Journal of Happiness Studies

, Volume 8, Issue 2, pp 293–298

Inspiring Economics

Luigino Bruni and Pier Luigi Porta (eds), Economics & Happiness: Framing the Analysis. Oxford University Press, 2005 ISBN 978-0-19-928628-7, 366 pp


    • Department of EconomicsUniversidad de las Americas
Book review

DOI: 10.1007/s10902-007-9048-3

Cite this article as:
Rojas, M. J Happiness Stud (2007) 8: 293. doi:10.1007/s10902-007-9048-3

This book puts together a group of interesting papers on happiness, most of them written by economists, and all of them dealing with issues of relevance for economists. A large group of these papers were presented at a conference on ‘The Paradoxes of Happiness in Economics’ organized by University of Bicocca in 2003. The conference dealt with some paradoxes raised to economic theory by findings in happiness research; such as what is the proper relationship between income and happiness? What is the right specification of a utility function? Is it possible for happiness being present even at low income levels? and What are the implications from happiness research for currently accepted public-policy recommendations?

Findings from happiness research have forced economists to get out of their theoretical shell to explore and incorporate new topics into their research. Some of these topics are well-known by other disciplines; hence, economists are getting inspired from knowledge generated in other disciplines. In consequence, the book incorporates issues such as relational goods, correspondence of sentiments, adaptation, habituation and treadmills, endogenous aspirations, comparisons and reference groups, psychological set-point theory, and deception, dissonance, and rationality; as well as some philosophical discussions on the notion of utility and related issues.

An introductory chapter written by Luigino Bruni and Pier Luigi Porta argues that happiness research has an important role to play in economics; however, economists must be open to inspiration from other disciplines. Thirteen contributions follow this introduction.

Easterlin: The need for understanding well-being. Richard Easterlin, a pioneer in the study of happiness and economics, opens the book by arguing for the need of building a better theory of well-being. Easterlin contrasts current well-being theories in psychology and economics. Following a domains-of-life approach, he rejects the set-point theory based on empirical work that shows that there is no complete adaptation over the life-cycle in domains such as marriage and health (which have proven to be relevant for well-being). Easterlin also criticizes the ‘more is better’ approach in economics; he shows that there is almost complete hedonic adaptation in the case of income and for most consumption goods. Thus, more is not always better, since aspirations rise—in more or less the same proportion—with income and consumption of some goods (endogeneity of aspirations). Easterlin explains this rise in aspirations as a consequence of habit formation (hedonic adaptation implies that additional stimuli do not impact well-being as much as initial ones) and of social comparisons (interdependence of preferences implies that people’s wants do depend on what other people are consuming) Easterlin navigates in between new research in economics and psychology to propose a foundation for a better theory of well-being. He suggests that a better theory must recognize: First, that there are many domains of life, that people get well-being from satisfaction in all these domains, and that they are not equally important for life satisfaction. Second, that there are differences across domains in the degree of hedonic adaptation and social comparison to attainment levels. Third, that there are intra-domain differences in hedonic adaptation and social comparison; for example, some consumption goods are more positional than others (an issue raised by Hirsch three decades ago). Fourth, that people can not accurately predict how their aspirations will change in any particular domain as consequence of attainments. Fifth, that differences across domains in aspiration changes, combined with their inaccurate prediction, may lead to a sub-optimal allocation of time and, in consequence, to the need of reconsidering economists’ recommendations for economic policy.

Frank: Spending and the conspicuous-consumption trap. Robert Frank presents a paper that follows up Easterlin’s argument of differences in aspiration changes across consumption goods. He states that the low impact of increasing incomes on happiness emerges from a conspicuous-consumption trap (an issue raised by Veblen about a century ago). Conspicuous consumption shows up in those goods where there is high—even complete—adaptation and where social comparison matters (e.g.,: a house). Frank argues that some of the resources allocated to conspicuous consumption could have a more gratifying alternative use in goods that are less conspicuous; such as: having more vacation time; spending more time with family and friends; doing more exercise and rewarding hobbies; working in more satisfying, autonomous, and secured jobs; and improving some public infrastructure—e.g., commuting facilities and urban parklands. However, social interdependence may lead to an overprovision of conspicuous goods and an under-provision of non-conspicuous goods. Thus, Frank states that it is the allocation of income, rather than income itself, what originates the main paradox of a lack of a strong relationship between income and happiness. Frank calls for an in-depth study of the way income is spent.

