Fundamentals of Happiness: An Economic Perspective 1839107723, 9781839107726

Examining the fundamental thinking underpinning the foundation for economic studies of happiness, this book explores the

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Fundamentals of Happiness: An Economic Perspective
 1839107723, 9781839107726

Table of contents :
Foreword • Vernon L. Smith
Preface and acknowledgments
1 Introduction and general overview of economic happiness
2 Ideas (fundamental) of happiness and well-being: ancient, medieval, and modern
3 Economics and happiness
4 Subjective studies in income and wealth: can money buy happiness?
5 Social welfare and happiness

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Fundamentals of Happiness

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To my wife, Noreena, my kids, Devi, Shanti and Rajan, Hari and Mena, and Rani and Jonathan, and my grandchildren, Brian, Sabrina, Aditi, and Abhishek. I will love them forever. I also dedicate this book to my mother Balkoomarie, my ­brothers Deonarine, Suruj, Prabhudyal, and Jai, and my sisters Balwantie, Lilwantie, and Ramdai who took particular interest in my education at different stages after my father died. I owe an immortal debt to a brother, the late Pt. Baldeo Persaud of Bath Settlement Berbice, who initiated me to the subject of happiness. Repeatedly he explained the story of Sage Narada Muni who went to the world of Lord Vishnu to ask for something, however small, to take to Earth in order to relieve the people there of suffering. That small thing was to worship the truth. ‒ L.R. B”H Dedicated to the memory of my sister, Esther, for bringing me to these shores; to the memory of my father, Henoch for his wisdom and to my mother, Sara for giving birth to me ‒ twice; and my grandparents, who died on Kiddush Hashem, Abraham Mordchai and Feigel Rosensaft, and Itzhak Meir and Chava Szenberg, to my children, Marc and Naomi Kunin, Avi and Tova Szenberg; to my grandchildren, Chaim and Elki Herzog, Moshe and Batya Shain, Nachum and Devorah Wolmark, Chanoch, Ephraim, Ayala and Menachem Pfeiffer, and Yaakov Nosson, and to my great-grandchildren, Chanoch, Faigale, Moshe, Avigdor Mordchai, Chaya Avigail, Yaakov, and Chaim Baruch; and to my wife, Miriam; and to the righteous German-Austrian officer who took my immediate family to a hiding place one by one from the Braun concentration camp just days before the last transport to Auschwitz, where most of my family perished, and to Tomasz Mirowski for providing my family a hiding place after our escape from the camp. ‒ M.S.

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Fundamentals of Happiness An Economic Perspective

Lall Ramrattan University of California, Berkeley Extension and Holy Names University, USA

Michael Szenberg Distinguished Professor and Honorary Chair of Business and Economics, Touro College and University System, USA

Cheltenham, UK • Northampton, MA, USA

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© Lall Ramrattan and Michael Szenberg 2021 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2020952727 This book is available electronically in the Economics subject collection

ISBN 978 1 83910 772 6 (cased) ISBN 978 1 83910 773 3 (eBook)


Typeset by Servis Filmsetting Ltd, Stockport, Cheshire

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Contents Foreword by Vernon L. Smithvii Preface and acknowledgmentsx 1 Introduction and general overview of economic happiness


2 Ideas (fundamental) of happiness and well-being: ancient, medieval, and modern


3 Economics and happiness


4 Subjective studies in income and wealth: can money buy happiness?124 5 Social welfare and happiness


Bibliography185 Index207


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Foreword The ubiquitous topic of Happiness has nowhere to my knowledge been so thoroughly treated, and in only five packed chapters in this book. Along with dozens of others, the authors do a fine job of including what my favorite scholar had to say: Adam Smith, in The Theory of Moral Sentiments (1759). My favored Dugald Stewart edition is magnificently subtitled: An Essay towards an Analysis of the Principles by which Men naturally judge concerning the Conduct and Character, first of their Neighbours, and afterwards of themselves. To which is (modestly, I assure you) added, A Dissertation on the Origins of Languages. New Edition. With a biographical and critical Memoir of the Author, by Dugald Stewart (London: Henry G. Bohn, 1853). This Foreword gives me an excuse for embellishing their discussion just a bit. The word ‘happiness’ appears 156 times in the Stewart edition, including Stewart’s memoir of Adam Smith. Of what does happiness consist? Very simply, I believe, it is to be loved and to be loveable. But if we have not genuineness, there can be no love, no joy, no purpose. In Smith, human happiness arises from the consciousness of being beloved. But its sources are not due to sudden changes of fortune. ‘He is happiest who advances gradually to greatness’, with the public (our friends, neighbors) aware of every step in the achieving process, and ‘in whom, upon that account, when it comes, it can excite no extravagant joy, and with regard to whom it cannot reasonably create either any jealousy in those he overtakes, or any envy in those he leaves behind’ (p. 56). Smith’s insightful recognition of the fundamental asymmetry between our joy and our sorrow, between gain and loss, is in the context of happiness: ‘What can be added to the happiness of the man who is in health, who is out of debt, and has a clear conscience?’ Any accessions of success are properly superfluous, for ‘if he is much elevated upon account of them, it must be the effect of the most frivolous levity’ (p. 62). To this tranquil state little can be added, but much might be taken from it. Measured from this state to the ‘highest pitch of human prosperity, the interval is but a trifle; between it and the lowest depth of misery, the distance is immense and prodigious. Adversity, on this account, necessarily depresses the mind of the sufferer much more below its natural state, than prosperity can elevate him above it’. Others find it difficult to sympathize with a ­vii

