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Happiness Research and Legal Scholarship.

"Behavioral law and economics," which combines insights from cognitive psychology with the rational choice paradigm used by law and economics, has so far relied on an economics-y standard of evaluation—efficiency—or forgone normative arguments altogether. But economists and psychologists have begun developing an alternative normative standard for evaluating law and policy, sometimes called the "happiness" approach, because it relies on surveys of self-reported happiness. These scholars argue that government should attempt to advance self-reported happiness rather than efficiency based on willingness-to-pay. The Journal of Legal Studies has just published the proceedings of a conference that addressed ways that this work can be used in legal scholarship. You can find it here. A few paragraphs from the introduction to the conference issue follow:

Economists who make normative proposals traditionally assume that policy should advance "efficiency," usually in the Kaldor or Hicks sense, which defines efficiency in terms of whether the project's winners can hypothetically compensate the project's losers. A compensation criterion is used because it can be based on ordinal utilities, which puts a smaller information burden on the decision maker than cardinal utilities do. Ordinal utilities, unlike cardinal utilities, can (in principle) be inferred from observations of consumer behavior. By seeing how people trade off goods, willingness-to-pay (or willingness-to-accept) amounts can be derived and summed, so that alternative policy outcomes can be easily compared.

This approach has received a great deal of criticism over the decades, but it has survived mainly because no alternative method has commanded widespread agreement. In recent years, however, a small group of economists and psychologists have argued that an alternative method is available. This method, often called the "happiness approach," relies on surveys that ask people to rate their happiness on a scale. Econometric analysis then finds correlations between ratings on the scale and various characteristics or experiences of the survey respondents—wealth, income, family relationships, and so forth. Though still regarded with skepticism in many quarters, the happiness approach has scored some notable successes. The various factors that are correlated with happiness appear to be robust: they recur in different surveys and are correlated with other factors that are plausibly linked to happiness such as physical well-being as measured with clinical tests.

In addition, many of the findings have a certain plausibility, while at the same time deviating from the results of willingness-to-pay and willingness-to-accept measures. Happiness improves with wealth but only to a point, and people are less happy when their neighbors are wealthier than they are. Happiness is correlated with health, but the happiness levels of people who suffer grievous injuries rebound with the passage of time. Happy people have friends and families, but adults with teenagers are less happy than adults with younger or older children. Educated and politically engaged people are happier.

The idea that policy should focus on happiness rather than preference orderings is hardly new. Indeed, the happiness view predates the preference-orderings view. Jeremy Bentham advocated a form of utilitarianism that maximized pleasures and minimized pains, an idea that is similar, though not identical, to the premise that self-reported happiness measures should be used. Economists subsequently abandoned this view in favor of ordinal utility functions. But the Benthamite approach never really went away. It has lurked at the margins of mainstream economic thought for decades. The most famous example is the Easterlin paradox. Richard Easterlin (1973) was the first to observe that self-reported happiness is correlated with wealth at the individual level but not, above a threshold, at the aggregate level: he found that happiness does not appear to increase with gross domestic product in wealthy countries (this finding has been challenged; see Stevenson and Wolfers 2008).

Tracy Johnson (www):
Philosophically I'm worried about what the big government approach to happiness standards may be. I'm reminded of the old story of the censored crying baby photo allegedly from the Soviet Union, the excuse for the censorship being: "In the Soviet Union, no one is unhappy."
2.2.2009 3:58pm
Jay Phillips:
In a clinical experiment, you can ask people to report their happiness and then measure wealth, etc. and draw correlations. These experiments are probably robust precisely because nothing is on the line.

In practice, it would be highly suspect if the government measured self-reported happiness and then tied it to material benefits. The same person who reported honestly in the academic study would have an incentive to report dishonestly if a welfare check or re-paved roadway was on the line.

At least with the more traditional measure of financial compensation there is no ability to lie. And sorry - I can't resist: In Soviet Russia, happiness reports YOU!
2.2.2009 4:11pm
martinned (mail) (www):
And how is this different from Kahneman &Tversky's Prospect Theory? To the extent that losing makes people sad, and gaining makes them happy, they amount to the same thing. (Don't they?)

In any case, I wouldn't be too worried just yet about how this would affect freedom and justice for all. For now, it's only the beginning of an idea. It doesn't even work yet.

Also, I'd be interested to know what prof. Posner himself thinks about this line of research? Is this at all promising? My two cents are that I have my doubts, but then I don't very much like the whole behavioural economics line of research.
2.2.2009 4:26pm
Anderson (mail):
(1) Policy should focus on happiness.

(2) Policy outcomes should be evaluated as objectively as possible.

(3) Aristotle taught, "Call no man happy until he is dead."

(4) Thus, for optimal policy evaluation, we should kill everyone &then measure how happy they were.
2.2.2009 4:39pm
Michael F. Martin (mail) (www):
As usual, the University of Chicago is one step ahead of the game. Csikszentmihalyi was publishing work in this field decades ago.

