Journal of Economic Literature Vol. XL (June 2002), pp. 402–435 Frey and Stutzer:Journal of Economic Happiness Literature, Vol. Research XL (June 2002) What Can Economists Learn from Happiness Research? BRUNO S. FREY and ALOIS STUTZER1 1. Why Study Happiness? marginally compensated for by a 1.7- percentage-point decrease in inflation APPINESS IS generally considered (Rafael Di Tella, Robert MacCulloch, an ultimate goal of life; virtually H and Andrew Oswald 2001). This result everybody wants to be happy. The significantly deviates from the “misery United States Declaration of Indepen- index” that, for lack of information, has dence of 1776 takes it as a self-evident simply been defined as the sum of the truth that the “pursuit of happiness” is percent unemployment rate and the an “unalienable right,” comparable to percent annual inflation rate. Another life and liberty. It follows that economics trade-off that can be calculated on the is—or should be—about individual hap- basis of estimated happiness functions piness; in particular, how do economic is the compensating variation for being growth, unemployment and inflation, and unemployed rather than holding a job. institutional factors such as governance For the same European countries re- affect individual well-being? ferred to above, a move from the lowest In addition to this intrinsic interest, income quartile to the highest income there are important reasons for econo- quartile would not be enough to offset mists to consider happiness research. The the adverse effect of unemployment, first is economic policy. At the micro- suggesting that unemployed people suf- level, it is often impossible to make a fer high non-pecuniary costs. Happiness Pareto-improving proposal, because a research can thus usefully inform social action entails costs for some indi- economic policy decisions. viduals. Hence an evaluation of the net Another reason why happiness is of effects, in terms of individual utilities, relevance to economists is the effect of is needed. On an aggregate level, eco- institutional conditions such as the nomic policy must deal with trade-offs, quality of governance and the size of especially those between unemploy- social capital on individual well-being. ment and inflation. Data for twelve Research for 49 countries in the 1980s European countries for the period and 1990s suggests that there are sub- 1975–91 show that a 1-percentage-point stantial well-being benefits from factors increase in the unemployment rate is such as improved accountability, effec- 1 University of Zurich, Institute for Empirical tiveness and stability of government, Research in Economics. We wish to thank a large the rule of law, and control of corrup- number of scholars and three referees for their detailed comments on this and previous versions tion. The data show that the effects of the paper. flowing directly from the quality of 402 Frey and Stutzer: Happiness Research 403 institutions are often much larger than employed, even when receiving the same those that flow through productivity and income as when employed, depresses economic growth (John Helliwell 2001). people’s well-being markedly.4 Happiness research can also help us Many happiness research findings understand the formation of subjective add new knowledge to what have be- well-being. This sheds new light on come standard views in economics, basic concepts and assumptions of eco- while other results challenge those nomic theory, such as whether people views. One finding is the consistently can successfully predict their own fu- large influence of nonfinancial variables ture utilities (George Loewenstein, Ted on self-reported satisfaction. This does O’Donoghue, and Matthew Rabin 2000) not mean that economic factors such as or whether individual self-assessments income, employment, and price stability of predicted, instant, and remembered are unimportant, but does suggest that utility are consistent (Daniel Kahne- the recent interest in issues such as good man, Peter Wakker, and Rakesh Sarin governance and social capital is well- 1997). It may also help to solve empiri- founded. The findings also enrich our cal puzzles that conventional economic knowledge of discrimination concerning theories find difficult to explain. A gender, ethnicity and race, and age. paradox needing explanation, for exam- Section 2 discusses the relationship ple, is that in several countries since between happiness and utility, and ar- World War II real income has drasti- gues that reported subjective well- cally risen but self-reported subjective being is a satisfactory empirical approxi- well-being2 of the population has not mation of individual utility. Sections 3 increased or has even fallen slightly. In to 5 report on how the economic vari- the