Layard: Moving towards public-policies implications. Richard Layard also works within the argumentative line of Easterlin and Frank. For many decades, he has been concerned about the proper role of state intervention in market economies. His contribution shows how he has found a fresh air in the growing happiness literature. He takes advantage of recent happiness-research findings to support some old claims about the market failing to provide a highly satisfactory society and about the need for state intervention. He also shows how happiness research can be used to design proper state policies. Layard states that rivalry and habituation are essential characteristics of human nature, which must be taken into account in the design of public policy. Interdependence in people’s utility functions, combined with differences in the degree of interdependence across goods, leads to a market failure: some goods—where conspicuous consumption prevails—are overproduced; while other goods (such a leisure time, social life, time with kids and spouse, autonomy at work, and exercise) are under-produced. The difficulty of people accurately predicting their habituation, plus differences in habituation across goods, also leads to market failure. Layard formalizes a utility function that incorporates rivalry and habituation differences across goods and shows how these models—soundly grounded on happiness research—can be used to design public policies for increasing well-being. He also shows that some widely accepted public-policy propositions of standard economics are rejected once rivalry and habituation are taken into consideration.

Van Praag: Dealing with satisfaction questions and evaluation norms. Bernard M.S. van Praag, presents an econometrically sound application of the financial satisfaction analysis. van Praag is a pioneer in the study of satisfaction questions. van Praag and his colleagues were dealing with satisfaction questions a couple of decades before the current interest for subjective well-being variables emerged in economics. They had to face the challenges of using reported satisfaction as a well-being proxy in an academic world that strongly opposed such a view and that believed it was possible to infer well-being from people’s actions. van Praag argues that ordinal utility functions can be relevant for explaining choice, but that the study of well-being requires to ‘look for another measurement method’ (p. 198), such as reported satisfaction. Based on sound econometric techniques, his contribution illustrates the empirical implementation of two related methodologies: the income evaluation question (IEQ)—associated to the old tradition of the Leyden school—, and the financial satisfaction question—which is widely used nowadays.

Frey and Stutzer: Happiness as a proxy for utility. Bruno Frey and Alois Stutzer show how the lack of an observable proxy for utility has led economics to speculative debates about the substance of utility, as well as to relying on complex models with little corroboration possibilities. They state that happiness research can help economics by providing an observable proxy for utility; so, it becomes possible to test alternative hypotheses and models in economics. By studying the role of aspirations and relative income in utility, Frey and Stutzer illustrate how happiness research can modify our understanding of the arguments and specification of a utility function. They also deal with marriage models to illustrate how happiness research makes it possible to test hypotheses and to discriminate between models.

Stark and You-Qiang: Happiness and relative deprivation. Oded Stark and You Qiang Wang build a simplified model to illustrate how people tend to agglomerate when relative deprivation matters. Their work shows both the usefulness and the limitations of building simplified models to explain and predict human behavior. Although the authors emphasize the relevance of their model in explaining geographical migration, their work fits within the literature on relative income and relative consumption, as well as within the literature on reference groups.

Sugden: The importance of social interaction. In a dense and rich chapter, Robert Sugden brings Adam Smith’s ideas about the relevance of mutual sympathy (correspondence of sentiments) back to economics. Sugden focuses on those social interactions where correspondence of sentiments takes place and argues that this kind of interactions positively affects episodic (transitional) happiness. The topic Sugden deals with fits within the relational-goods literature. Economics completely overlook the importance of relationality for well-being; however, it is a fundamental topic in the study of happiness. Sugden argues that happiness depends not only on first-order feelings (boredom, tiredness, fear, love) but also on second-order feelings (the feeling from ‘sharing’ with others our first-order feelings). He concludes that recent social trends, such as increasing scale of firms and increasing integration of markets, have raised production at the cost of depersonalizing societies. Hence, the positive impact of raising incomes is lessened by the decline in social interactions, which end up being undersupplied. Sugden’s contribution also has an important message for the growing literature on social capital; it states that the intrinsic value of social capital may be of greater importance than its extrinsic value.

Zamagni: Economics overestimates the individual; underestimates social relations. Stefano Zamagni follows up Sugden’s argument. He states that standard economics is limited to understand happiness because of its individualistic paradigm. He argues that happiness is a relationally based phenomenon; while standard economics deals with utility as a person–thing relationship, happiness requires a study of person–person relationships. Because of its limitations, standard economics focuses on concepts such as value of use and value of exchange of commodities, completely neglecting the importance of the value of bond within persons. In his contribution, Zamagni surveys the relevant literature on relational concepts such as altruism, sociality, reciprocity, relationality, and exchange of equivalents. Zamagni recommends opening economic theory to the gift principle in order to be able to study happiness.

