Happiness: A Revolution in Economics

Bruno S. Frey
Alois Stutzer
Matthias Benz
Stephan Meier
Simon Luechinger
Christine Benesch
Copyright Date: 2008
Published by: MIT Press
Pages: 256
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  • Book Info
    Book Description:

    Revolutionary developments in economics are rare. The conservative bias of the field and its enshrined knowledge make it difficult to introduce new ideas not in line with received theory. Happiness research, however, has the potential to change economics substantially in the future. Its findings, which are gradually being taken into account in standard economics, can be considered revolutionary in three respects: the measurement of experienced utility using psychologists' tools for measuring subjective well-being; new insights into how human beings value goods and services and social conditions that include consideration of such non-material values as autonomy and social relations; and policy consequences of these new insights that suggest different ways for government to affect individual well-being. In Happiness, emphasizing empirical evidence rather than theoretical conjectures, Bruno Frey substantiates these three revolutionary claims for happiness research. After tracing the major developments of happiness research in economics and demonstrating that we have gained important new insights into how income, unemployment, inflation, and income demonstration affect well-being, Frey examines such wide-ranging topics as democracy and federalism, self-employment and volunteer work, marriage, terrorism, and watching television from the new perspective of happiness research. Turning to policy implications, Frey describes how government can provide the conditions for people to achieve well-being, arguing that a crucial role is played by adequate political institutions and decentralized decision making. Happiness demonstrates the achievements of the economic happiness revolution and points the way to future research.Bruno S. Frey is Professor of Economics at the University of Zurich, Visiting Professor at the Swiss Federal Institute of Technology, and Research Director of CREMA (Center for Research in Economics, Management, and the Arts). He is co-editor of Economics and Psychology: A Promising New Cross-Disciplinary Field (MIT Press, 2007).

    eISBN: 978-0-262-27321-3
    Subjects: Economics, Psychology

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Series Foreword
    (pp. vii-viii)
    Hans-Werner Sinn

    Every year the CES council awards a prize to an internationally renowned and innovative economist for outstanding contributions to economic research. The scholar is honored with the title Distinguished CES Fellow and is invited to give the Munich Lectures in Economics.

    The lectures are held at the Center for Economic Studies of the University of Munich. They introduce areas of recent or potential interest to a wide audience in a nontechnical way and combine theoretical depth with policy relevance....

  4. Preface
    (pp. ix-xvi)
    Bruno S. Frey
  5. I Major Developments
    • [I Introduction]
      (pp. 1-2)

      Chapter 1 argues that happiness research is important because the ultimate goal of most human beings is to be happy. Research on individual well-being contributes to many aspects of life, but it is particularly useful for these purposes: to study what conditions contribute to individual well-being, to understand human behavior and test alternative explanations for it, to study changes in preferences and social interaction, to analyze the consequences of happiness on behavior, to inquire whether happiness is a cause or an effect (for instance, does unemployment make for unhappy people, or are unhappy people more likely to be unemployed?), or...

    • 1 Research on Happiness
      (pp. 3-14)

      Happiness is considered by many to be the ultimate goal in life; indeed, virtually everyone wants to be happy. The American Coloniesʹ Declaration of Independence takes it as a self-evident truth that the ʺpursuit of happinessʺ is an ʺinalienable rightʺ comparable to life and liberty. In the late 1980s, the fourth king of Bhutan, Jigme Singye Wangchuck, enunciated ʺGross National Happinessʺ as the principle guiding force in his country (Ura and Galay 2004).

      Economics is—or should be—about individual happiness. In particular, the question is: How do economic growth, unemployment, inflation, and inequality, as well as institutional factors such...

    • 2 The Relationship of Happiness to Utility
      (pp. 15-26)

      Standard economic theory employs an ʺobjectivistʺ position, observing the choices made by individuals. Individual utility only depends on tangible goods and services and leisure. Utility is inferred from behavior (or revealed preferences), and is in turn used to explain the choices made. This ʺmodernʺ view of utility has been influenced by the positivistic movement in philosophy. Subjectivist experience (e.g., captured by surveys) is rejected as being ʺunscientific,ʺ because it is not objectively observable. Most importantly, cardinality of utility and interpersonal comparability are not necessary for positive demand theory, which, in line with Occamʹs Razor, constitutes a great advantage (Robbins 1932;...

