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Happiness and Economics

How the Economy and Institutions Affect Human Well-Being

Bruno S. Frey

Publication Year: 2010

Curiously, economists, whose discipline has much to do with human well-being, have shied away from factoring the study of happiness into their work. Happiness, they might say, is an ''unscientific'' concept. This is the first book to establish empirically the link between happiness and economics--and between happiness and democracy. Two respected economists, Bruno S. Frey and Alois Stutzer, integrate insights and findings from psychology, where attempts to measure quality of life are well-documented, as well as from sociology and political science. They demonstrate how micro- and macro-economic conditions in the form of income, unemployment, and inflation affect happiness. The research is centered on Switzerland, whose varying degrees of direct democracy from one canton to another, all within a single economy, allow for political effects to be isolated from economic effects.

Not surprisingly, the authors confirm that unemployment and inflation nurture unhappiness. Their most striking revelation, however, is that the more developed the democratic institutions and the degree of local autonomy, the more satisfied people are with their lives. While such factors as rising income increase personal happiness only minimally, institutions that facilitate more individual involvement in politics (such as referendums) have a substantial effect. For countries such as the United States, where disillusionment with politics seems to be on the rise, such findings are especially significant. By applying econometrics to a real-world issue of general concern and yielding surprising results, Happiness and Economics promises to spark healthy debate over a wide range of the social sciences.

Published by: Princeton University Press

Title Page, Copyright Page

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pp. v

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pp. vii-viii

Everybody wants to be happy. There is probably no other goal in life that commands such a high degree of consensus. “The pursuit of happiness” is even called upon in the American Declaration of Independence, and the Kingdom of Bhutan endeavors to maximize “Gross National Happiness.” Yet, curiously enough, economists have shied away from dealing with happiness...

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pp. ix

Chapter 8 of this book draws on material contained in our article “Happiness, Economy and Institutions” published in The Economic Journal 110(466): 918...

PART I: Setting the Stage

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CHAPTER 1 Happiness

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pp. 3-18

“What is happiness?” This question is probably as old as mankind itself. The greatest human minds have struggled with this issue. A large part of philosophy has been concerned with defining what a good and happy life is. Similar efforts have been made by psychologists, who have dealt with what particular ingredients and circumstances make people...

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CHAPTER 2 Well-Being and Economics

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pp. 19-48

The 1930s witnessed a revolutionary change in the concept of utility. Economists—in particular, those inspired by the influential Lionel Robbins (1932)—became convinced that utility could not be cardinally measured. Utility should be used to explain the choices made by individuals between various goods. Empirically, utility should be inferred from the choices actually made...

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CHAPTER 3 Personality and Socio-Demographic Influences on Happiness

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pp. 49-68

Psychologists and sociologists rightly focus on the possible influence of personality factors (such as optimism, self-esteem, and perceived personal control) and demographic factors (such as age and gender) when studying why people are happy or unhappy. These factors play a large role in their respective field and therefore psychologists and sociologists have...

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PART II: Economic Effects on Happiness

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pp. 69-72

Within the economy, there are three major influences on happiness: Income. Unemployment. Inflation. These are the central variables of macroeconomic theories, and they have also proved to be the major determinants of the citizens’ satisfaction with their government, as captured by election and popularity functions. Income, unemployment, and inflation are directly relevant to an economic analysis...

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CHAPTER 4 Income

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pp. 73-94

Most economists take it as a matter of course that higher income leads to higher happiness. And why not? A higher income expands individuals’ and countries’ opportunity set; that is, more goods and services can be consumed. The few people not interested in more commodities need not consume them; they have the freedom to dispose of any unwanted surplus...

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CHAPTER 5 Employment

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pp. 95-110

Most economists see unemployment as an unfortunate event to be avoided as much as possible. To become unemployed is considered to be costly and, above all, involuntary. Government should intervene in order to raise the aggregate demand for goods. To produce the additional goods, more labor would be required and unemployment would fall. This view...

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CHAPTER 6 Inflation

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pp. 111-116

An increase in the general price level—inflation—is disliked by the population. But a lot depends on what kind of inflation takes place. When the price increase is anticipated, individuals can adjust to it. They can make contracts that take into account that prices will be higher in the future. In particular, they will ask for a wage increase in the future in order...

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PART III: Political Effects on Happiness

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pp. 117-120

Happiness is a complex phenomenon dependent on many factors. In part I, we discussed personality and socio-demographic factors and, in part II, the economic factors of income, unemployment, and inflation. This third part considers yet another but highly important sphere—namely, politics. Two quite different levels of politics can be distinguished...

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CHAPTER 7 The Current Politico-Economic Process

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pp. 121-132

Usually politics takes place within the rules laid down by the constitution. Political actors, such as the government, the voters, interest groups, and public bureaucracy, take the “rules of the game” specified in the constitution as given, and pursue their interests within these confines. Thus, for example, the political parties in a representative democracy proceed...

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CHAPTER 8 Constitution: Popular Referenda and Federalism

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pp. 133-152

People’s happiness is influenced by the kind of political system they live in. It is to be expected that people in constitutional democracies are happier because the politicians are motivated to rule according to their citizenry’s interests. If they disregard the wishes of the population, the politicians and parties in a democracy fail to be reelected and lose their power. Democratic...

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CHAPTER 9 Outcome and Process

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pp. 153-168

People are likely to experience happiness not only from the actual outcomes but also from the process itself: They experience procedural utility. Individuals may, for instance, experience a higher subjective well-being when they are treated in a way they consider to be just and fair, or in the absence of favoritism when it comes to being hired or promoted. Another...

PART IV: Conclusions

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CHAPTER 10 Happiness Inspires Economics

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pp. 171-184

The research on happiness presented in this book inspires economics in several ways: The extent to which people are happy or unhappy is an essential quality of the economy and society. The state of the economy strongly affects people’s happiness. But even more important, in the long run, is whether the constitution favors or hinders the pursuit of happiness...

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pp. 185-190

This appendix presents in Table A.1 the full microeconometric happinessfunction for Switzerland, as discussed in this book. Table A.2 shows theresults of the DFBETA robustness analysis discussed in chapter 8, section 8.3.3.The empirical analysis in Table A.1 is based on a survey of more than 6,000residents of Switzerland by Leu, Burri, and Priester (1997). The survey data...

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pp. 191-194

Democratic rights are defined here in terms of individual political partic-ipation possibilities. In Switzerland, institutions for the direct political partic-ipation of citizens exist on the federal level as well as on the level of cantons.However, the democratic participation rights on the cantonal level are veryheterogeneous. Therefore, an index is constructed to measure the different...


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pp. 195-214

Data Sources

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pp. 215-216


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pp. 217-220

E-ISBN-13: 9781400829262
E-ISBN-10: 1400829267
Print-ISBN-13: 9780691069982
Print-ISBN-10: 0691069980

Page Count: 200
Publication Year: 2010

Edition: Core Textbook

Research Areas


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Subject Headings

  • Happiness -- Economic aspects.
  • Economics -- Psychological aspects.
  • Well-being.
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