Happiness and Constitutional Political Economy

By far the best overview of the happiness literature from an economics and policy perspective is Frey & Stutzer's Happiness and Economics. Frey, a first class constitutional theorist, explores the big impact policy can have on happiness, but warns against construing the happiness function as an approximation of that unicorn of social science, the social welfare function, and then trying to maximize it. F&S point out that the goal of maximizing social welfare has traditionally faced three problems: (1) empirical emptiness; (2) aggregation (Arrow social choice stuff); (3) incentive compatibility (Buchanan public choice stuff). The happiness data perhaps solves (1), but it does not solve (2) or (3). Folks like Layard are particularly inept with respect to (3). Here's what F&S say:

Missing incentives. Deriving optimal policies by maximizing a social welfare function only makes sense if the government has an incentive to apply the optimal policies in reality. This is only the case if a “benevolent dictator” government is assumed. (Brennan and Buchanan 1985). From introspection as well as from empirical analysis in political economy (see, e.g., the collection of papers on political business cycles in Frey 1997), we know that governments are not benevolent and do not follow the wishes of the population, even in well-functioning democracies, not to mention authoritarian and dictatorial governments. Hence to maximize social welfare corresponds to a “technocratic-elitist” procedure, neglecting the crucial incentive aspect.

This criticism applies particularly when one tries to derive optimal policies by maximizing happiness.

This point cannot possibly be emphasized enough. Even if your theory of value, or your philosophical standard for policy evaluation, is “correct” in some metaphysical sense, this gets us almost nowhere. Why? First, people, especially agents of the state, must understand and broadly agree that it is correct. This is exceedingly unlikely. Second, people, especially agents of the state, must be motivated to reliably act in accordance with its prescriptions. But if understanding and agreement is unlikely, then motivation based on them is unlikely. It may be conceivable to structure incentives so that it is as if agents of the state were motivated by a commitment to a single normative standard, but it is usually unrealistic.

Here is F&S's approach:

There is a solution on hand that overcomes the problems posed by the impossibility theorem and by the government's missing incentives. Constitutional political economy (e.g., Buchanan 1991, Frey 1983, Mueller 1996, Cooter 2000) redirects attention to the level of social consensus where, behind the veil of ignorance, the basic rules governing a society–the fundamental institutions–are chosen or emerge. At the same time, the approach shifts from a (vain) effort to directly determine social outcomes to shaping the politico-economic process by setting the institutions.

. . . The fundamental institutions shape the incentives of policymakers. Once these basic institutions are in place and the incentives are set, little can be done to influence the current politico-economic process. Economic policy therefore must help to establish those fundamental institutions, which lead to the best possible fulfilment of individual preferences. Research in positive constitutional economics helps to identify which institutions serve this goal, and whether they do in fact systematically affect happiness.

F&S's research shows that procedural aspects of government, such as the directness of democratic participation and the degree of decentralized federalism, are themselves determinants of happiness. The Swiss are among the happiest people in the world not only because they are fabulously wealthy, but because the canton system allows for direct democratic rule of over local jurisdictions, with little interference from the central state.

  • Paul G. Brown

    Stewart’s point is Chomsky’s point. The media is in the business of manufacturing social consent by endlessly repeating tribal myths. The Market Is Good. Celebrities Are Important. Be Afraid Of Strangers. Money Uber Alles.

    In each of these myths you can see the shadow of some more primitive property of our individual lizard brain. Social Connections Good. Not My Genes Bad. Famine Coming! Can I Have Sex That?

    Look at Cramer’s show. I especially appreciated how Stewart lampooned Cramer’s use of props and sound effects. As a rule of thumb, the louder and more strident the conversation, the less light (knowledge) and the more heat (emotional provocation intended to make you more succeptable to advertising) is involved.

  • Ron

    It is ironic that Jon Stewart and a comedy show instead of the regulators or news media had to bring all of this public. Also in Cramers defense he is far less guilty than most of the other financial media for their efforts together with Wall Street, the politicians & incompetent regulators for what has happened.

    While I enjoy watching Cramer every night, one must remember the show is primarily entertainment. The financial networks exist to promote their advertisers financial and investment products. Who would expect them to warn about the credit bubble or coming Washington national debt collapse which will destroy much of the remaining private wealth in America today or what this will do to the dollar, the stock market, bonds, gold or the real estate market?

    China is now worried about their dangerous over investment in US Treasury obligations. Washington ’s long-term choice is either repudiation or monetization. For monetization to be effective, the depreciation in the dollar would have to be substantial and this in turn would dramatically raise prices of imports for American consumers which would mean a tremendous drop in foreign imports. Debt monetization would cause more disruption to exporting nations than selective repudiation of Treasury debt.

    The Campaign to Cancel the Washington National Debt By 12/22/2013 Constitutional Amendment is starting now in the U.S. See: http://www.facebook.com/group.php?gid=67594690498&ref=ts

    Thanks,

    Ron with 30 plus years in the investment business and banking industry.

  • ehhh, Jon Stewart’s prognostication record is what, exactly? He likes to pretend he’s news when he wants to pretend he’s news, and entertainment when that’s more convenient, but — bow tie or not — he’s mostly just a dick with an opinion and a forum. I think the sooner the public wises up to the fact that some news — perhaps all news? — cannot be summarized with clever one-liners, the better off we’ll be.

  • Sure, but government and it’s appointees operate under a vastly different incentive structure. Cramer suffers from assymetrical information and ironically profits more the more assymetrical it is whether its correct or not. While Geithner has an incentive to actually receive the right information so he can fix the problem. Cramer has no such incentive. If Cramer had figured out in 2006 that the market was going to collapse at the end of 2008, he would have been a fool to start doomsday proclamations as his show would have probably been canceled due to nobody watching and now a couple people would be saying, “Hey remember that crazy Jim Cramer said this collapse was coming, whatever happened to him?”

  • Sure this might be bad. It’s always bad when people engage in stupid, reckless behavior as regards their finances. It’s also bad when people take advantage of that tendency to profit. But when a guy bets his kid’s college fund on a prize fight, and it turns out the fight was fixed and he bet on the guy that took the dive, why is it we always blame the fixers first?