    • 3 How Income Affects Happiness
      (pp. 27-44)

      In this chapter, three aspects of the relationship between income and happiness are discussed¹:

      Are persons with high income at a given point in time happier than those with low income (section 3.1)?

      Does an increase in income over time increase happiness (section 3.2)?

      Are persons in rich countries happier than those in poor countries (section 3.3)?

      Persons with higher income have more opportunities to achieve whatever they desire: in particular, they can buy more material goods and services. Moreover, they have a higher status in society. The idea of a relationship between income and happiness at a particular time...

    • 4 How Unemployment Affects Happiness
      (pp. 45-54)

      Full employment is an indisputable goal of economic policy, because employment is associated with prosperity. Unemployment causes costs, because valuable manpower is wasted and an economyʹs real output falls short of its potential output. Based on this view, some attempts have been undertaken to provide quantitative estimates of the welfare cost of unemployment. For example, Okun (1970) calculated that a 1-percentage-point reduction in the rate of unemployment is associated in the short run with an increase of roughly 3 percent in the ratio of actual output to potential. However, these attempts are very restrictive and do not take into account...

    • 5 How Inflation and Inequality Affect Happiness
      (pp. 55-58)

      Theoretical economics discusses the costs of an increase in the general price level—inflation—by looking at the distinction between anticipated and unanticipated inflation. When price increases are anticipated, individuals can adjust to them with little if any cost. But when price increases come as a ʺshock,ʺ no such adjustment is possible. Individualsʹ adjustment is more costly when increased inflation causes higher variability in aggregate inflation and in relative prices. People need to invest considerable effort in informing themselves about, and insulating themselves from, the expected price increases. They may make many different errors—for instance, underestimating the extent of...

  6. II Pushing Ahead
    • [II Introduction]
      (pp. 59-60)

      The second part of the book ventures into topics so far neglected or studied in greatly different ways. It seeks to demonstrate the range of issues that happiness research can address and the fascinating results and insights it can yield. This research goes well beyond the estimation of happiness functions and opens new avenues for economic research.

      This part is based on research undertaken by the Zurich Group, a group of researchers associated with my chair in economics at the University of Zurich. Its members are therefore co-authors of this book, and I was actively involved as an author in...

    • 6 The Public Sphere
      (pp. 61-70)

      This chapter views democracy from a new perspective. Until now, democracy has normally been seen as a value in itself. From an instrumental point of view, democracy has been understood as the institution that results in political decisions closest to the preferences of the citizens. This discussion endeavors to show that democracy, understood as the constitutionally guaranteed participation rights of the citizens, systematically increases the populationʹs subjective happiness and life satisfaction to a considerable extent. Happiness research allows us to identify two different reasons for this increase in happiness. Democracy increases outcome utility by providing the people with more desirable...

    • 7 Self-Employment and Voluntary Work
      (pp. 71-86)

      This chapter discusses two areas in which specific features of work systematically affect individual happiness.

      Section 7.1 analyzes why the happiness of self-employed persons is higher than those employed by an organization. It also enquires whether the causation runs in the opposite direction, namely that happier people tend to choose self-employment.

      Section 7.2 looks at the higher life satisfaction of persons engaged in voluntary work. It again considers the possibility of reverse causation by self-selection.

      Economic research on happiness has identified the major determinants of self-reported subjective well-being or happiness. Among the many factors systematically influencing it, employment stands out....

    • 8 Marriage and Happiness
      (pp. 87-92)

      Economic models of marriage focus on specialization and the division of labor. Beckerʹs seminal work on the economics of marriage (1973, 1974a) is based on the gains married people acquire from household production and specialization of labor for different tasks.¹ The possibility of specialization with respect to the tasks in marriage is seen to offer substantial opportunities to increase the well-being of both partners. Sociological theories focus on spousesʹ joint consumption of household public goods, or on reciprocity and social equality in homogamous relationships. Homogamy describes the tendency for ʺlike to marry like.ʺ People of similar age, race, religion, nationality,...

