Happiness Happiness, CONOMICS E Bruno S

Bruno S. Frey is Professor of Economics at the University of economics/psychology Zurich, Visiting Professor at the Swiss Federal Institute of H APPINESS Technology, and Research Director of CREMA (Center for H Research in Economics, Management, and the Arts). He is APPINESS A REVOLUTION IN E CONOMICS co-editor of Economics and Psychology: A Promising New Cross-Disciplinary Field (MIT Press, 2007). Bruno S. Frey Revolutionary developments in economics are rare. The con- Munich Lectures series servative bias of the field and its enshrined knowledge make it difficult to introduce new ideas not in line with received The MIT Press theory. Happiness research, however, has the potential to Massachusetts Institute of Technology change economics substantially. Its findings, which are grad- Cambridge, Massachusetts 02142 ually being taken into account in standard economics, can http://mitpress.mit.edu be considered revolutionary in three respects: the measurement of experienced utility using psychologists’ tools for measuring subjective well-being, new insights into how human beings value goods and services and social conditions that include consideration of such non-material values as “Bruno Frey and his colleagues brilliantly defend the idea that happiness autonomy and social relations, and policy consequences of measures can serve a very useful function in economics, and in so doing enlarge the vision of all of the human sciences.” these new insights that suggest different ways for government to affect individual well-being. In Happiness, Bruno Jean Tirole IDEI, Toulouse H APPINESS Frey, emphasizing empirical evidence rather than theoretical “The authors have succeeded in producing an extraordinary book that will conjectures, substantiates these three revolutionary claims for open up this field and be the definitive reference for many years to come.” happiness research. Edward F. Diener Department of Psychology, University of Illinois A REVOLUTION IN E CONOMICS After tracing the major developments of happiness research in economics and demonstrating that we have gained impor- “An outstanding overview of the subject by a world leader in the field. Frey tant new insights into how income, unemployment, infla- has an instinct for the right, revealing question combined with the tech- niques to find an illuminating answer.” tion, and income demonstration affect well-being, Frey examines democracy and federalism, self-employment and Lord Richard Layard Emeritus Professor of Economics, London School of Economics volunteer work, marriage, terrorism, and watching television from the new perspective of happiness research. Turning to Munich Lectures in Economics “Long a pioneer in the application of psychology to economics, Bruno Frey policy implications, Frey describes how government can provides a masterful synthesis of happiness research, and demonstrates both provide the conditions under which people can achieve well- its policy value and growing challenge to economic orthodoxy.” being, arguing that effective political institutions and decen- Richard A. Easterlin Department of Economics, University of Southern tralized decision making play crucial roles. Happiness California demonstrates the achievements of the economic happiness revolution and points the way to future research. Frey Bruno S. Frey 978-0-262-06277-0 Happiness Munich Lectures in Economics Edited by Hans-Werner Sinn The Making of Economic Policy: A Transaction Cost Politics Perspective, by Avinash K. Dixit (1996) The Economic Consequences of Rolling Back the Welfare State, by A. B. Atkinson (1999) Competition in Telecommunications, by Jean-Jacques Laffont and Jean Tirole (2000) Taxation, Incomplete Markets, and Social Security, by Peter A. Diamond (2003) Growth and Empowerment: Making Development Happen, by Nicholas Stern, Jean-Jacques Dethier and F. Halsey Rogers (2005) Happiness: A Revolution in Economics, by Bruno S. Frey (2008) In cooperation with the council of the Center for Economic Studies of the University of Munich Council members: Martin Beckman, David F. Bradford, Gebhard Flaig, Otto Gandenberger, Franz Gehrels, Martin Hellwig, Bernd Huber, Mervyn King, John Komlos, Richard Musgrave, Ray Rees, Bernd Rudolph, Agnar Sandmo, Karlhans Sauernheimer, Klaus Schmidt, Hans Schneeweiss, Robert Solow, Joseph E. Stiglitz, Wolfgang Wiegard, Charles Wyplosz Happiness A Revolution in Economics Bruno S. Frey in collaboration with Alois Stutzer, Matthias Benz, Stephan Meier, Simon Luechinger, and Christine Benesch The MIT Press Cambridge, Massachusetts London, England © 2008 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. For information on quantity discounts, email [email protected]. Set in Palatino by SPi Publisher Services, Puducherry, India. