Abstract This paper intends to provide an evaluation of where the economic research on happiness stands and in which interesting directions it might develop. First, the current state of the research on happiness in economics is briefly discussed. We emphasize the potential of happiness research in testing competing theories of individual behavior. Second, the crucial issue of causality is taken up illustrating it for a particular case, namely whether marriage makes people happy or whether happy people get married. Third, happiness research is taken up as a new approach to measuring utility in the context of cost-benefit analysis.
Keywords: causality, cost-benefit analysis, happiness research, life satisfaction approach, marriage, selection, subjective well-being, terrorism
This paper intends to provide an evaluation of where the economic research on happiness stands and in which interesting directions it might develop. While the authors endeavor to provide a fair account, it is strongly influenced by our work undertaken at the chair for economic policy at the University of Zurich. The reader must be warned that other scholars might emphasize different aspects and problems, and in particular consider different future contributions to be important.
The first part of the paper discusses the current state of the research on happiness in economics. The survey section is on purpose kept short, mainly because the authors recently provided an extensive review in a journal and in a book (Frey and Stutzer 2002a,b). Here we only want to indicate the general flavor, and to direct the reader not familiar with the approach to the relevant literature. Instead, we emphasize the potential of happiness research in testing competing theories of individual behavior. The second part takes up the crucial issue of causality illustrating it for a particular case, namely whether marriage makes people happy or whether happy people get married. The third part looks at happiness research as a new approach to measuring utility in the context of cost-benefit analysis'. We argue that happiness research allows us to well capture the effects of public goods and public bads on utility. Indeed, the approach has several important advantages over the use of contingent valuation surveys and hedonic market evaluations. We illustrate the approach with the example for a major public bad, terrorism. The concluding section discusses some further possible applications of the economic research on happiness.
THE CURRENT STATE OF ECONOMIC HAPPINESS RESEARCH
A Primer in the New Approach
Research on happiness has been one of the most stimulating new developments in economics in recent years. It is devoted to one of the most important issues in life--if not the most important issue. The pursuit of happiness is an important determinant of human behavior: "How to gain, how to keep, how to recover happiness is in fact for most men at all times the secret motive for all they do" (James 1902, p. 76). It follows that economics is--or should be--about individual happiness. In particular, the question is how do economic growth, unemployment and inflation, as well as institutional factors, such as good governance, affect individual well-being? Economic activity is certainly not an end in itself, but only has value in so far as it contributes to human happiness.
However, economists have hitherto been reluctant to carry out any direct study on individual happiness. It is argued that no cardinal measurement of utility is needed to analyze how individuals react to changes in relative prices. The axiomatic revealed preference approach holds that the choices made provide all the information required to infer the utility of outcomes. Welfare judgments can be made by resorting to the Pareto criterion and therefore no comparison of welfare levels among individuals is required.
This view still dominates in economics. …