On my view, his work on optimal experience (a/k/a flow) offers lots of insights with instrumental value to economists who would like to extend their relevance beyond rationality.
2.2.2009 4:46pm
martinned (mail) (www):
@Michael F. Martin: Thanks for the tip. I don't really see though how this kind of work can be applied in the place of K-H efficiency as the undisputed (undisputable?) objective in economics. Would you mind explaining how this might work?
2.2.2009 4:54pm
anomdebus (mail):
Jim Hope: Very good. Now I want you all to imagine the perfect toy. What
would it be like?
Terri: [holding stuffed animal] It should be soft and cuddly.
Bart: Yeah, with lots of firepower.
Milhouse: Its eyes should be telescopes! No, periscopes! No, microscopes!
Can you come back to me?
Nelson: It should be full of surprises.
Milhouse: It should never stop dancing.
Martin: It should need accessories.


yeah, good luck with that (thanks snpp)
2.2.2009 4:56pm
Houston Lawyer:
Conservatives are happier than liberals. Those who attend worship services weekly are happier than those who don't. Conservatives and the religious are having replacement levels of children and liberals and the not-so-religious are not. Soon, we'll all be happier.
2.2.2009 5:00pm
Dave N (mail):
Anderson,

To quote Dick the Butcher: "The first thing we do, let's kill all the lawyers." Henry VI, Part 2, Act 4, Scene 2.
2.2.2009 5:03pm
Michael F. Martin (mail) (www):
@martinned

You should really shell out for a copy of one of Csikszentmihalyi's books. The wikipedia entry doesn't do it justice.

Basically, C. and his colleagues spent decades sampling everyday human experience by having people carry around pagers or cellphones that go off at random times, asking for a report of what activity each person is engaged in and whether they're happy with it. He's got a huge database that shows how and when people (from all walks of life, all over the world) report that they are enjoying themselves. The results are not always intuitive, and probably lots of interesting theories could be tested against this database.

C.'s own ("flow") theory is that people are happiest over long time periods when they are consistently engaged in challenging activities that are well-matched to their skills and that provide relatively clear and quick feedback.

I haven't seen any work applying flow theory directly to law &economics yet. But it's relatively easy to sketch out how that might work. In the same way that we use potential pareto efficiency to forecast the marginal effect of a particular rule, we could use a flow metric to forecast whether a particular rule is likely to provide marginal benefits or detriments to happiness. For example, free market competition is in general a great rule for increasing flow (and hence happiness). But less so when the incumbents are advantaged to the point where new entrants have no chance -- hence the need for IP and antitrust laws.

I should say that although I really like flow theory, in the long haul, the technique pioneered by C. (which he calls the "experience sampling method") is probably the larger contribution. Imagine what Bentham would have done with that database, and you get some idea of how legal history could have been very different from what it is now.
2.2.2009 5:23pm
loki13 (mail):

Conservatives are happier than liberals. Those who attend worship services weekly are happier than those who don't. Conservatives and the religious are having replacement levels of children and liberals and the not-so-religious are not. Soon, we'll all be happier.


There's a step missing from this chain of logic that makes it suspect. Hint: it occurs right before the last sentence.

("Being good isn't always easy
No matter how hard I try . . .
But the only one who could reach me
was the son of a preacher man")
2.2.2009 5:26pm
Arkady:
According to this article, Denmark 'happiest place on earth', those damned socialists seem to be ahead in the happiness game, at least in 2006. FWIW, we came in 23rd.
2.2.2009 5:26pm
martinned (mail) (www):

For example, free market competition is in general a great rule for increasing flow (and hence happiness). But less so when the incumbents are advantaged to the point where new entrants have no chance -- hence the need for IP and antitrust laws.

Yes, this is where I get off. (For the record, I have nothing against psychology and have been reading a lot about social psychology lately, I just prefer to keep psychology and economics apart, as two separate disciplines.) What basis do you have for this statement? Free markets are very stressful places, since everybody is semi-permanently at the brink of bankruptcy. Even the real-life version of a "free" market involves hard work by a lot of SMEs. It's no picknick. Monopolists, on the other hand, have it easy. (There's a famous quote to that effect, but I can't remember who said it. Something like "Peace of mind is the greatest of all monopoly profits.")

The same goes for consumers: In a perfect market they get more bang for their buck, but in a nice quiet oligopoly they get to develop a routine, no thinking involved, everybody can take it easy.

So I don't see how perfect competition leads to more happiness, much less an improvement of flow. (i.e. imho it is easier to make a case for the general concept of happiness, than the specific notion of flow, but I don't see it either way.)
2.2.2009 5:33pm
Sarcastro (www):
The way to happiness is whatever I want the government to do!
2.2.2009 5:38pm
EnriqueArmijo (mail):
Richard Epstein on happiness literature:


As Prof. Epstein describes it, happiness scholarship is, in part, 1) designed to attack the assumption that consumption leads to happiness; and 2) convince those who find happiness in consumption that they suffer from delusion as to the true meaning of happiness and how to achieve it.
2.2.2009 5:40pm
EnriqueArmijo (mail):
Sorry; I can't get the "link" button to link:

http://www.econtalk.org//archives/2008/11/richard_epstein
2.2.2009 5:43pm
joelouis:
The Kingdom of Bhutan utilizes Gross National Happiness as a measure of prosperity. Unsurprisingly, it isn't entirely clear how one goes about calculating this.
2.2.2009 5:52pm
martinned (mail) (www):
@EnriqueArmijo: The link doesn't work. Also, the criticism seems overdrawn. Surely the point is to build models where people can get happy by other means other than only consumption. (Then again, normal neo-classical economics can do that, too.) It's less an attack against consumption as such, and more an attack against a view of economic actors that is too narrow to be practicable. One of many, I might add, since there are many lines of research being done at the moment that move away from the narrow Chicago style of the 70s and 80s.
2.2.2009 5:53pm
Michael F. Martin (mail) (www):
@martinned

First, I should make clear that the example given of market competition is one I came up with. For all I know, C. would fine this an abuse of his theory.

