I find it extremely frustrating that economists, who like to color themselves intellectually rigorous folk, insist on confusing people about the meaning of words. Here's Robert Frank in Luxury Fever:
In economist's parlance, it is customary to speak not of happiness, but of utility. The analogous construct in the psychological literature is subjective well-being, a composite measure of overall life satisfaction. For present purposes, little will be lost if we view both expressions as being roughly synonymous with satisfaction.
The problem is that is “customary” for economists to speak not of happiness, but of utility, in a most confusing and haphazard fashion. Conceptually, happiness has nothing to with utility in economics, nor does subjective well-being, or subjective satisfaction. Utility is way of representing an ordering of preferences. It simply isn't a psychological concept, nor a value concept, nor does it imply either. A utility function is just a little machine in which you can put an ordering ofpreferences, a pair of alternatives, and have something that somebody decided to call a “utility” assigned to each alternative, the most preferred getting the greater utility.
If I prefer the presence of a mouse in Paul Krugman's kitchen over the absence of a mouse, and there is a mouse in Paul Krugman's kitchen, then my preference is "satisfied" and I “get” more utility from this state of affairs than the alternatives, even if it in no way enters into my life or experience. The world being such that my highest ranked preferences are semantically satisfied, and that I am “getting” as much utility as possible relative to my ordering, logically has nothing at all to do with my subjective well-being.
As Lionel Robbins put it, just as economics was systematically expunging the psychological from economics:
So far as we are concerned, our economic subjects can be pure egoists, pure altruists, pure ascetics, pure sensualists or – what is much more likely – bundles of all these impulses.
That is to say, economics makes no substantive assumptions about the contents of preferences. It cares only for the form of preferences, namely, that they be consistent.
So why does Robert Frank, and almost everyone else in the economics profession, insist on keeping us all in a state of confusion? Contra Frank in the preceding page of Luxury Fever, economists qua rigorous appliers of utility theory, don't think that being wealthier ought to make you happier. They think that a bigger budget gets you a more preferred bundle of goods, and more preferred means, by definition, more utility. But since utility is a not a subjective psychological state (since semantic satisfaction is not), no one should be surprised that having more utility won't make you more anything, subjectively. The world could be exactly the way you prefer it, and you could be miserable, because you could prefer to be miserable.
The “paradox” of our being wealthier, but no happier, is a paradox only relative to a substantive psychological theory, which is what utility theory isn't. Bentham did think that money was a proxy for pleasure, and that pleasure constituted happiness. So this would be a paradox for Bentham. But Bentham's vulgar psychological egoism and hedonism are, as Robbins more or less points out, simply not a part of economic theory. And the paradox emphatically isn't one for a modern utility theorist. The “paradox” is just proof that utility and happiness are non-identical, which didn't need to be proved anyway, since the only identities in an axiomatic theory are definitional.
[Update: What is “semantic satisfaction”? It is the “fit” between the content of a propositional attitude and the world. In the case of a belief, if the content of the belief matches the world, then its “satisfaction conditions” are met. In the case of a preference, if the world matches the content of the preference, then its satisfaction conditions are met. This is not the “I can't get no satisfaction” sort of satisfaction. Which is why preference satisfaction talk compounds the confusion over utility. It need not be satisfying to have one's preferences satisfied, and so one's utility may have no utility for creating utility, or, in other words, may be of little use in bringing pleasure.]