Subjective+Well-Being+Research_revised

Subjective+Well-Being+Research_revised - Economics of...

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1 Economics of Happiness: A Review of Literature and Applications Nattavudh Powdthavee 1 Institute of Education, University of London 13 th March, 2007 Forthcoming in Chulalongkorn Journal of Economics Abstract This paper presents a review of literature, validation, methods, and applications of subjective well-being data in economic analysis. The idea is to provide researchers and policy makers a comprehensive guideline to what need to be considered before embarking on a research in the economics of happiness such as data collection and the validation of happiness scales. JEL: I30 Keywords: Happiness, Life Satisfaction, Review, Policy Implications 1 Bedford Group for Life-course and Statistical Studies, Institute of Education, University of London, 55-59 Gordon Square, London, WC1H 0AL, UK. Tel: +44(0)7990 815924. Email: N.Powdthavee@ioe.ac.uk
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2 I. Introduction The conventional view of utility in standard microeconomic textbooks is that it employs an objective position, based on observable choices made by individuals (see Pindyck & Rubinfeld, 1997; Frank, 2002; Varian, 2002). In this analysis, utility only depends on tangible goods and services and leisure. An individual is then observed to prefer one bundle of goods to another. Given that all the choices made between alternatives satisfy a certain criteria of reasonableness, a utility function that will explain an individual's preferences between different bundles of goods can be inferred from behaviour. Utility has thus become merely a number that denotes preferences without any further substantive meaning whatsoever. The neoclassical concept of ‘decision’ utility has been influenced by the rise of positivism and behaviourism in the early 20 th century. The utilitarian view of measurable cardinal utility (i.e., the idea that utility scales can be measured and, in particular, are comparable between individuals 2 ) is rejected as being unscientific , because it is not objectively observable. The basic difficulty seems to be that there is no obvious way of comparing utility scales between individuals and, in particular, no way of showing that two individuals with similar income levels will get the same level of additional satisfaction from a given increase in income (Robbins, 1938). Most importantly, the ordinal concepts of utility (or revealed preference) have been demonstrated by numerous neoclassical economists - such as Hicks (1934) and Allen (1934) - to be sufficient for all the ordinary purposes of demand theory and could be used to derive welfare theory independent of cardinal utility assumptions. It has 2 See Bentham, 1789; Mill, 1863.
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3 become evident that the analysis of consumer demand can be undertaken using only statements about preferences. Thus, modern economic theory has completely given up the substantive and empirically measurable idea of utility in terms of satisfaction and pleasure in order to explain individual choices in favour of the preference index of ordinal utility. Over the last few decades, however, there has been a movement within economics
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Subjective+Well-Being+Research_revised - Economics of...

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