Second, the point is that neither perfect competition nor perfect monopoly (or monopsony) will maximize aggregate flow. Flow experiences require a balance between challenge and control -- too difficult, and people are anxious; too easy, they are bored. So perfect competition makes everybody anxious. Perfect monopoloy (or monopsony) makes the monopolist bored, and everybody else gives up.

@EnriqueArmijo

Prof. Epstein is absolutely correct that the happiness scholarship is leading an attack on the hypothesis that consumption leads to happiness.

The underlying problem with that assumption is that it is static -- i.e., the assumption is that there is some time-invariant amount of consumption that is sufficient to satisfy both individual and social needs. Arrow-Debreu is about shuffling things around into the time-invariant desires for consumption are matched as closely as possible.

But the empirical fact is that consumption (or the preference function) is NOT time-invariant. Sure you can come up with clever models to accommodate the time invariance -- Gary Becker's done quite well with such models -- but sooner or later they start to seem ad hoc, at least to me.

A hypothesis about how and when consumption and production activities make people happy is better than a hypothesis about how consumption and production make people happy.
2.2.2009 5:57pm
martinned (mail) (www):

Second, the point is that neither perfect competition nor perfect monopoly (or monopsony) will maximize aggregate flow. Flow experiences require a balance between challenge and control -- too difficult, and people are anxious; too easy, they are bored. So perfect competition makes everybody anxious. Perfect monopoloy (or monopsony) makes the monopolist bored, and everybody else gives up.

How do you aggregate flow? Does it come with numbers you can add up? And how is one meant to decide which is preferable: x amount of boredom (eg due to a monopoly position) or y amount of anxiety (eg due to fierce competition)?

None of this is measurable, all of it is extremely ad hoc, none of it is in the least objective or replicable. And I don't even mean objective in the sense that you and I should agree. I mean objective in the sense that you and I should be able to agree about your flow. Or someone else's, for that matter.

To be clear: as a psychological model it sounds quite reasonable. (At least what little is on the wiki page.) But how can any of this be a basis for policy?
2.2.2009 6:10pm
anomdebus (mail):
For the lazy: http://econtalk.org/archives/2008/11/richard_epstein.html

For the very lazy

60 character limit is a travesty!:)
2.2.2009 6:13pm
Michael F. Martin (mail) (www):
@martinned

Yes, it's a theory of psychology. But the point is that it may be useful inspriation for new theories of economics, which I take broadly to be about quantitative theories of social behavior (i.e., psychology of crowds), not just dollars and sense.

Read "aggregate happiness" there. The more people engaged in optimal experience (i.e., flow), the greater the aggregate happiness. I don't know the details of the sampling method well enough to answer the rest of your questions. Presumably, there's some scale that people self-report on, which they make some effort to calibrate and so on.

So is happiness any easier to measure now than it was in Bentham's day? No. The rational hypothesis and wealth maximization (through potential Pareto moves) are not going anywhere. Income is still the easiest thing to measure because dollars are commensurable. But why should rulemakers ignore clear evidence that having more income alone does not lead most people to greater happiness?

The need for new hypotheses about aggregate happiness will only become greater as we become more energy and resource constrained in the future.
2.2.2009 6:24pm
David Warner:
"(4) Thus, for optimal policy evaluation, we should kill everyone &then measure how happy they were."

The 20th Century in a nutshell.
2.2.2009 6:25pm
martinned (mail) (www):
@Michael F. Martin: Still on the aggregation principle. The text that Posner quoted explains it better than I ever could:


Economists who make normative proposals traditionally assume that policy should advance “efficiency,” usually in the Kaldor or Hicks sense, which defines efficiency in terms of whether the project’s winners can hypothetically compensate the project’s losers. A compensation criterion is used because it can be based on ordinal utilities, which puts a smaller information burden on the decision maker than cardinal utilities do. Ordinal utilities, unlike cardinal utilities, can (in principle) be inferred from observations of consumer behavior. By seeing how people trade off goods, willingness-to-pay (or willingness-to-accept) amounts can be derived and summed, so that alternative policy outcomes can be easily compared.

Interpersonal comparisons of utility, which is the Bentham-derived concept that economists actually maximise, are impossible. There is no way to add up happiness. The only possibility yet discovered is revealed preference and/or compensation. That's why ordoliberals like free markets. Because they're "free", all participants participate voluntarily, which they wouldn't do unless they were better off for it.

You can't simply measure everyone's happiness on a Likert scale and add up all the scores.
2.2.2009 6:53pm
Duffy Pratt (mail):
But I thought we established by popular vote in 1980 that Happiness = 1/(Rate of Inflation + Unemployment Rate). That means happiness as of November was 9.95
2.2.2009 7:20pm
ChrisIowa (mail):
Anderson

(3) Aristotle taught, "Call no man happy until he is dead."

Inspired. Do you have a source?

Anomdebus

Terri: [holding stuffed animal] It should be soft and cuddly.
Bart: Yeah, with lots of firepower.
Milhouse: Its eyes should be telescopes! No, periscopes! No, microscopes!


It HAS to have a rifle.
2.2.2009 7:31pm
Dr. T (mail) (www):
Happiness research may have some utility in economics. The biggest problem I have seen with happiness research is the structuring of the questions. Most happiness researchers seem to have difficulties writing "neutral" questions, and studies have shown that phrasing and context greatly affect how people reply to the questions.

Another problem relates to basal moods. For example, it's an atypically warm, sunny day in Seattle when you start asking questions related to happiness and some aspect of economics. Results are more likely to show greater happiness than if the day had been cool and rainy. Therefore, researchers have to take external factors into account.

