Bruno S Frey, Alois Stutzer
The measurement of individual happiness challenges the notion that revealed preferences only reliably and empirically reflect individual utility. Reported subjective well-being is a broader concept than traditional decision utility; it also includes concepts like experience and procedural utility. Micro-and macroeconometric happiness functions offer new insights on determinants of life satisfaction. However, one should not leap to the conclusion that happiness should be maximised, as was
... ed for social welfare function maximisation. In contrast, happiness research strengthens the validity of an institutional approach, such as reflected in the theory of democratic economic policy. (93 words) JEL classification: D60, D71, I31 . We are grateful to Matthias Benz and Marcel Kucher for helpful remarks. Recently, great progress has been achieved in economics: happiness has been seriously measured, and many of its determinants have been identified. This constitutes a sharp break from the notion, much cherished by economists, that revealed preferences only reliably reflect individual utility, and that it is the only way to make serious measurements. In happiness studies, instead of inferring utility from data on income and prices, people are directly asked about their subjective well-being. This paper wants to draw attention to this important development and discusses its consequences for the theory of economic policy. Three propositions are put forward: (1) The measurement of happiness constitutes a great advance for economics; (2) It is a mistake to leap to the conclusion that happiness should be maximized (in the sense of social welfare function maximisation); (3) Happiness research strengthens the validity of an institutional approach (in the sense of a democratic economic policy). Section I briefly discusses the concepts of utility and happiness basic to the argument. The following section provides econometric estimates of happiness functions. Section III argues that maximising such a happiness function is erroneous for several reasons. The next section demonstrates empirically that the institutional approach suggested by the theory of democratic economic policy is fruitful. The final section V summarises the results and shows that the study of happiness (i) helps to better grasp the role of institutions in economy and society; and (ii) is an area wellsuited for the integration of economics and psychology.