Take Adam Smith’s advice on low-priced clean-tech: Buy it
The US should not bar Chinese imports on flaky dumping charges
Every year, the World Happiness Report ranks countries in terms of happiness by calculating their happiness scores. The six key variables that make up this index are GDP per capita, social support, healthy life expectancy, freedom, generosity and lack of corruption. These are mostly calculated on the basis of individual selfassessments. In contrast, looking back at the legacy of Daniel Kahneman (1934-2024), a 2002 winner of the Nobel Prize in Economics who fused Psychology and Economics, it’s noteworthy that, starting in the 1990s, a significant part of his work concentrated on the assessment of “objective happiness” through “moments” of life.
These efforts bear a strong connection with his and Amos Tversky’s paradigm-shifting research from the 1970s that pioneered Behavioural Economics. Perhaps following that idea, Kahneman provided a whole new meaning of ‘happiness,’ which is multifaceted and neither separate nor time-neutral. According to Kahneman, if a person wins a lottery twice in a row, for example, the winner’s total utility will be higher if the first win is $1,000 and the second is $1 million, rather than if the sequence is reversed.
According to a popular estimate, each of these little time-spans of psychological presence (as in ‘present tense’) might last up to three seconds. This would mean that at least about 500 million moments occur in a life span of 70 years. Kahneman created a momentbased conception of objective happiness, an aspect of well-being, sometime in 1999-2000.
He posited that measurements of moments must be made in accordance with logical principles in order to generate a useful estimate of experienced utility. Populations with different life conditions can have their well-being compared using the cumulative distribution of ‘moment’ utilities. On a 6-point scale, for instance, we may evaluate the proportion of time that the rich and poor spend at a utility level below 4.
Crucially, unlike other measures of well-being, Kahneman’s moment-based objective happiness does not include any retrospection at all; rather, it only depends on instant introspection.
In a 2006 paper published in the
Daniel Kahneman and economist Alan B. Krueger (1960-2019) examined whether or not a subjective survey can accurately gauge someone’s level of well-being. “[S]ubjective well-being measures features of individuals’ perceptions of their experiences, not their utility as economists typically conceive of it,” they wrote. They suggested the U-index, a kind of misery index that quantifies the proportion of time spent in an unpleasant state and has the advantage of not requiring a cardinal understanding of people’s feelings.
Kahneman and his co-authors examined the veracity of the widely held notion that affluence is positively correlated with happiness in a 2006 paper published in Science. They found a weak relationship between income and global life satisfaction or experienced happiness. “People with above-average income are relatively satisfied with their lives but are barely happier than others in moment-to-moment experience, tend to be more tense, and do not spend more time in particularly enjoyable activities,” they stated. In their view, the role of attention helps explain why many people pursue high incomes, as their predictions of happiness increase on account of a ‘focusing illusion’, and why the long-term effects of income gains become relatively small as attention eventually shifts to less novel aspects of daily life.
Nevertheless, Kahneman’s research on happiness took a more objective shape when, in a 2010 paper with Angus Deaton, who would go on to win the Nobel Prize for Economics in 2015, Kahneman discovered a monetary “happiness plateau.” Kahneman and Deaton reported that—in the American context, of course—a measure of emotional wellbeing (or happiness) increased but then flattened somewhere between an income of $60,000 and $90,000 a year ($75,000 being the median).
How influential was this study? Inspired by this paper’s findings, Dan Price, CEO of the Seattlebased company Gravity Payments, established a $70,000 minimum wage for all its 120 workers in 2015, almost doubling the starting salary. What’s more, Price cut his own salary from $1.1 million to $70,000 in order to pay for this move. Price’s 2020 book has a description of this Robin Hood-type corporate endeavour.
However, in contrast to Kahneman and Deaton’s 2010 findings, Matt Killingsworth of the University of Pennsylvania found a linear relationship between happiness and (log) income in a 2021 study that used experience sampling. Subsequently, in 2023, Kahneman, Killingsworth and Barbara Mellers published an adversarial collaboration (perhaps Kahneman’s last published paper) to resolve this dilemma. Re-analyses of the data showed that happiness rises with household income up to $100,000, after which it “abruptly” levels out in situations of extreme unhappiness. Further, happiness increases at an accelerated rate beyond $100,000 for the 30% happiest people. According to this study, Kahneman and Deaton may have arrived at the right conclusion if they had expressed their findings in terms of unhappiness as opposed to happiness, as their measurements were unable to discriminate among degrees of happiness because of a ceiling effect. Think about it.