This topic gets discussed often on EconLog, and I side with Arnold Kling's opinion that happiness research is overrated.
2.2.2009 8:08pm
cd:
^^^ probably from the nicomachean ethics. (someone correct me if i'm wrong.)
2.2.2009 8:14pm
martinned (mail) (www):
@cd: Since I'm wired a little funny, I googled it for ya. It turns out the Nicomachean ethic does discuss this proposition, but it is derived from Solon. Source.

This is what wiki says about Solon:

Solon's travels finally brought him to Sardis, capital of Lydia. According to Herodotus and Plutarch, Solon met with Croesus and gave the Lydian king advice, which however Croesus failed to appreciate until it was too late. Croesus had considered himself to be the happiest man alive and Solon had advised him, "Count no man happy until he be dead", because at any minute, fortune might turn on even the happiest man and make his life miserable. It was not till after his kingdom had been taken from him by Cyrus, the Persian, that Croesus acknowledged the wisdom of Solon's advice.[Footnotes to Plutarch and Herodotos omitted.]
2.2.2009 8:23pm
Splunge:
Well, first of all I'd say happiness is an overrated goal. Satisfaction, the rational conviction that finite lifetime has been spent wisely, is a much more useful metric of personal and social achievement. I'm happier after a week of vacation skiing, but I'm more satisfied after a week of very productive work. Both I and (a wise) society tend to favor the former activity.

Secondly, happiness very often correlates with a strong degree of perceived serendipity. The person unexpectedly winning $50,000 in the lottery is generally a lot happier than the person realizing a long-expected $50,000 from a real-estate deal. (Indeed, if there was an unrealistic hope of $100,000 of gains, the $50,000 gain may leave a person unhappy.)

That is, people are often happiest when they acquire things they know they don't deserve, at least by virtue of their own efforts. In which case, maximizing happiness corresponds, rather perversely, with increasing arbitrariness and chance, i.e. with reducing the degree to which effort is reliably correlated with success. That's a recipe for social and legal cynicism and corruption.

Perhaps let us leave happiness to the priests, philosophers, and gurus. The lawyers and economists can try to focus on achieving mere everyday justice and a modest year-to-year economic stability, which, while certainly more plebeian achievements, appear to have entirely escaped their expensive efforts these past thousand years and counting.
2.2.2009 8:39pm
martinned (mail) (www):

The lawyers and economists can try to focus on achieving mere everyday justice and a modest year-to-year economic stability, which, while certainly more plebeian achievements, appear to have entirely escaped their expensive efforts these past thousand years and counting.

While I am completely in agreement with the rest of your comment, as both a lawyer and an economist, I feel I have to protest about this one. Especially if you take the "thousand years and counting" perspective, I would say the two disciplines, between them can take quite a bit of credit for the breathtaking rise in the standard of living over that time. (In the end, all progress comes from technological innovation, but that, in turn, does not happen unless the correct economic and legal prerequisites are in place.)
2.2.2009 8:46pm
Richard Aubrey (mail):
Splunge.
I believe there was some discussion of this when whatshisname hit the home run which bettered somebody else's record. He caught the ball, which later would have sold, say the collectors who know about such things, for a mill. Instead, he gave it to the ballplayer. I can't recall the player's name. Something something steroid. One of them, anyway.
So the discussion was whether something completely arbitrary, just good luck, had the perceived value of that worked for which had an equal assigned value.
'cause the guy gave away a million freakin' bucks.
To a guy who didn't need it.
Too much excitement, but the discussion was serious.

Insecurity makes one unhappy. If I win something which reduces my insecurity--I can pay off my mortgage--I'll be happier, or my baseline mood will be improved. I could still be devastated by some tragedy, but, on the other end of it, I still have my mortgage paid off.
Once you take care of most of the obvious insecurity, the next improvement is less obvious. Going from cheap port to, say, Sandeman's is good until the second case. Then it's the baseline.
2.2.2009 8:55pm
martinned (mail) (www):

Going from cheap port to, say, Sandeman's is good until the second case. Then it's the baseline.

That's why Prospect Theory was defined in terms of changes in wealth, rather than absolute levels.
2.2.2009 8:58pm
George Weiss (mail) (www):
according to pew-happiness has been totally flat since they started to measure in the 70's

http://pewresearch.org/pubs/?ChartID=37
2.2.2009 10:39pm
Michael F. Martin (mail) (www):
@martinned

If insights from positive psychology were intended to supplant traditional notions of wealth maximization (or Kaldor-Hicks efficiency), then I would agree that there is a fatal problem. I take the point to be not that wealth or profit isn't the best means for measuring happiness we know, but that there are aspects of happiness that aren't captured by the approximation we get from a measurement of wealth, and that some of those deviations from the approximation are consistent enough so that we should pay attention to them in policymaking.

I posted a few more thoughts on my blog, which you may be interested in. In general, I'm sympathetic with the fatigue or frustration that has set in with behavioral critiques of economics and finance. But some of the psychology research is compelling enough to be worth struggling with.
2.2.2009 10:57pm
martinned (mail) (www):
@Michael F. Martin: That seems fair. I'll take a look at the blog.

There is one thing to look out for, though. When I took behavioural finance in undergrad, I found that these insights were only invoked by economists to cover the holes their ordinary models left. If the models works, that's great, and if it doesn't, you find some idea from BF to cover the hole.

