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A short history of happiness and economics

For the first time since its creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well….it will be those people, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes
John Maynard Keynes, Essays in Persuasion, 1931

Happiness has been on the mind of economists from the inception of political economics. In The Theory of Moral Sentiments (TMS) Adam Smith dwells on the notion of happiness and makes clear his belief that 'in what constitutes the real happiness of human life all the different ranks of life are nearly upon a level.' (TMS ) He believed that 'to deserve, to acquire, and to enjoy the respect and admiration of mankind are the great objects of ambition and emulation' and that the attainment of this was achieved through 'the study of wisdom and the practice of virtue' rather than 'by the acquisition of wealth and greatness.' (TMS) Furthermore, for Smith, 'All constitutions of government are valued only in proportion as they tend to promote the happiness of those who live under them. This is their sole end and use.'  (TMS)  Ironically, Smith is often used by hard-line market economists and thinkers around the world to simplify and downgrade the role of governments in improving society through frequent reference to the ‘invisible hand’ that begets general prosperity via personal avarice. For this reason it is worth dwelling on Smith’s views.

While the first edition of Smith’s TMS was published in 1759, well before The Wealth of Nations (WN) in 1776, the much revised sixth edition, to which the above quotes were all new additions, dates from 1790. While the TMS might be thought of as Smith’s investigation of the sympathetic part of human nature, the WN was his investigation of its selfish side. For Smith the sympathy of the impartial spectator overcame the selfish side of the individual and he makes his thoughts on this very clear in the revised 1790 edition of TMS. Wisdom and virtue are the real goals, not wealth and fame but that does not stop Smith from attempting to define better the nature and causes of generating the growth of national wealth. And while some of the causes may be selfish, nevertheless the principle of sympathy still dominates all other human passions and should lead to increasing wealth, but not at the cost of ‘due modesty’’ and ‘equitable justice’.

Smith’s general view was shared by many other early economists, most of whom also entered into the world of philosophical thought. For example:

  • Ferdinando Galiani (Italy, 1729-87) for whom utility is happiness, it is the satisfaction of  a passion
  • Thomas Malthus (England, 1766-1834) who enquired into the causes which affect the happiness of nations
  • Jeremy Bentham (England, 1748-1832) the great Utilitarian for whom ‘the greatest happiness of the greatest number’ was the measure of right and wrong.

So clearly for these early, classical, economists the notion of utility, which later became so synonymous with money (i.e. Gross Domestic Product - GDP) for  20th century economists, was much more closely associated with happiness than simply economic growth.  Over time the perception of ‘utility’ has changed in the history of economics. In the second half of the 19th century ’utility’ came to be synonymous with the benefits a consumer derived from economic goods as revealed by that individual’s preferences. This individual preference (demand), when combined with the scarcity of any such good (supply), led to a price 'at the margin', that is, the price at which the cost of supplying another good of type X is met by the price at which a consumer is willing to pay (demand) for product X. In turn, the economic agents (individuals)  who inhabited such a world were assumed to exhibit very specific behaviour; namely  they were perfectly rational, strictly individualistic, fully capable of knowing the past, present and future and utility maximising, where utility was equivalent to the quantity of goods and was thus equivalent to the size of income This idea reduces to something like ‘more is better’ where ‘more’ is in relation to goods to which a pecuniary value can be given and where this value is measured by relative scarcity rather than gross utility. Thus wealth (income) becomes the only measure of success and hence GDP is the means by which a society’s or a nation’s well-being is judged. The clear assumption is that increases in material wealth naturally increases well-being and happiness.

However, this view of human beings as ‘rational economic agents’ ignores many non-pecuniary sources of well-being. For example, Adam Smith’s goals of wisdom and virtue are clearly missing.  So too are the many elements that lead to the richness and diversity of human action. The complexity of human psychology means that people are often irrational when making economic decisions. In other words, people make choices that do not necessarily lead to the greatest individual gain or fit with the idea of a rational choice being made over statistically identical options. The economist Amartya Sen argues convincingly that people's behaviour does not match the assumptions of economic theorists; people do not make decisions which are purely rational and self-serving as is usually assumed. This is why he talks about 'rational fools'.

Such reservations over the central tenets of ‘neo-classical’ economics have been around for some time. In 1974 Richard Easterlin opened up the debate about the ‘paradox of happiness’ by using data which showed that despite rising income levels people were not getting any happier. Another ground-breaking example was Tibor Scitovsky’s book The Joyless Economy: An Enquiry into Human Satisfaction and Consumer Dissatisfaction (1976). However, it was not until more recent times  that such criticism was given more credence  as the result of work  of economists such as Professor Richard Layard and the Nobel Prize Winners Amartya Sen (1998) and Daniel Kahnemann (2002).

What is remarkable about the domination of the idea that GDP can be used as a sole measure of social progress is that it has, over the years, been criticised by key economists. For example, in 1934 Simon Kuznets warned the U.S. Congress that 'The welfare of a nation can scarcely be inferred from a measurement of national income.' And in 1931 in his Essays in Persuasion, John Maynard Keynes, like Kuznets a key figure in the development of GDP, wrote that he looked forward to the day 'not far off when the economic problem will take the back seat where it belongs and that the arena of the heart and the head will be occupied …by our real problems – the problems of life and of human relations, of creation and behaviour and religion.'

So from even a cursory inspection of  the history of economics we can see that economists have viewed happiness as the ultimate goal of social progress or way of measuring human welfare and that an unhealthy obsession with levels of individual or national wealth has been a fairly recent phenomenon. Happily, however, this is beginning to change and it seems likely that  economists will reclaim their traditional role of trying to understand better what furthers human happiness and welfare.

Copyright: John McLaren, 2006

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