by István Kopácsi
In September 2023, the National Bureau of Economic Research published a paper by Miles S. Kimball and Robert J. Willis, presenting their long-researched topic, Utility and Happiness.[1]
The paper charts a middle path between the opposing views that either dismiss "happiness" in economics or equate it to "utility." Although the terms "utility" and "happiness" may appear synonymous at first glance, they have evolved distinct meanings in economics and psychology. The paper acknowledges this difference and highlights the central question of their empirical relationship at the intersection of economics and psychology.
In existing literature linking utility and happiness, the prevalent hypothesis is that current happiness aligns with flow utility. However, the authors argue this hypothesis is empirically untenable. Instead, they propose that a significant part of happiness resembles recent changes in lifetime utility rather than flow utility. It is also crucial to consider the enduring component of happiness, which is not always aligned with utility, as individuals often make choices that sacrifice momentary happiness for other objectives.
Consequently, Kimball and Willis define happiness as the sum of two components: short-term happiness (elation) based on recent news about lifetime utility and long-term happiness (baseline mood).
The distinction between utility and happiness not only elucidates existing happiness data but also provides a roadmap for future research. It posits that felt happiness contributes valuable insights to economics, both in terms of preferences and economic welfare, akin to health, entertainment, and nutrition.
Distinguishing Between Utility and Happiness
In clarifying terminology, we can recognize the historical tendency to equate "happiness" with flow utility. However, the authors' view of happiness emphasizes an individual's reaction to recent news about lifetime utility. Although there may be overlap between news about lifetime utility and lifetime utility itself in lay language, they stress the importance of maintaining a clear distinction between revealed preference utility and psychological happiness.
Their aim is to explore the dynamic relationship between current affect (felt happiness) and lifetime utility. Establishing this connection bridges psychology and economics, enabling both disciplines to complement each other and providing economists with valuable tools for understanding happiness.
The distinction between utility and happiness is not just a matter of logic; it is an empirical endeavor. Lifetime utility represents the extent to which individuals achieve their desires through their choices, while current affect refers to the positivity of individuals' feelings at a given moment.
The authors argue for the acceptance of utility as determined by standard economic methods and affect as determined by psychological methods. The nature of the relationship between these two concepts remains an open-ended question.
The argument that utility and happiness are empirically distinct centers on their distinct trends and reactions to changing circumstances, emphasizing that persistent, predictable effects on happiness imply the existence of components beyond changes in lifetime utility. The fact that individuals sometimes knowingly make choices that predictably lower their mood emphasizes the empirical distinction between utility and happiness.
An Integrated Theoretical Framework for Utility and Happiness
Given the evidence of differing behaviors between utility and happiness, the authors' integrated framework posits that happiness comprises two components: baseline mood and elation. Elation represents short-term happiness, depending on recent news about lifetime utility, while baseline mood signifies long-term happiness, akin to health, entertainment, or nutrition. This theory acknowledges a two-way linkage between affect and utility.
This framework have three key implications according to Kimball and Willis:
- Clear distinction between affect (psychological concept) and flow utility (economic concept).
- Elation primarily depends on unexpected changes in lifetime utility and can serve as a valuable signal of utility-relevant news.
- Baseline mood, although not a summary of flow utility, is a concern for individuals, with its importance likely to increase with rising per capita income.
Understanding the relationship between utility and happiness is essential, especially when baseline mood is recognized as controllable. The distinction between the two is becoming more important as methods to raise utility through happiness are emerging.
Conclusion
Happiness research is crucial because economic progress may not guarantee both wealth and happiness. Whether money can purchase happiness and how additional economic resources contribute to well-being are central questions, especially in the face of potential trade-offs between happiness and other values. Developing a theory that respects both economic principles and psychological findings is essential for tapping into the accumulated knowledge of the economics profession.