The same goes for insights derived from sociology, such as trust and embeddedness à la Granovetter. There is some really advanced game theoretic modelling to model "trust", but first of all in inherently does not really model trust, but rather reputation mechanisms of various kinds, and secondly it comes with stringent restrictions on when it might work. If either of these facts becomes troublesome, the economist will simply invoke trust and call it a day.

My "work" is on applying neo-institutional economics to the public sector. Obviously, there are a lot of fields other than economics that come into play there. However, I'm trying to keep the modelling stage strictly about economics, which in my view means not only "quantitative theories of social behavior" - indeed, economics is often qualitative - but also requires some minimum rationality. Without at least some rational connection between means and ends we cannot link positive and normative theory in the manner that economists are wont to do, making the whole thing useless. If it is possible to develop something like prospect theory that can function as an objective function, a more or less mathematical expression of what it is the actor is trying to do, that is great. If not, the fields should be kept separate, but combined in some meta-theory that provides a structural, systematic way in which they work together. (One could start, for example, with the economic verdict as to efficiency, and then modify it in some systematic way so as to take into account other values that are not captured in the objective function.)
2.2.2009 11:19pm
David Welker (www):

Because they're "free", all participants participate voluntarily, which they wouldn't do unless they were better off for it.


This is ridiculous at some level. It assumes a particular baseline that is heavily influenced by the initial assumption that a free market in a particular context exists.

Take an organ donor who, due to desperate economic circumstances, accepts compensation in exchange for an organ.

Let us imagine that this person spends a lot of time agonizing over the decision. Let us imagine that they a lot of social pressure is applied by family members who would like to enjoy the economic benefits of the transaction. Let us imagine that the organ donor goes through with the transaction, but then comes to deeply regret it.

Could it be that the organ donor would actually be happier if he or she had not been faced with this choice (and the associated social pressure that came to be placed on him or her because of the existence of this choice) in the first place?

The obvious answer is yes. Your view is foolish to the extent that it assumes that the decision to donate an organ (even if it is immediately the subject of intense regret) is totally rational.

Not everything that people participate in "voluntarily" (i.e. alcohol abuse, drug abuse, buying the latest must-have widget because their neighbor has it, prostitution, relationships with partners that hit and abuse them) are rational. Nor do such "voluntary" decisions make people either better off or happier. You are totally taking for granted initial conditions and also ignoring all sort of cognitive deviations from simplistic models of human behavior.

Sure, if we choose an arbitrary but easy to measure of efficiency it makes some decisions seem easier. But for some decisions at least, the response is so what? The supposedly "easy" decision is actually hard and you have merely transformed it into an easy decision based on ignoring the truth. You are artificially making the hard decision easy by making clearly false assumptions, i.e. it is based on you lying to yourself about the value of ignoring measures of efficiency that take into account that which you choose to ignore.

I am, of course, not saying there is not a place for Kaldor-Hicks efficiency. But the claim that this measure is THE ONLY valid measure of efficiency is beyond ridiculous. Why not have some analysis that proceeds with other measures of efficiency and evaluate it on a case-by-case basis? You would have to be extremely narrow-minded to not consider other measures of efficiency.
2.2.2009 11:43pm
Randy R. (mail):
Houston Lawyer: "Conservatives are happier than liberals."

So are the self-deluded.

Myself, I'm only happy when a conservative is unhappy. So I wasn't so happy for the last eight years. Now I'm very happy. Very happy indeed.
2.3.2009 12:04am
martinned (mail) (www):
@David Welker: Your organ donor example hardly argues against my claim. When he made his decision, by all accounts he benefited. And even if he did not, can I say so better than he can? The rest of the timeline is irrelevant. I did not claim that he would not come to regret his decision, nor is it relevant if he did. (It could be, depending on what it is one is trying to do, model-wise.)

As for your point about the starting point, that is obviously true. That is exactly the kind of thing we're trying to use economics to figure out.

Then you list a series of things people do that you claim are not rational: "alcohol abuse, drug abuse, buying the latest must-have widget because their neighbor has it, prostitution, relationships with partners that hit and abuse them". I would offer that each of these things is usually or at least possibly rational in the economic sense. Becker &Murphy (1988) have shown that rational drug addiction is very well possible, and (as one would expect) characterised by very high discounting. In other words, drug addicts don't care very much about the future, and given that preference, their addiction can very well be the most efficient way for them to optimise their welfare. That is what rationality means to an economist: the best possible connection between means and ends. Judging people's preferences is not economics.

As I already noted earlier, a lot of work is being done at the moment about relaxing the assumption of perfect rationality, or tinkering with the objective function (= preference mapping) in order to make it more realistic. But none of this involves the economist second-guessing people's decisions. That is for psychologists.


I am, of course, not saying there is not a place for Kaldor-Hicks efficiency. But the claim that this measure is THE ONLY valid measure of efficiency is beyond ridiculous. Why not have some analysis that proceeds with other measures of efficiency and evaluate it on a case-by-case basis? You would have to be extremely narrow-minded to not consider other measures of efficiency.

K-H is an extended version of the Pareto principle, which is widely used in economics because it avoids the need for interpersonal comparisons of utility.

For example, the first welfare theorem, which states that perfect markets are, well, perfect, can be proven quite easily with some supply and demand curves. But to construct those, you need to aggregate the choices of individuals, which means that you need to gather together a lot of information about people's preferences that you would not normally possess. Usually, economists fumble over this fact. Then again, since perfect markets are ex hypothesi perfectly transparent, all that is needed is the Pareto principle and some very weak assumptions about rationality in order to prove the theorem.