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person’s deep sorrow, but can thoroughly ‘enter into his joy’, and ‘it is on this account, that though our sympathy with sorrow is often a more pungent sensation than our sympathy with joy, it always falls much short of the violence of what is naturally felt by the person principally concerned’ (p. 63). As in the proverb, every man may indeed be the whole world to himself, but to all others he is a tiny and insignificant part of it. His happiness may be of far greater importance to himself, than that of the whole world beyond, but to all others he is of no greater consequence than any other single person: yet he dares not look mankind in the face, and avow that he acts according to this principle . . . When he views himself in the light in which he is conscious that others will view him he sees that to them he is but one of the multitude, in no respect better than any other in it. If he would act so as that the impartial spectator may enter into the principles of his conduct, which is what of all things he has the greatest desire to do, he must upon this, as upon all other occasions, humble the arrogance of his self-love, and bring it down to something which other men can go along with . . . In the race for wealth, and honours, and preferments, he may run as hard as he can; and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should jostle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of. This man is to them, in every respect, as good as he: they do not enter into that self-love, by which he prefers himself so much to this other, and cannot go along with the motive from which he hurt him. They readily, therefore, sympathize with the natural resentment of the injured, and the offender becomes the object of their hatred and indignation. (pp. 119‒120)

In the above passages and in propositions elsewhere in his first published book,1 Smith accounts for human sociability; its origins, rule structure, and species success. What of this wisdom carries over into his far better known, magnum opus? Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, edited with an Introduction, Notes, Marginal Summary and an Enlarged Index by Edwin Cannan, 2 vols (London: Methuen, 1904). Nothing carries over explicitly. Nowhere between the covers of his second book does Smith cite, connect, or build upon, the social structure of the rules we follow, that he so elegantly derives in his first book. Unlike today, when we freely and generously cite ourselves, for Smith this was just vain, bad form. However, behind all the most famous passages in his second book lurks the specter of his wisdom in the first. For example: ‘Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way’ (Vol. 2, p. 184). Significantly, in the secondary literature, such passages are routinely interpreted to mean that Smith was committed to individualism in the unbridled pursuit of self-interest.2 But

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Foreword ­ix

it is from his first book that we glean why the conditional clause ‘so long as he does not violate the laws of justice’ conveyed the substance of its message, and similarly, the strange, unexamined phrase ‘pursue his own interest his own way’. Little wonder that when people rediscovered his second book, it launched the great diversion known as ‘Das Adam Smith problem’, in which leading historians of economic thought revealed their utter incapability of reading and understanding his first book. And finally, on America, I believe we find him at his best: The rulers of Great Britain have, for more than a century past, amused the people with the imagination that they possessed a great empire on the west side of the Atlantic. This empire, however, has hitherto existed in imagination only. It has hitherto been, not an empire, but the project of an empire; not a gold mine, but the project of a gold mine; a project which has cost, which continues to cost, and which, if pursued in the same way as it has been hitherto, is likely to cost, immense expense, without being likely to bring any profit; for the effects of the monopoly of the colony trade, it has been shown [see Vol. 2, pp. 91‒136], are, to the great body of the people, mere loss instead of profit. It is surely now time that our rulers should either realize this golden dream, in which they have been indulging themselves, perhaps, as well as the people; or, that they should awake from it themselves, and endeavor to awaken the people. If the project cannot be completed, it ought to be given up. (Vol 2, pp. 432‒433)

