What really makes us happy?

Economists want to take quality as seriously as quantity. But measuring it is not always so simple

Can you put a price on tranquillity? Or, more controversially, do people really want it?

The Government is trying to measure the environmental damage of major road schemes: to what extent people living near a road suffer as a result of additional noise, dirt and other pollution. Obviously, town by-passes, which reduce urban traffic, will tend to have the opposite effect. This is something of a first. The cost/ benefit studies done before all big transport schemes do not seek to put a specific price on calm. Officialdom measures the time saved by people using new roads or railways, but cares less about the people who do not use them, yet are nevertheless affected.

It is an important breakthrough, for economists have been tardy at measuring quality as opposed to quantity. The normal measure of standard of living is gross national product per head, which ignores a host of things that affect living standards, such as pollution and crime. Indeed, crime actually increases GDP. If someone breaks into a car and steals a radio, the cost of the replacement, plus the glass, both show as an addition to GDP. In the unlikely event of the perpetrator being caught, the costs of the trial, lawyers, social workers, police, prison officers and the like - thousands of pounds - all appear as additional economic activity and so are included in GDP. No one would argue that living standards were really higher as a result of this human endeavour, but I suspect that few people instructing divorce lawyers are aware that one side-effect of their personal discomfort will be to boost the official figures for the country's standard of living.

There are a host of other examples of this sort of nonsense. The most extreme were the economic statistics produced in the former Soviet Union and its satellites, which simply looked at the quantity of output because that was what the central planning authority required. It did not matter whether the products were wanted by consumers or that they could not be sold on world markets; all that mattered was that they had been produced. When the Soviet Union collapsed, its GDP was shown to be perhaps half the level that the official figures had suggested.

A bit of this "producerism" lingers even here in Britain. Thus we tend to measure the performance of much of the public sector in terms of quantity of input - numbers of hospital beds, size of classes - rather than in quality of output. (If medical advances enable shorter post-operative stays in hospital, a fall in the number of beds may be a sign of an improvement in medical care, rather than the reverse.)

At the moment, the Department of Transport's plan has the specific aim of measuring what economists would call the externalities of a project - the costs that some activity, say the operations of a factory, impose on the rest of the community. It is a long-established principle that such offloading of costs should be taken into account, and that, for example, factories that pollute should have to "pay" for that in higher taxation. In practice it is not always possible to apply this, largely because there are no trustworthy figures. So anything that attempts to measure accurately the value we place on such intangibles as calm is enormously helpful. You can do this in a reasonably scientific way by looking at differences in similar houses in calm and noisy locations. The market signals the value: it is not a question of some researcher making up a figure.

But think where this leads. There are fringe pressure groups, such as the New Economic Foundation, which have attempted to adjust GNP figures to include quality of life, the running down of natural resources, and so on; the UN does a human development index, which adjusts GNP per head for education, health and other social variables; and there is a lot of high-quality economic work happening here at the London School of Economics on what makes people happy.

This LSE work has unearthed some wonderful nuggets of information, such as the fact that there has been little or no rise in reported happiness in Europe or the US during the past 20 years, and that happiness is U- shaped with age: children and retired people are happy, while the thirtysomethings are (relatively) miserable. But the main thrust of economics is still to measure what is easily measured rather than what really matters. So we are either deluged with useless data about things we do not need to know, or fed biased figures designed to support the views of the pressure group that has compiled them. Governments twist statistics, too, but the good news from the Department of Transport is that this initiative might be the start of a more general move to develop more figures about the things that really matter.

And what are they? I suggest there are two. The first is, what really does makes us happy? The second is, in what way might that be changing over time?

On the first, we have some knowledge as a basis. There are the points from the LSE work. Other conclusions are that unemployed people are tremendously unhappy, and that a worker's job satisfaction depends more on relative pay than absolute pay. There are studies by other organisations that compare happiness internationally. These show, for example, that Latin Americans tend to be rather happier than one might expect, given the practical financial problems many of them face in their daily lives. By contrast, the Japanese, despite their low crime levels and low unemployment, tend to be rather miserable.

This sort of work shows just how careful we should be in concocting the data. Look at that human development index constructed by the UN. The country at the top - the best country in the world in which to live - is Canada. And that is the country which came within a whisker of breaking up less than a month ago, and which may well break up within the next 15 years. If Canada were so wonderful, why would the Quebecois want out?

And so it is, to some extent, with tranquillity. People say they want calm, but drive around with stereos blasting though six speakers. For several millennia people have chosen to live in cities, despite all the observable unpleasantness of life there.

Given our deep hypocrisy, the best way of seeing what we really want is to look at what we do, not what we say. We say we want to keep the high street shops, yet we go to the supermarket on the outskirts. We say we value security, but some of us at least like creating a bit of chaos in our lives. Maybe what we really crave is balance, but that's not a state of affairs that can easily be expressed in a politician's sound- bite.

Is this changing over time? Human beings do not change - we have the same brains as the Romans. But I suspect that the giant demographic shifts now taking place will alter the balance of our society's aspirations. As the proportion of older people rises, older peoples' values will come to dominate more and more: calm may well come to be valued more highly than buzz.

One thing is certain, though. The more we measure the hard-to-measure, the more we will know about ourselves and our aspirations. Understanding ourselves may not make us any happier, but at least it gives us fewer excuses for being miserable.