Happiness Economics
College 1, 8-11-2022, Introduction: Economists, Happiness, and Well-being: Some Pre-
History
Some pre-history
What was the classical economics perspective on happiness? What do contemporary economists
think about well-being?
Adam Smith (1723 – 1790)
How did Adam Smith understand happiness?
- Definitie = ‘tranquility and enjoyment’. If you are happy, you enjoy life. No stress, go with
the flow.
- And ‘tranquility and enjoyment’ is a real aim of economic development! On individual level.
- Sources of happiness:
o Recognition from others
o Self-respect
- Material welfare plays only a limited role (and sometimes goes against happiness!). Tension
between money and wellbeing.
“What can be added to the happiness of the man who is in health, who is out of debt, and has a clear
conscience (don’t blame yourself, not guilty to anything)? To one in this situation, all accessions of
fortune may properly be said to be superfluous (overbodig).”
- The conflict between the wish to improve our life (as an engine of economic development!)
and ‘tranquility and enjoyment’ as happiness. Economic development is based on our wish to
change, this conflicts with tranquility and enjoyment.
- ‘Commercial society’ (that is, for Smith, competitive capitalist economy) multiplies our needs
and desires
o Which often depend on the opinion of others and are for this reason never fully
satiable! Source of happiness is recognition of others.
- Those multiplied needs and a constant pursuit (nastreven) of wealth are true engines of
economic growth!
o Mandeville’s Fable of the Bees
- From individual unhappiness to public happiness
o but the term is vague, Smith insists on individual happiness as the major concern of
governments
- Paradox: we have to be unhappy for the society to ‘feel’ well
o Why?
o Because when are dissatisfied, we innovate!
,How to resolve this paradox?
- For Smith, liberty and security promoted by commercial society are more important than
material wealth!
- Perfect happiness is unattainable (we depend on the others!). If economy grows, benchmark
raises.
- Preventing misery is more important than improving happiness
- So a crucial factor to look at is how the government promotes happiness
- Less misery means more safety and freedom (independence) from the direct dependence on
others
. . . commerce and manufactures gradually introduced order and good government, and with them,
the liberty and security of individuals, among the inhabitants of the country, who had before lived
almost in a continual state of war with their neighbors, and of servile dependency on their superiors.
This, though it has been the least observed, is by far the most important of all their effects. (WN, 412)
→ In capital economy, you have less direct dependence to others.
- This is the key to happiness, according to Smith. Happier because you are independent.
How to attain the good society, for Smith?
- In a commercial society envisioned by Smith (but not before!), both the rich and the poor
enjoy liberty and security
o And hence can be equally happy!
- This happened after the lords lost the power in exchange for the luxuries.
- Competition matters! It reduces the dependency on the others.
- The desire for luxuries is a salvation, ending the oppression of the lords
o Increases the happiness as an unintended consequence!
- A social explanation!
- What matters is that ‘commercial society’ is able to deliver higher levels of liberty and
security
- So, with the progress it is not the case that we get happier because we are becoming richer.
Society becomes richer, which indirectly matters for our happiness (freedom/security).
- And we do not necessarily get unhappier because of our pursuit of material welfare!
Standard economics
Standard economics and well-being
- Economists are interested in welfare consequences of policies and institutions
- But what is individual welfare?
- Utilitarianists (Bentham, Mill, Sidgwick): Utility = happiness, mental state
o Property of objects causing this mental state! Object has high utility → useful, happy
o We need to maximize utility of society. The only intrinsically good thing follows from
the ethical obligation to promote good states of affairs.
- In 1930s, the view of utility as happiness was abandoned: from ‘old’ to ‘new’ welfare
economics (without interpersonal utility comparisons). Everyone’s utility is different.
- What is good for a person?
o Standard economics answers: we shouldn’t care.
, - What matters is preference satisfaction as the best guide to well-being (what is good for the
person). We don’t know what happiness is, but we know how to formally achieve it.