Our brethren in the United Kingdom eventually followed this advice from one of their most loyal, greatest, and dissenting citizens. Vernon L. Smith Professor of Economics and Law George L. Argyros Endowed Chair in Finance and Economics Economic Science Institute Chapman University 2002 Nobel Laureate in Economics

NOTES 1. Smith’s first book, The History of Astronomy, was published posthumously in 1795 along with other essays, but was written in the early 1750s. 2. ‘The core of Smith’s thesis was that humans’ natural tendency toward self-interest (or in modern terms, looking out for yourself) results in prosperity. Smith argued that by giving everyone freedom to produce and exchange goods as they pleased (free trade) and opening the markets up to domestic and foreign competition, people’s natural self-interest would promote greater prosperity than with stringent government regulations’ (https://

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Preface and acknowledgments This book started as a project of gathering noteworthy quotes from all media on happiness. As we started to write it, we realized that some fundamental ideas that were preserved and augmented over history on happiness were treated as background material. Ideas of virtue, prudence, wisdom, honor, pleasure, health, freedom, justice, wealth, and so on, are at the source of happiness. They are simple everyday terms that escape any definitions, but they evolved over time, sometimes to ideal possibilities that are hard to fathom, and sometimes to mere base pleasure. We aspire to fill the gap in the literature by bringing the fundamental ideas of happiness from the economic viewpoint to the forefront. The economic viewpoint embraces moral philosophy, psychology, bookkeeping, efficiency, specialization, states of equilibrium, governance, international relations, and so on. Economics assumes that people want to better their life and its associated happiness. In the world of economics, we rank things according to their usefulness to us, which has an underlying distribution that brings the greatest happiness to us. We measure such happiness by observing the things people choose to buy. Lacking such a basis, we survey people under experimental conditions, asking them questions to discern their states of happiness. A principal axis of happiness is concerned with the divine. It is an axis for reflecting and churning on the realm of truth, bliss, and consciousness. Such aspects of happiness are covered in the literature on religion and mysticism. Our main concern is with happiness on the material plane, which bundles within us the capacity for happiness. The domain of such happiness resides in our functionality and capability, two highways to freedom and justice. In taking care of our need, we have to harness our emotions and feelings that can be culprits in diverting us from the road to happiness. Our feelings and emotions are significant sources of our moral sentiments. Economics tends to strike a balance of some of our moral sentiments that are automatically guided by invisible forces, and some by humans in order to secure our happiness. In the process of preparing this book on happiness, we have accumulated numerous debts and it is our pleasure to acknowledge the individuals and institutions who have made this volume possible. First, we would like to thank Alan Sturmer, our editor, whose personal interest in this project ­x

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Preface and acknowledgments ­xi

was encouraging to us, and Dr Danna Messer for reviewing the manuscript and offering valuable comments. Progress from draft manuscript to final version was aided by Stephanie Miodus, our very talented assistant who currently attends Temple University pursuing a PhD in School Psychology. Michael owes an awesome debt of gratitude to Alan Zimmerman and Iuliana Ismailescu, for their goodness of heart, enduring support, positive attitude, gracious good cheer, and deep friendship. They have an electricity around them and a sense of commitment. In the same category, he would like to include Renee Blinder, Elena Goldman, Laura Nowak, Miriam Tsymuk, Carmen Urma, Sergiu Viorel Urma, and Joshua Zilberberg who are all dear friends. They are a constant source of affection. He also wants to recognize Elki and Chaim Herzog; Batya and Moshe Shain; Chanoch and Ephraim Kunin; Devorah and Nachum Wolmark; Ayala Szenberg and Menachem Yehuda Feifer; and Yaakov Nosson Szenberg. They work with diligence, character, good humor, exactitude, and patience. They have all lightened many a task. Their assistance was incalculable and he is grateful to them. As he strolls down memory lane with my rusty wheels turning, his heart warms with gratitude toward Ester Budek Robbins, Lisa Ferraro, Laura Garcia, Anna Geller, Yelena Glants, Iva Joseph, Janet Lieben-Ulman, Jennifer Loftus, Sadia Nabi, Larisa Parkhomovsky, Andrea Pascarelli, Ira Robbins, Sandra Shpilberg, Marina Slavina, Justyna Tuniewicz, Janet Ulman, and Aleena Wee, my past talented and devoted graduate research assistants who have helped directly and indirectly in more ways than he can list. They all lead successful, productive lives. Their input lives on in these pages. In addition, a number of former students, who are part of Michael’s extended family, deserve thanks for their invaluable input and assistance: Tamar Gomez, Lorene Hiris, Richard LaRocca, Luba Sagui, Cathyann Tully, and Sonja Wiedenmann. They all occupy high educational and administrative positions at various universities and companies. Special thanks to Touro’s Vice Presidents Stanley Boylan, Robert Goldschmidt, Rabbi Moshe D. Krupka, and David Raab, and Deans Henry M. Abramson, Barry Bressler, Sandra Brock, Avery Horowitz, Moshe Sokol, Marian Stoltz-Loike, and Dr Melech Press, Chairman of the Psychology Department, for their ongoing support and commitment to scholarly endeavors and helping Michael navigate Touro’s waters. And to Dr Mark Hasten, the chairman of Touro College’s Board of Trustees and Board of Overseers, for his friendship and support. Michael’s deepest gratitude goes to Dr Alan Kadish, President of Touro College and University System, for his extraordinary leadership, dedication to excellence, kindness, cheerfulness, and inspiration. He is the backbone of the organization, holding the wheel and steering Touro’s ship in the right direction.