My point is, I'm not sure why you object to K-H. It is by far the most modest concept of efficiency imaginable. It makes very few assumptions and is value neutral, as all social science is supposed to be, but rarely is. Only when economists can make their model work with Pareto efficiency, do they use a less realistic/modest and more mathematically tractable approach such as social welfare maximisation.
2.3.2009 12:08am
Michael F. Martin (mail) (www):
@martinned

I share your practical and probably also your aesthetic distate for ad hoc theory. And I agree that the connection between positive and normative theory must be systematic. I don't know whether the community will ever agree that another hypothesis provides as many insights as the rational hypothesis into both positive and normative problems.

There are some tantalizing hints, however, as to what the future might hold. Consider the empirical observation made by several applied mathematicians that the sending and receiving of email obeys poisson statistics. Although further empirical study is necessary, I see no reason to believe that other social activities might not obey similar statistics.

Better transparency into production and consumption activities coupled with cheaper processing will almost certainly lead to new insights into the dynamics that underly an economic equlibrium. While time-independent preferences work fine in many situations, it may be that a more general and useful formulation of the rational hypothesis attaches a characteristic periodicity to the magnitude of preferences such that preferences are "complete" and "transitive" only at a specified moment in time. Anyway, if that were then, utility functions would be complex maps, but utility maximization problems might not be harder to solve since by now we have learned plenty of tricks in complex analysis.
2.3.2009 12:10am
martinned (mail) (www):

And I agree that the connection between positive and normative theory must be systematic.

Hmmm, isn't it the case that whenever there is such a connection, there is rationality? The basic method of economics involves working out what the smart idea is, and then hypothesising that people will do what is smart. Is there any other way to make the connection?
2.3.2009 12:15am
Michael F. Martin (mail) (www):
The answer is no if you look at a window of time within which the relevant preferences are stable, and maybe otherwise.
2.3.2009 12:32am
David Welker (www):

The rest of the timeline is irrelevant. I did not claim that he would not come to regret his decision, nor is it relevant if he did.


In the real world (which is perhaps not the world you think is "relevant") it is in fact relevant when someone comes to regret a totally irreversible and life-changing decision.


Judging people's preferences is not economics.


To the extent the economics refuses to judge people's preferences (i.e. a drug addicts self-destructive decision to destroy his own and his families long-term happiness and well-being or an abused woman's decision to stay with someone who is beating her brutally on a regular basis) it is utterly and completely useless to those who do not think that all preferences should be accorded equal weight.

Furthermore, the idea we should not judge preferences, no matter how destructive, is actually a quite radical normative view. Adopting this extreme and inescapably normative view does not make economics neutral.


K-H is an extended version of the Pareto principle, which is widely used in economics because it avoids the need for interpersonal comparisons of utility.


Really? It does not really avoid this, because the utility that is maximized is the one that is backed up by money. That is, if someone needs medicine to cure what would be an otherwise fatal encounter with malaria and someone else wants to purchase an addictive drug, but the person who needs the malaria doesn't have money but the person who wants the addictive drug does have money, the "efficient" outcome is for social resources to be invested in producing the video game rather than the malaria medicine through "voluntary" transactions.

This isn't really normatively neutral. Especially when you translate these assumption into actual policy.

I don't think that, for some subset of analysis (I am not saying we should do away with H-K in all analysis or anything radical here), it makes perfect sense to go ahead and say that the preferences of someone who needs malaria medication to survive is more valuable than someone who wants to feed their drug addiction. That is, to go ahead and make an judgment about interpersonal utility.

I for one, don't think you can escape making hard and even controversial decisions when it comes to the real world. To the extent that economics tries to dodge the difficult issues, it renders itself less relevant to policy-making.
2.3.2009 12:35am
martinned (mail) (www):
I don't follow. Long version?
2.3.2009 12:36am
David Welker (www):
Note, in the post above, the inexplicable reference to video game should be to "addictive drug" instead. I think that is a better example for the point I am making.
2.3.2009 12:36am
martinned (mail) (www):
1. My previous commment obviously replied to Michael F. Martin.

@David Welker: Let me try to reply without writing an entire economics textbook:


In the real world (which is perhaps not the world you think is "relevant") it is in fact relevant when someone comes to regret a totally irreversible and life-changing decision.

What I meant was that I'm not sure there is any decision rule, economic or otherwise, that would include regret except to the extent that it is forseeable. (Regret avoidance is actually a very cool decision rule, although I'm not sure what kind of work is being done there at the moment. In any case, it's more of a psychology thing.)


To the extent the economics refuses to judge people's preferences (...) it is utterly and completely useless to those who do not think that all preferences should be accorded equal weight.

Furthermore, the idea we should not judge preferences, no matter how destructive, is actually a quite radical normative view. Adopting this extreme and inescapably normative view does not make economics neutral.

I never said that preferences should be accorded equal weight, or that they should not be judged. I only said that doing so is not the subject matter of economics. The fact that economics is mostly value neutral means that you can bolt any set of values onto it. It also means that, given Hume's is/ought distinction, any economics-based policy recommendation always has at least one exogenous value assumption bolted on. Beware of such hidden assumptions, they are the source of much mischief!


Really? It does not really avoid this, because the utility that is maximized is the one that is backed up by money.