Over the last three decades of his incredible career, spent at Princeton University, Kahneman, the King of Happiness, undoubtedly delivered an objective appraisal of happiness by integrating psychology and economics. His contribution to happiness research can be assessed coherently. Happiness, however, will remain elusive. And it’s possible that unhappiness is also something worth looking into.
Bad economic ideas don’t die. Instead they just return a decade later to haunt another generation. That seems to be the situation with China’s steel industry. US Treasury Secretary Janet Yellen plans to cite the example of steel over-capacity on a trip to China as justification for what looks like a pending crackdown on imports of Chinese clean-tech products. “In the past, in industries like steel and aluminium, Chinese government support led to substantial overinvestment and excess capacity,” she said in a speech. “Now, we see excess capacity building in ‘new’ industries like solar, EVs and lithiumion batteries.”
That example harks back to a panic from 2016. “China’s steel industry is actively and deliberately flooding the international market,” United Steelworkers, a US union, said then. Its [mill output] growth was “far faster than domestic and international demand would dictate.” This theory led to anti-dumping tariffs on some steel products as high as 256.44% under President Barack Obama in 2015, before President Donald Trump followed up three years later with 25% tariffs on all Chinese steel products.
None of it was true. China wasn’t seeking to make more steel than long-run demand would dictate. It wasn’t responsible for weak prices in the US and tariffs didn’t halt a job decline in US metals manufacturing. It’s bad enough that misguided steel protectionism has served only to raise costs and reduce competitiveness for the rest of the US economy. Worse still is the way the same failed policy is now being dragged out in support of far more damaging barriers on clean-tech, slowing our ability to fight climate change.
Look at steel production. Chinese mills did increase capacity in the second half of the 2000s, more than doubling potential output to 1.06 billion tonnes from 489 million tonnes between 2006 and 2010, before rising to a peak 1.22 billion tonnes in 2014. With construction and factory demand lagging, capacity utilization fell to 67% in 2015, well below the 75% or more seen as consistent with sustainable profits.
Note that China’s steel output did not peak then. Instead, a boom in construction and manufacturing raised demand by 249 million tonnes over the subsequent five years. Contrary to the perception of a crisis around 2015, China wasn’t over-supplied. It pretty much had the right number of mills to satisfy projected needs. Capacity utilization since 2018 has consistently been at healthy levels north of 80%.
You could make quite as strong an argument that the US and Europe, whose utilization has frequently been well below 75%, have overcapacity. The better argument, though, is to accept that there are often dislocations between industrial capacity and demand, and that this need not be evidence of malign geopolitical intent.
Perhaps, though, China was flooding the US market to escape the consequences of its bad investment decisions? Wrong again. As a share of total production, China has always been a rather small-scale exporter. It only seems so weighty because it produces more than half of the world’s steel, so any shortfall between capacity and output seems hulk-sized. At the height of the overcapacity panic in 2015, exports to North America came to just 4.4 million tonnes, about 8% of the 55.5 million tonnes total.
The best explanation for weak US prices was simply that US steel consumption had peaked and was in decline, as the country moved to a post-industrial, service-oriented phase of its development. No amount of protectionism has been able to change the fact that US steel output now is about 80% of its level in 2008.
Chinese steelmakers, furthermore, have not only grown into the capacity that they built, but made money doing it. That’s a sign that there never was a long-term excess of supply over demand. When your rival is making sustainable profits, accusing it of overcapacity is just another way of complaining that their better productivity is taking away your market share.
There’s one big difference when it comes to clean technology. Unlike steel, electric vehicles, solar panels and lithiumion batteries really are easily traded on a global scale, and the scale and technological accomplishments of Chinese companies make them formidable competitors. That doesn’t mean that they have been beneficiaries of unfair advantages, though, as we [in the US] have argued.
Instead, what is being built in China is not overcapacity, but merely the basic capacity the world needs if it’s to build the low-emissions economy needed to get the planet to net-zero emissions.
If China is producing tools to avert global warming more cheaply than we can do ourselves, we should follow the advice of Adam Smith: “Buy it.”