Economics and Happiness

Seminar Paper, 2009

17 Pages, Grade: 1,7


Table of Contents

1. Introduction

2. Happiness
2.1 Terms and definitions
2.2 Happiness and Utility
2.3 Measuring Happiness

3. Determinants of Happiness
3.1 Income
3.1.1 Differences in income between individuals
3.1.2 Income over time
3.1.3 Income between different countries
3.2 Unemployment and Inflation
3.2.1 Unemployment
3.2.2 Inflation
3.3 Democracy and Institutions
3.4 Hardship
3.5 Inequality

4. Concepts related to Happiness
4.1 Rivalry
4.2 Adaptation and habituation
4.3 Aspiration level theory

5. Policy implications

6. Summary


1. Introduction

"Money does not buy happiness" - with that statement Richard Easterlin (1974) somehow initiated a new field of research for economists. Within the last thirty years plenty of surveys and dozens of papers were produced to identify the determinants of happiness. Unfortunately little importance was attached to a definition or a consistent concept of what "happiness" is. Only within the last decade happiness research has gained the self-efficacy to educe policy recommendations from its own insights - with ambiguous success.

In my paper I will give a brief summary of the central findings in happiness research and introduce some approaches of explanations for surprising evidence. In the end I will present a few policy recommendations to illustrate the above mentioned du- biousness of success. As I have to present plenty of evidence I will set aside criticism of methodology in every single survey and leave it with a cross-the-board one right now: happiness research has to catch up to a considerable degree in methods of conceptualization, measurement and statistics.

In the first section, I will present a general approach to the term "happiness", its use and its measurement. Next I will describe the main identified and examined determi­nants[1] of happiness - namely income, unemployment and inflation, democracy, hardship and inequality. Section 4 deals with concepts that perhaps can give a micro- theoretical foundation for some of the results in happiness research. Not surprisingly they stem from psychology because classic economic theory assuming rational deci- sions ("homo oeconomicus") is not capable of describing irrationalities like rivalry, adaptation or aspiration level shifts. In the last section I will introduce some implica­tions for policy found in literature. Finally, the content of this paper is summarized.

Modern economic policy aims at stabilizing a steady economic growth. In contrast, Aristotle defines "happiness" as self-sufficiency. Thus, there is an obvious discrepan- cy between happiness and what were reaching for today. So we should first take a look at what we want to study.

2. Happiness

2.1 Terms and definitions

Happiness research lacks a general definition of what "happiness" is. Following Eas- terlin (2005, p.29), most researchers put the terms "well-being, happiness, life- satisfaction and welfare to be interchangeable." The concept is often measured by one scale questionnaires as in the US General Social Survey (National Opinion Re­search Center 1999): "Taken all together, how would you say things are these days — would you say that you are very happy, pretty happy, or not too happy?" Though there are a lot of contrary theories dealing with "happiness" in literature, e.g. Ben- thams hedonism or the objective list theory by Aristotle (cf. Nussbaum 2005), happi­ness research does not exactly define what it is dealing with. Veenhoven (2005, p.244) gives us the chance to get an idea of what he tries to capture, when he de- fines happiness as "the degree to which people evaluate their overall quality of present life as a whole positively." But this is apparently no answer to the forecited philosophical discussion. Furthermore, it is often maintained that "happiness" is a proxy for utility and can be reliably and validly measured by the above-mentioned questionnaire (see below). In spite of its weakness I will no longer criticize this con­cept of happiness in my paper as it aims to be primarily descriptive. Owed to a better readability I will always refer to the term "happiness", ignoring that there are plenty of ideas packed into one concept by different authors.

2.2 Happiness and Utility

It is a common assumption in standard economic theories that "individual utility only depends on tangible goods and services and leisure" (Frey and Stutzer 2002, p.404). Thus, utility is observable, objectivistic and determines the decisions of an individual. Frey and Stutzer (2002, p.404), in contrast, emphasize the role of subjectivist expe- rience such as "emotions, self-signaling, goal completion [...] or status." The basic problem of such a concept is its measuring. Frey and Stutzer (2002) suggest using measurements of happiness as "proxies for utility." This would make happiness the "ultimate goal" of life, which seems dangerous given the fact that most of the surveys in happiness research point to concepts similar to terms of pleasure and pain (cf. Nussbaum 2005, p.176f.). Nevertheless, it is an attractive complementary approach to objectivistic standard economic theories.

2.3 Measuring Happiness

If one wants to find out, how happy people are, it seems a "straightforward strategy to ask them about their well-being" (Frey and Stutzer 2002, p.405). An alternative way to the questionnaire mentioned in the previous chapter is to ask people to what ex- tent (on a 5-point scale) they agree to the following statements (Frank 2005, p.65f.):

- "When good things happen to me, it strongly affects me."
- "When I get something I want, I feel excited and energized."
- "When I'm doing well at something, I love to keep at it."

Another important scale is the World Values Survey (cf. Inglehart et al. 2002): "All things considered, how satisfied are you with your life as a whole these days?" An­swers were given on a ten-point scale reaching from dissatisfied to satisfied.

For all of these scales are single-item and based on self-reports, there may occur various biases, especially the social desirability bias. Indeed, there has been a lot of research about this fundamental question, which is summarized by Frank (2005, p.66): "These happiness measures are consistent, valid and reliable." One may stay suspicious as that conclusion is drawn with a survey (amongst others) proving a negative relation between reported happiness and the odds to commit suicide. I pre- fer following Veenhoven (2005, p.246), who concludes that "the validity and reliability of such simple self-reports however are to be doubted."

3. Determinants of Happiness

3.1 Income

Following Frey and Stutzer (2002), I will structure the research on the influence of income into three passages. First, I will analyze the differences in income within a country at a given point in time. Next, I consider longitudinal data, focusing on the development over time. Finally, some cross-sectional research for different countries is summarized.


[1] should rather call them „influencing factors" as it is not suitable to speak about „determinants" of a non-defined term like happiness.

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Economics and Happiness
Johannes Gutenberg University Mainz
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Henning Müller (Author), 2009, Economics and Happiness, Munich, GRIN Verlag,


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