I hardly know where to begin with this one. For starters, it has nothing whatsoever to do with K-H. Secondly, it is absolutely wrong in that the purchasing power of individuals is exogenous to micro-economics, which is what your malaria and video-games story is. What I'm saying is that if one feels badly for the poor kids in Africa, one can give them money. All economics does is figure out what the best way is to spend the money that someone actually has given that person's preferences. I'm sorry if we haven't come up with a way yet to imagine resources out of thin air. Just because all human beings are selfish and therefore tend to spend only a small part of their income on charity does not mean that economics is to blame. On the contrary, the nature and causes of the wealth of nations is the oldest and most important problem in economics.
2.3.2009 12:50am
David Welker (www):
martinned,


The fact that economics is mostly value neutral means that you can bolt any set of values onto it.


Why couldn't an analysis be "value neutral" by defining multiple efficiency functions and documenting the results of each?


For starters, it has nothing whatsoever to do with K-H.


Well, I am not economist. But I do understand your point about distribution. I remember one of my law professors, who did have a Ph.D. in economics who, like you favored H-K and who also insisted that if you want to do any redistribution you should do it through the tax system rather than distorting incentives by focusing on distribution in other areas. (Of course, the tax system also involves distorting incentives -- I think he probably believed it distorted incentives less.) I thought and still think this is an interesting point of view, but perhaps not always practical since distributive decisions through the tax system is likely to be more politically controversial and difficult than focusing on distribution in other policies. I think when you consider the political economy angle, his idea that you should only worry about distribution through the tax system is probably problematic.

But, I do think that if the goal is to maximize aggregate social utility as measured by H-K, then implicitly you are making intrapersonal comparisons of utility when you engage in aggregation, right? Isn't there a problem if you believe there is a diminishing marginal utility to increased income? Also, to the extent that you avoid making interpersonal comparisons of utility (which aren't impossible, just messy), isn't your definition of efficiency missing something in terms of saying that state X is more efficient than Y, even though the consumption bundle that consists of X may involve preferences that are not as meritorious, on average, as the consumption bundle that consists of Y.

I am not convinced that we should not be considering the merits or value of people's decisions. Also, I do not see how choosing only one definition of efficiency that attempts to achieve this is an objective decision, to the extent that it fails to capture information that policy makers might think important. (And shouldn't one goal of economics be to help policy-makers make decisions?) Also, isn't it just as objective to present an analysis with multiple alternative efficiency functions and let policy makers decide which one they want to subscribe to?

I may be way off base here. It has been a really long time since I took micro.
2.3.2009 1:45am
martinned (mail) (www):
@David Welker:

I don't mean to sound condacending, but you're actually starting to make more sense.

Still, I'm not entirely sure what you mean by an "efficiency function". Efficiency is some comparison of what goes in and what comes out. While that is certainly a function, in the mathematical sense, there isn't a lot of room for alternatives here. In economics, there are different efficiency concepts that differ from each other mostly in how many assumptions they need, and how realistic they are. The most important classes are Pareto/K-H, which are simple and modest, and social welfare maximisation. There are a lot of alternatives for the latter, but the simplest and most common approach is to work with cardinal utilities and simply add up all individual utilities. (I hope you see now why this is not something one would do unless the math requires it.) Social welfare maximisation thus defined is always Kaldor-Hicks efficient and vice versa. (Pareto is a different story.) This is why I'm not sure what you have in mind when you're talking about "multiple results".


But, I do think that if the goal is to maximize aggregate social utility as measured by H-K, then implicitly you are making intrapersonal comparisons of utility when you engage in aggregation, right?

No. Every "player" gets more than they put in, otherwise they wouldn't be playing. That is all you need to know here.

Isn't there a problem if you believe there is a diminishing marginal utility to increased income?
2.3.2009 1:56am
martinned (mail) (www):
Oops, wrong button...


Isn't there a problem if you believe there is a diminishing marginal utility to increased income?

All economists would believe that, but the model is in terms of utility. Only the operationalisation is often in money terms, because unlike utility, income can be measured.

Talking about certain preferences being meritorious or not is the proper task of government, which they can legitimately do because they enjoy (hopefully) the consent of the governed. The role of economic science here is to analyse the costs and benefits of certain policies, not to set the goals. (Banning drugs leads to a black market, with violent crime due to the inability of drug dealers to use the courts, etc.)

Something else worth noting is the no. 1 alternative for an additive social welfare function. Instead of adding all individual utilities together, you can also multiply them. (i.e. take the geometric mean instead of the arithmetic one.) Doing so implies a social goal of equality of outcome, because such a social welfare function favours outcomes that are equal.

(To see this, take x+y=10, i.e. a constant pie size. An additive SWF W=x+y can be maximised in any number of ways, some of which quite unequal. But the SWF W=x*y is maximised for x=y=5, the equal outcome.)

When economic models use such an explicit social welfare function, which is not very often, a multiplicative one works just as well as an additive one. The choice depends on the values that are plugged into the model, i.e. depending on whether the model is meant to apply to the US or Sweden.

Such a desire for equality is something that in most cases can't be fit into the model very easily. That is why the decision maker has to take it into account afterwards. In many cases, economics can identify a number of alternative policies, each with a likely outcome. Some will be more efficient than others, but it is up to the (democratic) decision maker to decide how much weight efficiency should get relative to other values, such as equality or liberty.
2.3.2009 2:07am
David Welker (www):
martinned,

Thanks for your response. Very interesting.

I know you are correct in terms of how mainstream economists view their function i.e. leave the normative decision-making to the policy makers. (Not that it is exactly hard to find an opinionated economist!)