United States between 1946 and ables of income, unemployment, and 1991, per-capita real income rose by a inflation affect happiness. Section 6 factor of 2.5 (from approximately shows that, in addition to current eco- $11,000 to $27,000 in 1996 US$), but nomic conditions, institutional factors, over the same period, happiness on in particular the type of democracy and average remained constant.3 At a given the extent of government decentraliza- point in time, higher income is posi- tion, systematically influence how satis- tively associated with people’s happiness, fied individuals are with their lives. yet over the life cycle, happiness stays Section 7 provides a summary and dis- more or less unchanged. Another para- cusses the implications for economic dox is that, since ancient times, work policy and theory. has been considered a burden for indi- viduals to bear, but empirical research on 2. Happiness and Utility happiness strongly suggests that being un- 2.1 Historical Sketch 2 Subjective well-being is the scientific term in psychology for an individual’s evaluation of her ex- For a long time, the study of happi- perienced positive and negative affect, happiness, ness was the province of psychology.5 or satisfaction with life. They are separable con- structs, and the precise terminology will be used 4 In addition to the literature already cited, see whenever empirical research is cited. Otherwise, Blanchflower (1996), Andrew Clark and Oswald the terms happiness, well-being, and life satis- (1994), Frey and Stutzer (1999), and Liliana faction are used interchangeably. Winkelmann and Rainer Winkelmann (1998). 3 This is a “well-established finding” (Richard 5 See, for example, Michael Argyle (1987), Die- Easterlin 2001, p. 472, 1974, 1995; David Blanch- ner et al. (1999), Kahneman, Diener, and Norbert flower and Oswald 2000; Ed Diener and Shigehiro Schwarz (1999), Alex Michalos (1991), David My- Oishi 2000; and Charles Kenny 1999). ers (1993), Richard Ryan and Edward Deci (2001), 404 Journal of Economic Literature, Vol. XL (June 2002) Only recently has this psychological re- advantage (Lionel Robbins 1932; John search been linked to economics. The Hicks 1934; Roy Allen 1934). The axi- pathbreaking contribution by Easterlin omatic revealed-preference approach (1974) was noted by many economics holds that the choices made provide all scholars, but at the time found few the information required to infer the followers. General interest in the utility of outcomes. The axiomatic ap- measurement and determinants of sub- proach is not only applied to derive jective reported well-being was raised individual utility, but also to measure by a symposium (Robert Frank 1997; social welfare. To do so, social welfare Yew-Kwang Ng 1997; and Oswald comparison is based on the consump- 1997). Since the late 1990s, economists tion behavior of households (Daniel have started to contribute large-scale Slesnick 1998; for a critical analysis Ng empirical analyses of the determinants 1997, 2001). of happiness in different countries and The positivistic view still dominates periods. in economics. Amartya Sen (1986, p. This paper does not intend to provide 18) observes that “the popularity of this a general survey on happiness research view in economics may be due to a mix- (which has already been done by ture of an obsessive concern with ob- Kahneman, Diener, and Schwarz 1999, servability and a peculiar belief that and Frey and Stutzer 2002). Rather, we choice . is the only human aspect wish to show which insights may be im- that can be observed.” Its dominance is portant, if not necessary, for integrating reflected in the contents of micro- into economics. economics textbooks. Not all contempo- rary economists, however, subscribe to 2.2 Objective and Subjective Utility this view. Numerous scholars have chal- Standard economic theory employs lenged standard economic theory from an “objectivist” position based on ob- different angles. There are countless servable choices made by individuals. examples of nonobjectivist theoretical Individual utility only depends on tangi- analyses in economics. They incorporate ble goods and services and leisure. It is emotions (Jon Elster 1998) self-signaling inferred from behavior (or revealed (self-esteem), goal completion, mastery preferences), and is in turn used to ex- and meaning (Loewenstein 1999) or plain the choices made. This “modern” status (Frank 1985). In order to explain view of utility has been influenced by human behavior, interdependent utility the positivistic movement in philoso- functions are considered, rather than phy. Subjectivist experience (e.g., cap- interpersonally independent ones (Clark tured by surveys) is rejected as being and Oswald 1998). This challenges es- “unscientific,”