Economic approaches to happiness
Economics has traditionally been concerned with furthering utility. The term welfare economics indicates the desire of economists to improve social welfare. While sometimes people equate economic welfare with things like GDP, this is clearly at variance with the roots of economics. Welfare relates to an overall measure of well-being, in economics typically labeled as utility. The concept of ‘utility’ has a long tradition but the label appears to have been used to mean different things, e.g. as being synonymous with ‘welfare’, ‘satisfaction’, ‘preference’, or, also happiness. The exact meaning and measurability of utility has always been a matter for discussion (Van Praag, 1993). Cohen (1993) indicates that two common interpretations of utility are (i) preference satisfaction and (ii) hedonic welfare. In the latter interpretation, utility may be seen as synonymous with happiness. This then obviously traces back to the utilitarian principle of the greatest happiness.. Happiness then is seen as the ultimate maximand of human actions (and therefore commonly is considered to be more profound and evaluative than pleasure).
In order to promote the greatest happiness for the greatest number, policy choices need to be made that commonly involve comparing individuals. In general terms, in classical welfare economics utilities were cardinally measured, could be added across individuals and the social optimum was reached when this sum was at a maximum (assuming a given population). (Brouwer et al., 2008) A major problem for economists was the growing awareness that interpersonal comparisons of utility (happiness) are difficult (if not impossible). How can we compare, in an absolute sense, happiness scores as we cannot observe the underlying individual ‘happiness scale’? This not only gave rise to new, neo-classical, streams of welfare economics (e.g. Partian welfare economics), but also reduced the emphasis on measuring happiness. Instead, ordinal comparisons of states of the world became more common. Such developments, and the underlying debates, also show the potential for more fundamental work in the field of happiness research and the potential merit of multi-disciplinary research (e.g. between economics and philosophy).
In recent years, the measurement of ‘happiness’ has become more popular again, in empirical research (e.g. Easterlin, 1995; Oswald, 1997; Kahneman et al., 1997; Frey and Stutzer, 2002). In this genre, an measure of ‘happiness’ is used as a (partial) index of welfare and is understood to have a deeper meaning than mere superficial pleasure. (Brouwer et al., 2008) Ferrer-i-Carbonell and Frijters (2004) interpret happiness questions as describing ‘general satisfaction’ which can be seen as “a positive monotonic transformation of an underlying metaphysical concept called welfare” (Ferrer-i-Carbonell and Frijters, 2004). Although some economists (re-)entered the happiness field as already in the 1970s (Easterlin 1974), happiness economics really took off in the late 1990s and leading books appeared in the early 2000s, e.g. Frey & Stutzer in 2002 and Van Praag and Ferrer-i-Carbonal in 2004.
While the field is still in development, there is a growing stream of publications and some 600 subscribers to a service that keeps track of these (nep-hap). As yet, there is little institutionalization. EHERO aims at bringing more organization into happiness economics and establishing links with happiness researchers in other disciplines. In doing so, it will also draw on sub-disciplines, such as behavioural economics and health economics, where the development of theory and practice in measuring happiness or happiness-like outcomes such as quality of life, may provide lessons for other areas as well.
The economic approach to happiness can be characterized in terms of leading questions, methods and data sources.
Economics is about scarcity and choice and one of the leading questions is which choices provide most utility. If utility is equated with (certain measurements of) happiness, the question emerges what choices result in the greatest happiness (for the greatest number). That still leaves many questions open. Without being exhaustive, we mention some:
One of the problems is that choices are typically made ex ante and under uncertainty. This complicates matters as the expected utility that drives decisions (also labeled decision utility) may differ from (and may be meaningfully distinguished from) experienced utility as a result from those decisions (Kahneman et. al 1997)). This has to do with framing effects, with reference points, and, potentially, miss-prediction of the actual impact on happiness of achieving certain states. The relevance of combining psychological and economic insights, as done in the field of behavioural economics, is clear in this context.
EHERO aims at investigating these issues and further the knowledge in this area, with the ultimate aim of better policy making aimed at achieving happiness. Such choices can concern private matters, such as at what age one retires, corporate issues, such as implementing a monetary incentive and public policies, such as rising the pension age. Information and public policies, such as increasing the pension age. Information on important determinants of happiness, such as health, income, political stability, will help to optimize happiness. Information on consequences of happiness will help to appraise synergy with other things we value.