In your opinion, do you think there is ever any difficulty in translating the output from economic models into policy choices? I suppose that this is why policy makers make use of expert economists, so that they can truly understand what the models are and, just as importantly, are not telling them. My concern is that perhaps some of the normative trade-offs are not as explicit as they could be and that models may give a false sense of objectivity. (i.e. you should focus on efficiency as defined in the models, and not other values.)

To the extent that these models are translated into policy, do you think the trade-offs in the variables not captured in the models are well-understood? Could there ever be any value in building non-neutral normative values (where you are quite explicit about what those values are) into models in order to better understand the trade-offs and perhaps ensuring a higher level of consistency? Or is it truly better to keep these things totally out of the models and just leave it to what is may be somewhat ad-hoc decision-making by policy makers later.

Also, it seems like a weakness of these models in terms of making decisions is that they do not really give you an answer at the end. The policy maker has to take the results and somehow combine those results with their values, perhaps in an indeterminate fashion, to actually make policy.

Is a model that takes values as input and says, well, given what you say your values are, this is the optimal allocation of funding for policy X which is believed to have a given set of trade-offs? Or are the values that we are trading off too difficult to properly quantify anyway, so lets just leave it out of any model?

One supposes that there is a place for happiness research, even if not explicitly incorporated into the model as additional information. If we know that X makes people more happy and X is not in the model, perhaps policy makers would want to include that in a policy decision, just as we would consider other values like liberty. But, might there be some value in incorporating happiness research into some sort of decision making model (perhaps this decision-making model is not properly called an economic model, but instead takes the output of an economic model as input) so that research results in this area are not overlooked? After all, wouldn't policy makers likely have some difficulty recalling and processing the results of happiness research if they had to apply it in an ad hoc fashion?
2.3.2009 3:11am
American Psikhushka (mail):
I see some problems with the thinking behind "happiness" research.

To an extent there seems to be a bias against wealth. Intentional or not, there seems to be a collectivist/socialist bias that has a thumb on the scale as far as how much happiness wealth provides.

This is dangerous because its not apparent that the researchers understand that generally individuals acquire wealth in a market economy by creating value. Generally the more value provided, the more wealth created. (Provided property rights are honored, there are always those trying to steal the proceeds of value created by others.) When they create this value and receive individual wealth for it they are also creating societal wealth - increasing the capital stock, increasing the standard of living, decreasing unemployment, etc. So regardless of how much happiness is created, value and wealth creation are absolutely vital to societal wealth and prosperity. It's actually good and necessary that wealth makes people happy to various degrees. The researchers seem to have some kind of unfounded collectivist guilt about it. This is dangerous, because it is the foundation of the economy.

That's one of the biggest problems, but there are also major problems with the measurement - the framing, subjectivity, etc. I hope they are not involved with making any decisions that actually effect real people's lives. A recipe for misery.
2.3.2009 7:35am
American Psikhushka (mail):
David Welker-

It does not really avoid this, because the utility that is maximized is the one that is backed up by money. That is, if someone needs medicine to cure what would be an otherwise fatal encounter with malaria and someone else wants to purchase an addictive drug, but the person who needs the malaria doesn't have money but the person who wants the addictive drug does have money, the "efficient" outcome is for social resources to be invested in producing the video game rather than the malaria medicine through "voluntary" transactions.

Still pushing the communism, I see. The reason why this would not work is because you would have to control the whole economy and confiscate nearly all income. The communist and socialist countries that tried had trouble even sustaining themselves after a while, let alone other countries. Many faced starvation.

So if you tried to do this in the western market economies they would quickly stagnate and weaken, just like what happened when it was tried elsewhere. Eventually you would leave the western market economies with failed economic systems just like some of the poorer countries.

I hope you live in a shack, eat ramen noodles, don't spend any money on entertainment, and are typing your posts from a library computer, otherwise you are a hypocrite. Because every cent you spend above that standard of living could have gone to someone who needed it somewhere on the planet. Somehow I doubt that is your living situation. It's sort of like the politicians (or policy makers) in some of the old communist countries having mansions, limosines, cooks, etc. while everyone else waits in line for stale bread.
2.3.2009 8:17am
David Welker (www):

Still pushing the communism, I see.


I stopped reading after this sentence.

Do you think it might be possible for you to deal with differences in views more productively than spewing out ridiculous and false statements?
2.3.2009 12:36pm
Duncan Frissell (mail):
Wealth doesn't correlate with happiness on an aggregate basis because a significant chunk of the population become godless atheistic communist depressives.

Just use the GSS. Require everyone to get a job (at least all males), marry (persons of the opposite sex), reproduce, attend a Christian church once a week, become Right-Wing nuts (or libertarians) and aggregate happiness will be maximized. Simple.
2.3.2009 1:37pm
Randy R. (mail):
American: "Still pushing the communism, I see"

oddly enough, it's also what most religions push as well.

Duncan : "Require everyone to get a job (at least all males), marry (persons of the opposite sex), reproduce, attend a Christian church once a week, become Right-Wing nuts (or libertarians) and aggregate happiness will be maximized."

thank goodness I'm gay, and so can opt out of all this canned happiness!
2.3.2009 6:07pm
klimmklimm (mail) (www):
Perfect work!
Gluttony kills more men than the sword.
Good health is above wealth

[url=http://buy-xenical-online-klim.blogspot.com/][/url]
9.20.2009 8:19am
petrarka (mail) (www):
Perfect work!
9.24.2009 9:34am
petrarka (mail) (www):
Perfect work!
9.24.2009 9:34am
petrarka (mail) (www):
Perfect work!
9.24.2009 9:34am
petrarka (mail) (www):
Perfect work!
9.24.2009 9:34am

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