Happiness and Economics

Happiness and Economics: How the Economy and Institutions Affect Human Well-Being

Bruno S. Frey
Alois Stutzer
Copyright Date: 2002
Pages: 200
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  • Book Info
    Happiness and Economics
    Book Description:

    Curiously, economists, whose discipline has much to do with human well-being, have shied away from factoring the study of happiness into their work. Happiness, they might say, is an ''unscientific'' concept. This is the first book to establish empirically the link between happiness and economics--and between happiness and democracy. Two respected economists, Bruno S. Frey and Alois Stutzer, integrate insights and findings from psychology, where attempts to measure quality of life are well-documented, as well as from sociology and political science. They demonstrate how micro- and macro-economic conditions in the form of income, unemployment, and inflation affect happiness. The research is centered on Switzerland, whose varying degrees of direct democracy from one canton to another, all within a single economy, allow for political effects to be isolated from economic effects.

    Not surprisingly, the authors confirm that unemployment and inflation nurture unhappiness. Their most striking revelation, however, is that the more developed the democratic institutions and the degree of local autonomy, the more satisfied people are with their lives. While such factors as rising income increase personal happiness only minimally, institutions that facilitate more individual involvement in politics (such as referendums) have a substantial effect. For countries such as the United States, where disillusionment with politics seems to be on the rise, such findings are especially significant. By applying econometrics to a real-world issue of general concern and yielding surprising results, Happiness and Economics promises to spark healthy debate over a wide range of the social sciences.

    eISBN: 978-1-4008-2926-2
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
    (pp. vii-viii)
    (pp. ix-xii)
  5. Part I: Setting the Stage
    • Chapter 1 HAPPINESS
      (pp. 3-18)

      ʺWhat is happiness?ʺ This question is probably as old as mankind itself. The greatest human minds have struggled with this issue. A large part of philosophy has been concerned with defining what a good and happy life is. Similar efforts have been made by psychologists, who have dealt with what particular ingredients and circumstances make people happy or unhappy.

      But there has certainly not been any consensus as to what happiness is. It means different things to different people. It is open for everyone to define for themselves what happiness is. Some people are prepared to argue that it is...

      (pp. 19-48)

      The 1930s witnessed a revolutionary change in the concept of utility. Economists—in particular, those inspired by the influential Lionel Robbins (1932)—became convinced that utility could not be cardinally measured. Utility should be used to explain the choices made by individuals between various goods. Empirically, utility should be inferred from the choices actually made. It is therefore appropriate to speak of ʺdecision utilityʺ in the sense of a preference index indicating whether good A is preferred to good B.

      Since World War II, this so-callednew welfare economicshas become the conventional view enshrined in a myriad of theoretical...

      (pp. 49-68)

      Psychologists and sociologists rightly focus on the possible influence of personality factors (such as optimism, self-esteem, and perceived personal control) and demographic factors (such as age and gender) when studying why people are happy or unhappy. These factors play a large role in their respective field and therefore psychologists and sociologists have a lot of factual knowledge about them. They are also well aware of possible pitfalls when using these concepts. Moreover, simple observation based on real-life experience suggests there are people who are intrinsically ʺhappyʺ and others who are intrinsically unhappy. The same applies to demographic factors. Many people...

  6. Part II: Economic Effects on Happiness
    • Chapter 4 INCOME
      (pp. 73-94)

      Most economists take it as a matter of course that higher income leads to higher happiness. And why not? A higher income expands individualsʹ and countriesʹ opportunity set; that is, more goods and services can be consumed. The few people not interested in more commodities need not consume them; they have the freedom to dispose of any unwanted surplus free of charge. It therefore seems obvious that income and happiness go together (provided, of course, that the two are correctly measured). Consequently, economics textbooks do not even make an effort to come up with a reason, but simply state that...

    • Chapter 5 EMPLOYMENT
      (pp. 95-110)

      Most economists see unemployment as an unfortunate event to be avoided as much as possible. To become unemployed is considered to be costly and, above all, involuntary. Government should intervene in order to raise the aggregate demand for goods. To produce the additional goods, more labor would be required and unemployment would fall. This view is behind Keynesian theory, which dominated the field in the 50s and 60s and is now experiencing a comeback.

      But there are also economists who hold quite a different view. According to the ʺnew classical macroeconomics,ʺ unemployment is voluntary. People choose to leave employment because...

    • Chapter 6 INFLATION
      (pp. 111-116)

      An increase in the general price level—inflation—is disliked by the population. But a lot depends on what kind of inflation takes place. When the price increase is anticipated, individuals can adjust to it. They can make contracts that take into account that prices will be higher in the future. In particular, they will ask for a wage increase in the future in order to compensate for the loss in purchasing power of money. In contrast, if inflation is not anticipated or comes as a shock, such adjustment is not possible. Wage earners, as well as owners of nominal...

  7. Part III: Political Effects on Happiness
      (pp. 121-132)

      Usually politics takes place within the rules laid down by the constitution. Political actors, such as the government, the voters, interest groups, and public bureaucracy, take the ʺrules of the gameʺ specified in the constitution as given, and pursue their interests within these confines. Thus, for example, the political parties in a representative democracy proceed from the assumptions that the parliament decides which parties are able to form the government, and that the parliamentary majority promulgates the laws. Therefore, in order to come to power, a political party must endeavor to get as high as possible a share of the...

      (pp. 133-152)

      Peopleʹs happiness is influenced by the kind of political system they live in. It is to be expected that people in constitutional democracies are happier because the politicians are motivated to rule according to their citizenryʹs interests. If they disregard the wishes of the population, the politicians and parties in a democracy fail to be reelected and lose their power. Democratic institutions—in particular, the right to participate in elections and vote on issues—thus contribute to citizensʹ happiness via a favorable outcome of the political process.

      Section 8.2 of this chapter discusses various relationships between democratic systems and subjective...

      (pp. 153-168)

      People are likely to experience happiness not only from the actual outcomes but also from the process itself: They experienceprocedural utility. Individuals may, for instance, experience a higher subjective well-being when they are treated in a way they consider to be just and fair, or in the absence of favoritism when it comes to being hired or promoted. Another important case in which procedural utility is obviously important has to do with the labor market. As Scitovsky (1976) argued in hisJoyless Economy, intrinsic work enjoyment is a major source of well-being. (See also Lane 2000, p. 170.) Scitovsky...

  8. Part IV: Conclusions
      (pp. 171-184)

      The research on happiness presented in this book inspires economics in several ways:

      The extent to which people are happy or unhappy is an essential quality of the economy and society. The state of the economy strongly affects peopleʹs happiness. But even more important, in the long run, is whether the constitution favors or hinders the pursuit of happiness (section 10.2).

      The results of happiness research tell economic policymakers which factors tend to raise or diminish peopleʹs well-being. The temptation to maximize the happiness functions econometrically identified is, however, mistaken. Rather, institutional (or constitutional) rules promising higher happiness are to...

  9. Appendix A
    (pp. 185-190)
  10. Appendix B
    (pp. 191-194)
    (pp. 195-214)
    (pp. 215-216)
  13. INDEX
    (pp. 217-220)