06_raga_ch06_topic_01.qxd 2/19/10 10:27 PM Page 1
WHAT MAKES PEOPLE HAPPY? 1
What Makes People Happy?
In the eighteenth century, Jeremy Bentham (1748–1832) became the leading philoso-
pher of utilitarianism, a view holding that an individual’s prime concern should be
their own happiness. 1 The philosophy also urged that the objective of public policy
should be the maximization of the sum of all people’s happiness. Bentham’s implicit
view was that happiness could be measured and that it could also be compa
different individuals. That no obvious ways then existed to measure happi
ness was rec-
ognized as a challenge, but was not seen to undermine the basic philosophy.
In the early twentieth century, however, a new breed of economists (then called
“political economists”) argued that a measurable concept of happin
ess (or utility) was
not necessary in order to derive unambiguous predictions about individual
was only necessary that individuals had a stable set of preferences—th
at is, they could
always specify whether bundle A was preferred to bundle B, bundle B was p
bundle A, or that the individual was indifferent between the two bundles.
For the next
several decades, economists built models based on the idea that individuals strive to max-
imize their utility, even though it was also recognized that utility could be neither
observed nor measured. In addition, in most economic models individual ut
assumed to be a function of the individual’s level of real income, or perhaps real con-
sumption. Economists were usually quick to admit (when the question aros
e) that other
things also matter for an individual’s utility, but their models continued to emphasize the
market-based, easily quantifiable variables such as real income or real c
In recent years, however, economists have been asking whether it might, after all, be
possible to measure individual happiness and, if so, what is it that actu
ally makes people
happy? In this research program, economists rely heavily on progress made
ogists and others in the social sciences. Here we offer a brief introduct
ion to some of the
results from this research. As you will see, the results contrast with a
assumptions in economic theory, and also lead to some unusual policy implications.
Happiness: Definition and Trends
Richard Layard, one of the leading current scholars on the economics of h
defines the concept as “feeling good” and “enjoying life,” an
d bases his research on
survey responses in which individuals rate their happiness on a numeric s
studies ask people to reconstruct their activities in the previous day an
d report how
happy they were during each activity. Perhaps not surprisingly, the highest rated activ-
ity was having sex while the lowest-rated activity was the morning commut
e to work
or school. Though this ranking may give us some comfort that the survey r
indeed accurately indicating people’s happiness, there is a general concern that what
people say about their happiness may not accurately reflect their genuine happiness.
At this point some neuroscience can shed light on the situation. Layard r
medical studies showing that the spatial pattern of an individual’s brain activity
depends significantly on what they are thinking. Specifically, when viewing an image of
a positive event, the activity is located in the left side of the brain.
At the same time, the
1 See the “Timeline of Great Economists” at the back of the textbook
criptions of the life and
work of several great economists as well as notable historical events of
2 This topic draws heavily on Richard Layard, Happiness: Has Social Science Got a the Lionel
Robbins Memorial Lectures, 2002–2003, London School of Economics. See
also the more recent book by
the same author, Happiness: Lessons from a New Science, Penguin Press, 2005.
Ragan and Lipsey, Economics,13th Canadian Edition
Copyright © 2011 Pearson Canada Inc. 06_raga_ch06_topic_01.qxd 2/19/10 10:27 PM Page 2
2 WHAT MAKES PEOPLE HAPPY?
individuals tend to respond that the image is one that makes them happy. On the other
hand, when viewing an image of a negative event, the right side of t
ain is activated
and the individual tends to reports that the image makes them less happy.
of results from neuroscience strongly suggest that when people report
t they are
happy or unhappy, there really is something genuine happening.
If survey-based measures of happiness actually measure an individua
then economists should be able to determine the validity of a long-standi
in economics—that individuals are happier when their income is higher.
Is this assump-
tion supported by the evidence?
There are three striking empirical findings that relate to happiness and
The first is that despite a doubling (or more) of average real per capi
ta income over the
past 50 years, there has been almost no change in the average level o
reported in the population. The second result, somewhat paradoxically, is that at any
time within a given country, the highest income earners report themselves to be signifi-
cantly happier than the lowest income earners. Both results not only appl
y to the
United States, but also to Europe and Japan.
A third result is about the relationship across countries between ave
income and average happiness. In the group of countries with average i
me less than
U.S.$15 000, there is a positive relationship between per capita inco
happiness. But in those countries with average income above this threshol
d level, there is
no evidence that income and happiness move together. Some may wonder whether the
concept of happiness has the same meaning in different languages and c
ures, but the
same results are found even when different versions of the survey qu
ns are used.
Interpreting the Happiness/Income Results
One interpretation of these empirical results is that an individual’s happiness depends
on their income relative to some “norm,” and that the norm has been increasing
broadly in line with average per capita incomes. For example, suppose
t your hap-
piness depends on your income relative to the Canadian average income.
income in Canada has increased by 35 percent over the past decade, and your income
has also increased by 35 percent, then you will be no happier now than
u were a
decade ago, although you will clearly have greater real income. However, if average
Canadian income increased by 35 percent while your income increased by 7
you would be happier now than a decade ago because your relative income increased.
Some evidence for the importance of relative income for individual hap
presented in Table 1, which shows happiness in the United States across income groups
TABLE 1 Happiness by Income in the United States
Top 25% of Income Bottom 25% of Income
1975 1998 1975 1998
Very Happy 39% 37% 19% 16%
Pretty Happy 53% 57% 51% 53%
Not Too Happy 8% 6% 30% 31%
(Source: Richard Layard, Happiness: Has Social Science Got a Clue? Based on data
from the General Social Survey.)
Ragan and Lipsey, Economics,13th Canadian Edition
Copyright © 2011 Pearson Canada Inc. 06_raga_ch06_topic_01.qxd 2/19/10 10:27 PM Page 3
WHAT MAKES PEOPLE HAPPY? 3
in 1975 and 1998. In both income groups, real incomes increased over this
period, and standard economic theory would predict that people in both gr
therefore feel happier as their real incomes rise. But the table shows that for both high-
income and low-income groups, the fraction of people who are “very hap
happy,” and “not too happy” was virtually unchanged between 1975 and
is consistent with the idea that people’s happiness comes much more from their relative
income levels than from their absolute income levels.
The importance of an individual’s relative income for their happiness can explain
the first two empirical results just mentioned. As real per capita income
s were growing
considerably over the post–World War period, average happiness would be relatively
unchanged as long as the distribution of income was also roughly unchanged. In addi-
tion, at any given time, people in the upper-income groups would be happier than the
people in the lower-income groups for the simple reason that incomes in the first group
are higher than average while incomes in the second group are lower than average.
In order to explain the third result we need to add some consideration to
of genuine poverty. In countries with very low per capita incomes, an increase in real
income may have noticeable effects in reduced hunger, disease, and mortality. The
emergence from extreme poverty that higher real income allows might natur
account for an increase in happiness. In higher-income countries, however, almost
everyone lives far above these subsistence levels, and increases in incom
e will not lead
to such drastic changes. In this higher-income world, it may be therelative income that
matters more for happiness.
Habituation and Rivalry Layard offers two possible explanations for why indi-
viduals may care more about their relative income than about their absolu
levels. The first is habituation; the second is rivalry. Habituation is the idea that people
quickly adapt to changes in their personal situations, either negative or
that the long-run effects of these changes on happiness are rel