and therefore are expected to act in the interests of their members rather than being driven by external shareholder pressure for profits.

There is however only a handful of building societies left in the UK, as 10 of the largest 12 building societies demutualised to become banks in the mid-1980s. Ironically, mutuals were then derided for their inability to fulfil the ideal norm of the shareholder value model due to limits on participation in wholesale funding and high-risk businesses; these constraints in fact safeguarded them during the financial crisis. Interestingly, none of these demutualised societies exist independently today, having been either merged or taken over by a larger bank.

Building societies have reportedly weathered the financial crisis well; a majority of them have remained profitable despite continuing difficult market conditions including very low interest rates and low mortgage activity, KPMG’s Building Societies Database 2011 reports.

The case for remutualising failed financial institutions was put forth in a report by Oxford University’s Centre for Mutual & Employee-Owned Business, which noted that building societies are less prone than banks to pursue risky speculative activity. Having more diverse models of financial service providers would also help produce a more stable financial sector and enhance competition within the system, it added.

There is no denying the appeal of mutuals and employee-owned companies in these troubled times. Increasingly, more people are drawn to the principle of building businesses that also benefit employees, customers and society as a whole, as opposed to the individualistic, profit-oriented practices which many believe were the root causes of the current financial chaos.

Such business models are however not without their downsides. For one, they are more complex to run, depending on the ownership and management structures. There are also questions as to how much business risk they can take, and how an external injection of capital would affect mutually-owned organisations. Financial Times’ Tony Jackson also pointed out that Lehman Brothers and Bear Stearns had very high levels of employee ownership when they imploded. And of course, pro-capitalists would be downright uncomfortable with the socialist and communist connotations of such business models.

One can however hope that there is some real effort to seriously reflect on the failings of the current economic system, and rather than just going back to ‘business as usual’ when things improve, that we may find ourselves with a more meaningful business environment; one that goes beyond making profits in the short term and looks at gaining value not just for shareholders but for society as a whole over the long term.