The Economics of Happiness

The Economics of Happiness

Introduction

The economics of happiness is a unique approach to assessing the subjective-well-being of individuals within the context of economic theory. The economics of happiness utilises expansive notions of utility and combines economic measurements with those more commonly used by psychologists to assess the general life-satisfaction felt by people. The economics of happiness is a broader stake of behavioural economics that seeks to understand the pecuniary and non-pecuniary factors that lead to the maximization of happiness.

The goal of this essay is to develop a greater understanding of the concept of the economics of happiness. It will show how and why this type of theory goes a long way in explaining the type of choices made by individuals. This essay will portray that a return to the theories of Adam Smith, Jeremy Bentham and John-Stuart Mill have been made by modern day economists like Richard Easterlin, and so, while being a relatively new branch of economic study, has its roots in the thinking of early economists.

This essay will define happiness and show how happiness research can be adapted to economic theory, and show which economic insights can be gained from this research. By showing both pecuniary and non-pecuniary factors that determine happiness, this essay will show that the return to measuring happiness as a behavioural tool, is a valid and useful branch of economics. Some economic theory explained by happiness data includes the Easterlin Paradox, Aspiration Level Theory and the Relative Income Hypothesis, each which proves that indeed money alone does not buy happiness.

Defining Happiness

Happiness is a term that has been criticised for being very vague in its definition, but can be defined as a satisfaction with life in general. (Graham, 2005, p. 6). �Happiness’ is therefore interchangeable with �life-satisfaction’ or �subjective well-being’. The generality of its definition thus allows for a broader measurement of happiness to satisfy the question of what truly makes individuals happy. Happiness measurements are based on both subjective and objective data. (Veenhoven, 2002, p. 2). Objective economic measures of happiness are conducted from an external point, basing determinants of well-being on factors such as unemployment, conspicuous consumption, inflation and taxation (Graham, 2005, p. 43), while subjective data is based on self-reported happiness extracted from research surveys. While subjectivity may have its misgivings, it is imperative for this type of study, as objective indicators alone are not adequate for complete results. (Veenhoven, 2002, p. 6).

A Return to Early Economists

The early theorists of economics, Smith, Bentham and Mill shared a belief that individuals act in the pursuit of happiness, basing their desires and decisions on that which maximises their pleasure, and amplifies their utility. In The Theory of Moral Sentiments, Adam Smith considers that individual behaviour (economic activity) is driven by passions, but that we are under the illusion that with the pursuit of material wealth and social status comes permanent happiness. (Ashraf, Camerer, & Loewenstein, 2005, p. 3). Jeremy Bentham too understood utility as satisfaction, (Frey & Stutzer, 2001, p. 4) and was interested in the pursuit of individual happiness, developing his theory of utilitarianism based on the actions which would reap the greatest good for the greatest number. (Nussbaum, 2004, p. 64) Bentham therefore believed that proper conduct was based purely on maximising pleasure and minimising pain. (Nussbaum, 2004, p. 63). Even Thomas Jefferson, proclaimed that individuals have a right to the pursuit of happiness, going so far as to equate it to the right to life and liberty. (Easterbrook, 2004, p. 28).

However, as the field of economics became increasingly concerned with quantitative measures and objective data, rather than �frivolous utility’ (Ashraf, Camerer, & Loewenstein, 2005, p. 8), later neo-classical economists focused rather on revealing preferences through patterns of consumption, and labour market participation. (Graham, 2005, p. 6). Individuals were seen as rational beings, able to distinguish what would bring them the most utility, and as a result economists shied away from behavioural economics.

However in recent years, an increasing amount of economists have returned to observations of behavioural research, in scrutiny of the strictly rational decision-based models. (Graham, 2005, p. 6). This brings us to where we are today, having come full circle, with a relatively new outlook on the determinants of happiness, and its purpose within the field of economic activity.

Economics and Happiness

Why should economists be concerned