“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).