- Preference satisfaction bears no necessary connection to any mental state!
o satisfying preferences does not always make me happier
o I may even prefer something that is bad for me
- What preferences are, doesn’t matter. Consequences where preferences are satisfied matter
Conceptual problems of the preference-satisfaction account
- Preferences might change (also after policies)
o Should we educate people to have easily satisfiable preferences? If we do that, we as
policymakers succeed.
- Preferences can be based on false beliefs.
- Don’t ask people what they want, but make sure that they get what they want.
- They can contradict each other
- Preference can be antisocial, expensive etc.
- Where do preferences come from?
When the preferences of oppressed people derive from their oppression, one cannot measure their
welfare by considering how well their preferences are satisfied. (Hausman&McPherson 2006: 128)
- One solution: rational/well-informed preferences. Preferences perfectly rational people
would come up with. This is technically possible.
➔ But this makes the whole issue even more complicated: it is difficult to gather info’s on
utility!
Welfarism and its alternative
The general approach of making no use of any information about the social states other than that of
personal welfares generated in them (Sen 1977)
- Social welfare depends only on the welfare of individuals (irrespective of how you define
individual welfare). Let the people choose.
- In individual welfare, we focus on subjective (the same), ordinal (not measurable in units, but
in levels), individual utilities (all the rest is instrumental!)
- In policymaking: often reduced to monetary wealth! Just money. Give individuals money →
they can satisfy their preferences better.
Non-welfarism (dictated by the need to engage in concrete policy decisions):
- Fairness, freedom, civil rights, equity, solidarity, distributional concerns
- Primary goods, resources, capabilities, advantages, rights, freedom of choice, so info’s about
societies beyond individual information
- Multidimensional idea of individual welfare
Whenever economists had to engage in policy (even such welfarists as Paul Samuelson), they
suggested going beyond welfarism
- The lack of distributional concerns in the notion of Pareto-efficiency (cant improve
someone’s utility without decrease utility of others)
- Other ethical issues (such as polluting, child trafficking, discrimination...)
College 1, 8-11-2022, Introduction: Economists, Happiness, and Well-being: Some Pre-
History
Some pre-history
What was the classical economics perspective on happiness? What do contemporary economists
think about well-being?
Adam Smith (1723 – 1790)
How did Adam Smith understand happiness?
- Definitie = ‘tranquility and enjoyment’. If you are happy, you enjoy life. No stress, go with
the flow.
- And ‘tranquility and enjoyment’ is a real aim of economic development! On individual level.
- Sources of happiness:
o Recognition from others
o Self-respect
- Material welfare plays only a limited role (and sometimes goes against happiness!). Tension
between money and wellbeing.
“What can be added to the happiness of the man who is in health, who is out of debt, and has a clear
conscience (don’t blame yourself, not guilty to anything)? To one in this situation, all accessions of
fortune may properly be said to be superfluous (overbodig).”
- The conflict between the wish to improve our life (as an engine of economic development!)
and ‘tranquility and enjoyment’ as happiness. Economic development is based on our wish to
change, this conflicts with tranquility and enjoyment.
- ‘Commercial society’ (that is, for Smith, competitive capitalist economy) multiplies our needs
and desires
o Which often depend on the opinion of others and are for this reason never fully
satiable! Source of happiness is recognition of others.
- Those multiplied needs and a constant pursuit (nastreven) of wealth are true engines of
economic growth!
o Mandeville’s Fable of the Bees
- From individual unhappiness to public happiness
o but the term is vague, Smith insists on individual happiness as the major concern of
governments
- Paradox: we have to be unhappy for the society to ‘feel’ well
o Why?
o Because when are dissatisfied, we innovate!
,How to resolve this paradox?
- For Smith, liberty and security promoted by commercial society are more important than
material wealth!
- Perfect happiness is unattainable (we depend on the others!). If economy grows, benchmark
raises.
