The theory behind public economics needs radical reform. It fails to explain the recent history of human welfare and it ignores some of the key findings of modern psychology. Indeed these two failings are intimately linked: it is because the theory ignores psychology that it is unable to explain the facts.
The fact is that, despite massive increases in purchasing power, people in the West are no happier than they were fifty years ago. We know this from population surveys and other supporting evidence which I shall review.
The most obvious explanations come from three standard findings of the new psychology of happiness.1 First, a person’s happiness is negatively affected by the incomes of others (a negative externality). Second, a person’s happiness adapts quite rapidly to higher levels of income (a phenomenon of addiction). And third, our tastes are not given – the happiness we get from what we have is largely culturally determined.
These findings provide a challenge to the theory and conclusions of public economics, as set out for example in Atkinson and Stiglitz (1980). The challenge to public economics is to incorporate the findings of modern psychology while retaining the rigour of the cost–benefit framework which is the strength and glory of our subject.2 In what follows I shall first review the measurement of happiness. Then I shall take the three findings that I discussed one by one, and pursue the policy implications of each of them. I shall end with some overall reflections.
Layard, R. (2006). Happiness and public policy: A challenge to the profession. The Economic Journal, 116(510), C24-C33.
