… and the Pursuit of Happiness - Institute of Economic Affairs

… and the pursuit of happiness
lessons the from unbearable austrian lightness and public of choice happiness economics policy
influence the overall level of happiness and satisfaction. Many
studies have found support for Easterlin’s ‘progress paradox’ (see
Frey and Stutzer, 2002a, for a review). If incomes have gone up
over time, researchers wonder, why has happiness stayed relatively
flat?
Researchers have provided two main explanations for this
paradox. One explanation is that people judge their level of wealth
not in absolute terms, but rather in relative terms. This implies
that increases in welfare are not just a matter of everyone’s income
increasing. Instead, an increase in one individual’s income must be
relatively higher than everyone else’s in order for it to have a real
effect on the welfare of the individual in question. This means that
even if the general level of income increases, it will have little effect
on any one person’s happiness in the absence of relative changes.
Another explanation is the ‘hedonic treadmill’ effect, which
refers to the tendency of people to return to some baseline level of
happiness. As a result, increases in wealth yield smaller increases
in satisfaction and happiness than one would expect. It is not
necessarily the case that people are unhappy, but rather that
happiness is fleeting. This is because as people become wealthier
their expectations also increase, meaning their overall level of
happiness remains flat. This implies that even as people work
harder to achieve happiness, they ultimately remain in the same
place. Related to the hedonic treadmill explanation, researchers
argue that the continual striving to increase wealth, which leads
only to temporary increases in satisfaction, results in negative
consequences in other aspects of life. For example, more effort
expended to earn more income results not only in a short-term
spike in happiness, but also less time to spend with family, friends
and members of the community.
A strong set of policy conclusions has emerged from these
explanations for the progress paradox. For example, numerous
happiness researchers call for some form of taxation on labour
and luxury goods (see Frank, 1999; Layard, 2005). The logic
behind this tax is as follows. If relative wealth is what matters,
then an increase in one person’s wealth, relative to others, must
harm other people. This is the equivalent of a negative externality,
which is typically solved through a tax that forces people to internalise
the cost of their actions. In theory, a tax would raise the cost
of consuming labour or luxury goods, overcoming the causes of
the progress paradox discussed above. That is not all. Proponents
of this type of taxation add that there is another benefit because
the money raised through taxes can be used for such ‘public
goods’ as better schooling, recycling, more art programmes,
healthcare and public transportation, among others (see Frank,
1999: 249–61; Griffith, 2004: 1392; Layard, 2005: 47). At first
blush, these policy prescriptions seem like a win-win, for proponents
promise not only more happiness, but more public goods
as well.
We, however, are sceptical. The purpose of this chapter is
to raise some conceptual and practical issues with the study of
happiness economics and the associated policy recommendations
as outlined above. Our analysis draws on concepts from Austrian
economics and public choice economics.
Among other things, Austrian economics emphasises the
subjectivity of costs and benefits; the importance of dispersed
and context-specific knowledge of time and place, which is crucial
to economic coordination and cannot be known or collected by
planners; and that the market is a continuous process characterised
by productive entrepreneurial activities. Public choice
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