A related question in economics (and other disciplines such as philosophy) is what are the most appropriate maximands in social policy. Recently, there has been a plea to measure broad outcomes, both subjective (including happiness) and objective ones (e.g. GDP, capabilities). Understanding how happiness interacts with other objectives, such as material prosperity, social justice and moral responsibility, is an important area of research. In that context EHERO will explore synergies en conflicts, again with the aim of allowing more informed choice, at the level of individuals, firms and societies.
Even well informed people may fail to choose the optimal, due to the various psychological biases as have been revealed by behavioral economics. In that context EHERO will also investigate the possibilities to nudge people’s choices to happiness-maximizing ones (Thaler at al. 2008)
Economists have developed powerful models for analyzing optimal outcomes and related techniques for predicting these in given conditions. This holds both for theory and practice. Econometricians have also developed sophisticated techniques for identifying causal effects. These methods can be applied to happiness, the more so now large dataset and long time-series become available.
Using experiments, behavioral economists can analyze the extent to which choices are biased. These experiments thereby shed light on the discrepancy between actual choice and happiness-optimal choice. Experiments can also be used to investigate nudging strategies, such as the framing of choices.
Happiness economics draws currently on large scale panel studies that have been tailored to financial questions in the first place, but involve measures of happiness. One of these is the much used German Socio-Economic panel Study (GSOEP), but there are several more good economic data sets that involve information about happiness, such as the Dutch Household Panel. One of the aims of EHERO is to exploit these sources. In order to do so EHERO will create an efficient method to analyze such data sets.
There is probably more data on happiness in other pockets of economics that are under the surface and therefore under explored. One such sleeping source is HR documentation that sometimes involves information of the happiness of employees during their career in an organization. An example is the study by Howard and Bray (1988) among A&T managers. Another possible find place is marketing research, though perhaps primarily focused on expected utility (which is interesting in its own right), some of the many studies in this field have involved indicators of experienced utility among which happiness.
Specific studies also can provide insight in happiness of individuals. Such studies may target specific sub populations, such as informal caregivers in the field of health care (Brouwer et al., 2006), but also may provide insights from the general public. Experiments can also shed light on specific issues, such as trade-offs between maximands and on the way people choose between alternatives affecting happiness.
EHERO will have good access to three data sources in particular: the Happiness Indicator (GeluksWijzer) run by the participants Bakker, Oerlemans and Veenhoven, the Wage Indicator (LoonWijzer) in which participant Tijdens is much involved and the World Database of Happiness kept by the participating team Veenhoven.
Areas of application
Happiness research can be important in many different types of economic research and in various sub-disciplines. This may include Development economics, where happiness may be one important outcome measure (next to others such as ‘capabilities’ and life-expectancy). In Marketing research the focus has been on expected utility and consumer satisfaction. It will be interesting for happiness research to learn from those experiences and, also, to study the effects of consumption of the life-satisfaction of consumers. For instance, learning more about how big purchases such as houses and pension plans work out on the happiness of the buyers, is an interesting research question. Human resource management is another area in which more happiness research could be fruitful and relevant. To see how job-satisfaction, on which much focus has been, translates into life-satisfaction (and/or vice-versa) is important. The same goes for the area of Health economics where happiness research could complement currently common health-related quality of life measures. This is especially true for areas in which health improvement is not the main goal (e.g. care sector) and where good outcome measures are currently lacking.
Baucells, M. & Sarin, R. (2012). Engineering Happiness. University of California Press
Easterlin, R. (1974) Does economic growth improve the human lot? Some empirical evidence. In: P. David and M. Reder (Eds.). ‘Nations and Households in Economic Growth’, New York: Academic Press
Frey, B. & Stutzer, A (2002) Happiness and economics, Princeton University Press
Howard, A. & Bray, D.W. (1988) Managerial lives in transition: Advancing age and changing times, Guilford Press, New York
Kahneman, D., Wakker, P.P. & Sarin, R. (1997) Back to Bentham: Explorations of experienced utility, Quarterly Journal of Economics, 122: 375-405
Nep-hap: New economic paprespapers on happiness: nep.repec.org
Kapteyn, A., Van Praag, B.M. & Van Herwaarden, F.G. (1978) Individual welfare functions and social reference spaces, Economics Letters, 1:. 173-178
Thaler, R.H, & Sunstein, C.R. (2008), Nudge: Improving decisions about health, wealth and happiness, Yale University Press
Van Praag, B.M. & Ferrer-I-Carbonell, A (2004), Happiness quantified: a satisfaction calculus