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Unformatted text preview: he Economic ournal, ( o ember), –. # Royal Economic Society . Published by Blackwell
Publishers, Cowley Road, Oxford OX JF, UK and Main Street, Malden, MA , USA. CONTROVERSY
ECONOMICS AND HAPPINESS*
Hu D. Dixon
In , Ludovico Antonio Muratori, published a book titled Della Pubblica
Felicita that introduced the use of the word ‘ public happiness ’. He saw public
policy as seeking to ﬁnd the best economic means to achieve the ‘ public
happiness ’. Other contemporary Italian economists" developed the link
between the theory of value (based on the individual’s calculus between
pleasure and pain) and the theory of public policy based on ‘ public happiness ’.
The historical foundations of the modern economic model of individual choice
were largely utilitarian. Many neoclassical economists in the late th and
early th century would have considered themselves to be utilitarians :
Edgeworth, Jevons and Wicksteed to name a few. For such economists, ‘ utility ’
was a word that referred to something substantial, a mental state which might
someday be measured. Edgeworth named the as yet uninvented machine to
measure utility the ‘ Hedonometer ’. This view was by no means universal :
Marshall was one of the most notable critics of the utilitarian viewpoint in his
Principles, at least in its more extreme hedonist version.
However, since the Second World War, the conventional view has been that
there is no place for utility in this substantial sense. ‘ Utility ’ is just a number
given to possible outcomes that can in some sense explain or predict choices.
The reasons for this switch were quite compelling. First, the rejection of the
notion that utility was in principle measurable. Since satisfaction\pleasure and
happiness are purely subjective, the idea of an objective scientiﬁc measure of
utility is put into question.# Secondly, the development of ordinal utility theory
showed that cardinal utility was unnecessary for economics, even for much of
welfare economics. Since it was both suspect and unnecessary, the utilitarian
foundations of choice theory were rejected, although the vocabulary lived on.
Together, these arguments have proven persuasive to most of the economics
profession for the last half-century.
Things may, however, be changing. This controversy brings together three
economists from diﬀerent backgrounds who all believe that happiness should
* I would like to thank Andrew Clark for helping me to set up this controversy, and Massimo Paradiso
for informing me about the early Italian utilitarians.
" The most notable examples being the Neapolitans Antonio Genovesi and Giuseppe Palmieri writing in
# However, it is not precluded. Hot and cold were for most of human history purely subjective sensations,
subject to many ambiguities and seeming paradoxes. That has not meant that we have been unable to
develop an objective measure of temperature that is closely related to the subjective.
[ ] ] : take a more central role in economics once again.$ They all share the view that
it makes some sense to talk of ‘ measuring ’ utility. This is done not by placing
electrodes on the heads of people (although that may come), but by asking
people questions. Whilst this may well not be an exact way of measuring an
individual’s well-being, the answers to such questions from a large number of
people can be used as a guide to what factors in general make people feel
happier. In particular, we can certainly use this sort of data to explore some of
the basic maintained hypotheses of economics : for example, the notion that
utility is an increasing function of income at the individual and aggregate level.
Andrew Oswald opens the controversy with a paper that focuses on the
empirical side of what we can ﬁnd from existing data on happiness and its
relation to economic performance. He presents several ﬁndings which he draws
from the data. One of the ﬁrst economists to take a look at these data was
Richard Easterlin in . He formulated the hypothesis that well-being
depends on relative income, not absolute income : this arose from the
consideration of cross-country comparisons, and within country time-series.
Oswald argues that using US data, there is a very small tendency for happiness
to be increasing over the post-war period : the results are similar but much
more mixed in Europe. For Oswald, the evidence is quite clear that whilst
money might buy a little happiness, it does not buy very much. On the other
hand, there are certain factors which do seem to inﬂuence overall well-being :
for example, happiness is U-shaped in age with a minimum in the early thirties,
unemployment makes people very unhappy and so on. There is clearly plenty
of data available on well-being, and it should – Oswald argues – be used by
Bob Frank explores in some detail the policy implications of the Easterlin
hypothesis. He draws the conclusion from the data that relative consumption
determines well-being (this was an idea also put forward by Fred Hirsch and
Tibor Scitovsky in the mid-s, among others). If every one in a society
seeks to maximise their own welfare, then there is an externality present : an
increase in my own consumption makes me better oﬀ relative to you, and hence
my consumption decreases your utility. The end result is that the equilibrium
in society is ineﬃcient : we all end up consuming more than is socially optimal.
Since consumption uses up resources, we can all gain if we consume less : with
lower average consumption across the population, utility would not be
reduced. However, the real resources released from the production of consumer
goods (including durables and housing) would be released for other uses
(education, health and leisure), which could make everyone better oﬀ. This is
a very simple argument, but it has powerful and clear policy implications.
Frank himself argues strongly for a consumption tax as a practical implication
of his analysis.
Yew Kwang Ng approaches the problem from the perspective of a
traditional welfare economist. He argues very strongly against the orthodox
$ Of course, one might accept that one can measure well-being to some degree of accuracy, yet still reject
the notion of a utilitarian social welfare function or moral system. The arguments for and against
utilitarianism as a moral system are perhaps as extensive as they are inconclusive.
# Royal Economic Society [ ] view that cardinal notions of utility should be rejected. Whilst he accepts that
there are measurement problems, he believes that it makes sense to talk about
cardinal utility, and that it is certainly more in tune with common sense than
the pure ordinalist’s view. If we accept this, then the whole focus of welfare
economics (and indeed economics as a whole) should shift towards a science of
promoting well-being and happiness. Conventional measures of welfare such as
per-capita GDP are highly misleading if this is our objective. Like Frank, he
argues that great increases in well being can be achieved if we take happiness
Perhaps more years after Muratori argued for founding public policy on
the notions of private and public happiness, it is time for economists to reevaluate the foundations of their prejudices. Perhaps by excluding notions of
well-being and happiness from economics, we have created an artiﬁcial
limitation which precludes economics from answering some of the most
important questions. Whilst the Hedonometer may take some years to be
invented, you can reach you own conclusion after reading these three
Uni ersit of ork # Royal Economic Society ...
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This note was uploaded on 08/31/2009 for the course ECON 4999 taught by Professor Barry,poulson during the Spring '07 term at Colorado.
- Spring '07