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Frey, Bruno S. Happiness : a revolution in economics / Bruno S. Frey, in collaboration with Alois Stutzer . [et al.]. p. cm. — (Munich lectures in economics) Includes bibliographical references and index. ISBN 978-0-262-06277-0 (hardcover : alk. paper) 1. Happiness—Economic aspects. 2. Economics—Psychological aspects. I. Title. BF575.H27F74 2007 330.01—dc22 2007038248 10 9 8 7 6 5 4 3 2 1 Contents Series Foreword vii Preface ix I Major Developments 1 Research on Happiness 3 2 The Relationship of Happiness to Utility 15 3 How Income Affects Happiness 27 4 How Unemployment Affects Happiness 45 5 How Inﬂ ation and Inequality Affect Happiness 55 II Pushing Ahead 6 The Public Sphere 61 7 Self-Employment and Voluntary Work 71 8 Marriage and Happiness 87 9 Watching Television 93 10 Procedural Utility 107 vi Contents 11 Mispredicting Utility 127 12 The Value of Public Goods 139 III Policy Consequences 13 Happiness Policies 151 14 Happiness and Political Institutions 177 15 A Revolution in Economics 199 References 205 Index 237 Series Foreword Every year the CES council awards a prize to an internationally renowned and innovative economist for outstanding contributions to economic research. The scholar is honored with the title Distinguished CES Fellow and is invited to give the Munich Lectures in Economics. The lectures are held at the Center for Economic Studies of the University of Munich. They introduce areas of recent or potential inter- est to a wide audience in a nontechnical way and combine theoretical depth with policy relevance. Hans-Werner Sinn Professor of Economics and Public Finance Director of CES University of Munich Preface Economics is undergoing a remarkable new development, which may even be called revolutionary. This development is likely to change economics substantially in the future. Our discipline has, at the same time, a conservative bias, due to its well-established body of knowledge. To this day, the core of economics is universal; the same principles of economics are taught everywhere in the world. This enables scholars to communicate easily. But an unfortunate consequence of this enshrined knowledge is that it is difficult to introduce new ideas not in line with received theory. Happiness research is, to some extent, an exception. Its findings are slowly being taken into account in standard economics. Indeed, research on happiness has already become a hot topic, particularly among young economics scholars. The economics of happiness is arguably revolutionary in three respects: Measurement The measurable concept of happiness or life satisfaction allows us to proxy the concept of utility in a satisfactory way. It proposes the opposite of something that was considered a revolution in the 1930s, when Sir John Hicks, Lord Lionel Robbins, and others claimed that utility cannot and need not be measured. This was a great advance, and it opened the way to a fruitful application of microeconomics to economic issues, and more recently to issues far beyond economics. But the situation has changed dramatically since the 1930s. Psychologists have taught us how to measure happiness and thus to fill the concept of utility with life. Although these measures are certainly not ideal, they can usefully be applied to economic, political, and social problems. At the same time, the ways of measuring experienced utility are continually being improved. x Preface Approximating experienced utility by using measures of subjective well-being allows us to extend economic theory into new areas. In par- ticular, it enables us to analyze errors in decision making. Standard economic theory equates the utility expected when deciding between consumption bundles with the utility experienced when consuming them. Individuals always maximize their utility and only make errors in a random way. In contrast, happiness research demonstrates that individuals tend to make systematic errors when choosing between alternatives. For example, they often mispredict the utility gained by future consumption. They overestimate the satisfaction they derive from having a higher income in the future, and they underestimate the utility gained from immaterial aspects of life, such as friendship and social relations. As a result of these errors in judgment, they find them- selves less satisfied with life than they could be according to their own evaluation. Similarly, individuals’ utility is lower when they are subject to significant

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