Happiness and Utility in Economic Thought—Or: What Can We Learn from Happiness Research for Public Policy Analysis and Public Policy Making?

Abstract In the past decades, a great interest has emerged in understanding the nature of people’s well-being beyond consumption opportunities. It is widely believed that happiness research based on self-reports on people’s satisfaction with life has made a significant contribution to this understanding. The growing numbers of happiness studies provoke the question whether, and eventually how, public economists should include well-being considerations into policy analysis. Aiming to contribute in answering this question, this review paper provides a survey of the general happiness conception, the formative steps of happiness research, and its relationship to the economic concepts of ordinal and cardinal utility. We furthermore describe the pitfalls of conventional utility approaches and find that both the ordinal and the cardinal approaches have shortcomings which are not shared by happiness measurements. One advantage is that self-reports on well-being reflect the consequences of people’s choices in terms of the well-being they eventually experience. Externalities, as well as the effects of bounded rationality, are inherently taken account of when using happiness measurements for the evaluation of public policies. While it is not entirely clear yet how evidence from happiness research is to be used towards enlightening policy makers, the answer will certainly depend on the policy field under consideration. In general, happiness research may make two major inroads: it may help to discover which conditions foster people’s well-being, besides the goods and services provided by the market; it may also help to develop a realistic conception of man, thus facilitating an adequate modeling of multiple-goal and potentially bounded rational real-life actors in policy impact analysis.