Economics of Happyness

Little by little, psychology’s insights into happiness and well-being are being integrated into economic theory and debate. Happiness has become one of the hot topics in economics over the last decade, with both the size and depth of the literature increasing at a rapid rate.

Though US-based psychologists Daniel Kahneman and Ed Diener and economists Richard Easterlin and Alan Krueger can take much credit, so too can the British ‘brat pack’ consisting of Warwick’s Andrew Oswald, Paris-based Andrew Clark, Dartmouth’s Danny Blanchflower and (as an honourary elder statesman), the LSE’s Richard Layard. The two Andrews were writing about this stuff years ago, when ‘respectable’ academic economists thought the topic barking.

What is particularly encouraging is that economists are starting seriously to tackle the major empirical and the theoretical challenges that this literature has uncovered. A new paper by Andrew Clark, Paul Fritjers and Michael A Shields, prepared for the Journal of Economic Literature, ups the ante. Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles (PDF) takes as its starting point Easterlin’s seminal 1974 paper which posed a paradox – that happiness does not appear to increase with income, once basic needs are fulfilled. The paper covers a lot of ground, including adaptation, social comparisons, relative income, utility and much more besides. There is a short but insightful description of the key challenges for empirical work. And to wrap it up, the authors explore some implications for economic theory and policy design.

(Originally published in the The Economist)

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