… 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
implication is that public policy should be oriented such that it
raises the relative cost of obtaining tangible goods. With the
relatively higher cost of tangible goods, individuals will tend to
increase their consumption of intangible goods.
This line of reasoning, however, assumes that status is fixed.
It is true that if there is a fixed amount of status, then competition
for status goods is zero-sum. But why should we assume that
the amount of status is given and fixed? If we allow for time and
entrepreneurship in our analysis of status, one could easily argue
that the array of status goods is constantly emerging and evolving.
Under this line of reasoning, old forms of status are discarded,
existing forms of status evolve, and new forms of status emerge.
Cowen (2000) argues that markets continually create new
margins of fame as new technologies and opportunities emerge.
If status is viewed as a continually evolving process instead of as
some fixed ‘stock’, then it is unclear that status is as big a problem
as happiness scholars would lead us to believe.
Practical issues
What goods count and how much?
Happiness scholars often talk of taxing the ‘pollution’ created by
status and relative income. Layard notes that when one person
earns more income others suffer because they earn less in relative
terms. The person that gains, however, ‘does not care [that] he is
polluting other people in this way …’ (Layard, 2005: 247). A tax,
it is argued, can force the higher earner to internalise the costs of
their pollution. This logic sounds reasonable to many. After all,
who likes pollution? A deeper consideration of the implications of
taxing relative increases in income, however, should make one at
least somewhat sceptical of these policy implications.
To understand why, consider what taxing the ‘pollution’
created by increases in relative income would actually mean.
Taken literally, it would mean that all productive entrepreneurial
activity would need to be taxed since it leads to an increased
income for the entrepreneur. The economics of profit and loss
indicate that profits result when an alert entrepreneur combines
resources in a manner that customers value. This is why customers
are willing to turn over their money for the good or service. A tax,
however, is a means of discouraging an activity. A tax on productive
entrepreneurship would lead to fewer productive activities
which would make people worse off by reducing innovation and
positive-sum interactions. Even if productive entrepreneurial
activities do generate costs in terms of ‘pollution’ by increasing
relative incomes, this cost must be weighed against the benefits
in terms of increased wealth and all that comes with it – higher
standards of living, better education, lower levels of disease, less
infant mortality, etc. (Lee, 2005). Given that future entrepreneurial
activities cannot be known or measured, it is unclear how
one would carry out such an analysis in any meaningful way.
Proponents of a ‘happiness tax’ on productive activities may
claim that this is unreasonable. They may claim that they do not
want to tax all activities, but instead just certain luxury items
and high-status activities. But how are these luxury and status
items to be determined and weighted in practice? Should only
for-profit activities be taxed? What about non-profit opportunities
such as the Gates Foundation, which lead to status in the
world of philanthropy? What about medical research aimed at
curing disease? After all, discovering a cure for a disease is surely
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