Nussbaum: Who is the judge of a person’s happiness? Martha Nussbaum provides an interesting contrast of the views of Bentham and Aristotle on happiness; she also shows how Mill’s philosophy falls in between Bentham and Aristotle. Nussbaum’s contribution illustrates the longstanding ethical tradition of understanding happiness as how a person ought to live his or her life. For example, in page 177 Nussbaum states how Aristotelians associate happiness to “a normative account of the good life for a human being.... happiness is a normative notion, meaning ‘the human good life’, or ‘a flourishing life for a human being’”. Nussbaum’s approach has been widely used by philosophers and religious thinkers; who have assumed they are in a better position than the person herself for judging her life. Happiness is, in consequence, defined by ‘thoughtful people’ (p. 172), who believe they are able to make an imputation about a person’s happiness or well-being, without any interest for empirically exploring what this real person feels and thinks. The approach has also been common in economics. Because of a lack of a positive theory of well-being, most economists have ended up adopting normative approaches when dealing with well-being. It is important to state that recent happiness research in economics does not follow this ethical approach; however, the ethical tradition may still be useful as a source of inspiration for applied research. Hence, in an indirect way, the paper raises some fundamental questions that happiness research in economics needs to address; for example: Should economics focus on an understanding of happiness as a transitional feeling or as an evaluation of a person’s life? Who is the authority in making a judgment about a person’s life: the person herself or a group of thoughtful people?

Matravers: How to reconcile personal happiness and social morality? In another philosophically oriented chapter, Matt Matravers deals with the question of whether personal happiness and social morality are compatible. Matravers states the question as whether it is possible to reconcile a person’s own motivation to be happy (personal happiness) with the social motivation of pursuing the general interest (social morality). He discusses how utilitarians and neo-Kantians (Rawls and Scanlon) have tried to solve this problem. Most economists have followed a functionalist approach to happiness by working at the individual level (as if persons were living alone and were defined as such out of context) and then aggregating to get a social condition. However, it seems that more research on the happiness of persons (who are not only interacting with other persons, but who are also being defined as such in society) is needed to answer the question raised by Matravers. This is an issue of crucial relevance for those interested in the public-policy implementation of happiness-research findings.

Veenhoven: Happiness needs no paradise! Ruut Veenhoven, a pioneer in the study of happiness, advices economists about the need for better and broader theories to understand happiness. He shows how poor and academically compartmentalized theories of well-being may mislead researches to apparent paradoxes. In his contribution, Veenhoven addresses the apparent paradox of happiness in hardship; he shows that people can be happy even under conditions that are considered as hard. Veenhoven argues that happiness is not necessarily associated to trouble-free living, as many philosophers and some policy-makers have erroneously presumed. He argues that ‘happiness needs no paradise’ since ‘evolution gave rise to an ability to face adversities.’ Veenhoven concludes that ‘the illusion of a paradox is based on over-estimation of hardship and in false theories of happiness’ (p. 262). Veenhoven’s contribution shows that economists doing happiness research should not rely on their economic theories alone. Hence, economists are faced with a broader question: whether it is possible to completely understand such a complex phenomenon as happiness with the tools, the accumulated knowledge, and the models of an economically educated mind alone.

Phelps: Personal stories complement our understanding. In the same line than Veenhoven’s, Charlotte Phelps’ contribution reminds economists that a person’s happiness is a complex phenomenon; which involves countless explanatory factors beyond economic ones. The low R-squared coefficients in regressions that explain happiness on the basis of what economists have presumed as relevant explanatory variables illustrates this point. Phelps argues for the importance of nurturing, family antecedents, and warmth of maternal affection in infancy as relevant explanatory variables for a person’s happiness. She provides an empirical study of the importance of these variables; the sample is amazingly small because she needs a long panel data that incorporates variables seldom gathered in panel studies. Although the sample is so small to make any inference, her arguments are reasonable. Phelps’ contribution shows the importance of considering many other variables beyond economic ones when explaining happiness; it also shows the importance of doing qualitative and in-depth study of personal cases.

Pasinetti: The road taken. A short contribution by Luigi Pasinetti ends the book; he comments on the road taken by Classical economists of focusing their attention on material wealth rather than happiness.

The book offers some wonderful contributions to economists in the area of happiness and economics, many of them written by pioneer researchers in the area. These contributions illustrate how economics has benefited from happiness research, and how economists have been forced to get out of their self-constructed academic shell and to substitute their ever-increasing simplified economic agents for real human beings. The book provides frontier knowledge that is useful to understand some of the current paradoxes of happiness in economics. It could also provide some guidance for future research; however, it is missing a final chapter discussing potential roads to explore. It is probably not convenient to conceive the book’s role as that of framing the analysis, because it does not exhaust the set of relevant issues and approaches in happiness and economics; at the current stage of research, it is probably a better idea to keep all avenues open.

Copyright information

© Springer Science+Business Media B.V. 2007