    • 9 Watching Television
      (pp. 93-106)

      Europeans spend, on average, 3 hours and 30 minutes per day watching television; Americans spend as much as 4 hours and 50 minutes per day (IP International Marketing Committee 2004). In many countries nowadays, watching television occupies almost as much time as working. Over their entire life (including youth and old age), many people spend more time in front of their TV than doing paid work. They must enjoy this entirely voluntary and freely chosen activity, or else they would not engage in it. According to the standard neoclassical economic theory of revealed preference, people are assumed to know best...

    • 10 Procedural Utility
      (pp. 107-126)

      Procedural utility means that people also value the conditions and processes that lead to outcomes, rather than only the outcomes (Frey, Benz, and Stutzer 2004; Benz 2005, 2007). Procedural utility represents a completely different approach to human well-being from the standard approach applied in economics. The economic concept of utility as generally applied today is outcome-oriented: individual utility is seen as a result of benefits and costs associated with instrumental outcomes. In contrast, procedural utility refers to the non-instrumental pleasures and displeasures of processes. The procedural view is also important for another reason: happiness is difficult, if not wholly impossible,...

    • 11 Mispredicting Utility
      (pp. 127-138)

      Standard economic theory relies on revealed behavior, which takes as granted that all observed behavior is utility-maximizing from the point of view of the person acting. Individuals are perfectly informed about the utility they derive from alternative consumption bundles and are perfectly able to maximize utility. These assumptions imply that people do not make any systematic mistakes when they make decisions. Happiness theory departs from these far-reaching assumptions and separates the act of decision from the utility therewith experienced. Because it is possible to measure experienced utility independently by indicators of subjective well-being, possible systematic errors in individual decisions can...

    • 12 The Value of Public Goods
      (pp. 139-148)

      The benefits from public goods are inherently difficult to measure because they are not exchanged on markets. Therefore, prices paid cannot serve as indicators of the value attributed to them by individuals. A wide variety of approaches to the measurement of preferences have been developed. (See e.g. Freeman 2003.) Two main avenues have been pursued:

      Stated Preference MethodsThe most prevalent method is Contingent Valuation. Individuals are directly asked to value the public good in question. However, the hypothetical nature of Contingent Valuation Surveys may entail unreliable and superficial answers and may induce strategic answering behavior.

      Revealed Preference MethodsThe...

  7. III Policy Consequences
    • 13 Happiness Policies
      (pp. 151-176)

      Many different conclusions have been drawn from the modern research on happiness. A popular literature has emerged seeking to give readers personal advice on ʺhow to become happy.ʺ Some of the advice is of little value, but some of it is soundly based on research. For example, an article in the journalNew Scientist(2003) identifies ten essential elements to a happy life.¹ The importance of each item of advice is evaluated by a group of happiness researchers, whose evaluations are used byNew Scientistin a survey that grades the proposals on a scale ranging from 0 (ʺvery unimportantʺ)...

    • 14 Happiness and Political Institutions
      (pp. 177-198)

      The fundamental social institutions shape the incentives of the policy makers. Once these basic institutions are in place and the incentives set, little can be done to influence the current politico-economic process. This is the fundamental message of Constitutional Economics. Economic policy therefore must help to establish fundamental institutions that enable individuals to reach the level of happiness to which they aspire. Research in positive Constitutional Economics helps us to identify which institutions serve this goal, and whether they do in fact systematically affect happiness.

      Two basic institutions that affect happiness significantly are direct democracy and federalism. Section 14.1 analyzes...

    • 15 A Revolution in Economics
      (pp. 199-204)

      Some readers may well agree that happiness research has yielded new insights that may be called revolutionary when compared with standard economics. Other readers will not be convinced that happiness research has really extended our knowledge much beyond what was known before. They would not call this new branch of economics revolutionary.

      The term ʹrevolutionaryʹ has many different meanings and connotations, and its use is strongly determined by personal preferences. But most scholars would agree that it involves fundamental new insights, and the question then is ʺWhat do ʹfundamentalʹ and ʹnewʹ mean in the case of happiness research?ʺ The skeptics...

  8. References
    (pp. 205-236)
  9. Index
    (pp. 237-240)