- Preventing misery is more important than improving happiness
- So a crucial factor to look at is how the government promotes happiness
- Less misery means more safety and freedom (independence) from the direct dependence on
others
. . . commerce and manufactures gradually introduced order and good government, and with them,
the liberty and security of individuals, among the inhabitants of the country, who had before lived
almost in a continual state of war with their neighbors, and of servile dependency on their superiors.
This, though it has been the least observed, is by far the most important of all their effects. (WN, 412)
→ In capital economy, you have less direct dependence to others.
- This is the key to happiness, according to Smith. Happier because you are independent.
How to attain the good society, for Smith?
- In a commercial society envisioned by Smith (but not before!), both the rich and the poor
enjoy liberty and security
o And hence can be equally happy!
- This happened after the lords lost the power in exchange for the luxuries.
- Competition matters! It reduces the dependency on the others.
- The desire for luxuries is a salvation, ending the oppression of the lords
o Increases the happiness as an unintended consequence!
- A social explanation!
- What matters is that ‘commercial society’ is able to deliver higher levels of liberty and
security
- So, with the progress it is not the case that we get happier because we are becoming richer.
Society becomes richer, which indirectly matters for our happiness (freedom/security).
- And we do not necessarily get unhappier because of our pursuit of material welfare!
Standard economics
Standard economics and well-being
- Economists are interested in welfare consequences of policies and institutions
- But what is individual welfare?
- Utilitarianists (Bentham, Mill, Sidgwick): Utility = happiness, mental state
o Property of objects causing this mental state! Object has high utility → useful, happy
o We need to maximize utility of society. The only intrinsically good thing follows from
the ethical obligation to promote good states of affairs.
- In 1930s, the view of utility as happiness was abandoned: from ‘old’ to ‘new’ welfare
economics (without interpersonal utility comparisons). Everyone’s utility is different.
- What is good for a person?
o Standard economics answers: we shouldn’t care.
, - What matters is preference satisfaction as the best guide to well-being (what is good for the
person). We don’t know what happiness is, but we know how to formally achieve it.
- Preference satisfaction bears no necessary connection to any mental state!
o satisfying preferences does not always make me happier
o I may even prefer something that is bad for me
- What preferences are, doesn’t matter. Consequences where preferences are satisfied matter
Conceptual problems of the preference-satisfaction account
- Preferences might change (also after policies)
o Should we educate people to have easily satisfiable preferences? If we do that, we as
policymakers succeed.
- Preferences can be based on false beliefs.
- Don’t ask people what they want, but make sure that they get what they want.
- They can contradict each other
- Preference can be antisocial, expensive etc.
- Where do preferences come from?
When the preferences of oppressed people derive from their oppression, one cannot measure their
welfare by considering how well their preferences are satisfied. (Hausman&McPherson 2006: 128)
- One solution: rational/well-informed preferences. Preferences perfectly rational people
would come up with. This is technically possible.
➔ But this makes the whole issue even more complicated: it is difficult to gather info’s on
utility!
Welfarism and its alternative
The general approach of making no use of any information about the social states other than that of
personal welfares generated in them (Sen 1977)
- Social welfare depends only on the welfare of individuals (irrespective of how you define
individual welfare). Let the people choose.
- In individual welfare, we focus on subjective (the same), ordinal (not measurable in units, but
in levels), individual utilities (all the rest is instrumental!)
- In policymaking: often reduced to monetary wealth! Just money. Give individuals money →
they can satisfy their preferences better.
Non-welfarism (dictated by the need to engage in concrete policy decisions):
- Fairness, freedom, civil rights, equity, solidarity, distributional concerns
- Primary goods, resources, capabilities, advantages, rights, freedom of choice, so info’s about
societies beyond individual information
- Multidimensional idea of individual welfare
Whenever economists had to engage in policy (even such welfarists as Paul Samuelson), they
suggested going beyond welfarism
- The lack of distributional concerns in the notion of Pareto-efficiency (cant improve
someone’s utility without decrease utility of others)
- Other ethical issues (such as polluting, child trafficking, discrimination...)