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1. Introduction and general overview of economic happiness Through ancient, medieval, and modern times, people have wrestled with the pursuit of happiness. Humans have tried to locate happiness from the points of view of the divine, of man on earth, and some combination referred to as a God-man or superman. The earth was created with resources that can make a person happy by some effort, action, or choice guided by reason. Some psychologists think that to look for happiness through intuition, chance, or grace is a primitive concept. Some philosophers think that there is no path or method to happiness. A set of people think that one can obtain happiness through grace or a gift of God, the Creator, or a supernatural being. Another set of people think that happiness comes as a side-thing from living a virtuous life, and many people think that it correlates with gaining wealth and income. The very definition of being human spans those views. In the twentieth century, the word ‘humanism’ was purged of transcendental religious belief, and specialized to human welfare in earthly life. In Greek times, the focus was on human affairs, but by the time of the Renaissance, this was coupled with the belief in God (Inwood, 1999, 99. 100‒101). For instance, the Dutch philosopher Erasmus of Rotterdam (1466–1536) was a Christian and a humanist, but the German monk Martin Luther (1483–1546) backed away from humanism and moved more towards the soul. Now, humanism is focused on the welfare of the people and not on transcendent religion. From the individual point of view, Ludwig von Mises, a founder of the libertarian school of economics, ‘defines human action as the striving for happiness’ (Mises, 1996 [1949], p. 14). This view holds that we are personally responsible for our own happiness. Humans use their will and understanding to make choices in life, and must live with the consequences, good or bad. The scope of this view is rather wide, including improvement of one’s ego, satisfaction of one’s appetite, people seeking higher or ideal satisfactions, people who seek bliss, and so on (pp. 14‒15). From the social point of view, Kenneth Galbraith, a prominent institutionalist, viewed happiness as ‘The Good Society’. According to Galbraith, ‘In the good society, all its citizens must have personal liberty, basic ­1

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well-being, racial and ethnic equality, and opportunity for a rewarding life’ (Galbraith, 1996, p. 4). This means that the economics of the good society must work for everyone. It must have strong growth and associated employment and income (p. 24). The bottom line is that the good society is a rule-driven rather than a market-driven path to success. Another welfare approach to happiness started with the Bergson welfare function (Bergson, 1982). This function uses an index of utilities, Ui , i 51. . ., N, for each of N people in society. In such a model, one can set up multiple measures of social happiness depending on the social equity one is after. Many analyses are satisfied with just the concept of social efficiency, which is associated with the concept of Pareto efficiency. Pareto’s concept is a relation that states that the utilities each individual gets, Ui, are not dominated by any other utilities, Ui . So it is not the case that, Ui . Ui for all i  1, . . . . . . , N. It is well known that Nicholas Kaldor, Sir John Hicks, and Paul Samuelson extended this criteria to equity issues such as consumer surplus, and that Sen’s paradox found it in conflict with individual rights (Gravel, 2001, p. 164).

SOME GENERAL MEASURES OF HAPPINESS The correlation between happiness, money, wealth, utility, and income has been made throughout history. For The Good Society: There is, first, the absolute, inescapable requirement that everyone in good, even decent, societies have a basic source of income. And if this is not available from the market system, as it is now called, it must come from the state. Nothing, let us not forget, sets a stronger limit on the liberty of the citizen than a total absence of money. (Galbraith, 1994, p. 167)

One measure of the welfare of a nation is the gross domestic product (GDP). Adam Smith, the father of classical economics, wanted to grow the wealth of a nation most rapidly. He chose a self-interest system partly because people who follow their self-interest unintendedly benefit others. Ever since, economists have been concerned with where the system underperforms. For David Ricardo, it was pushing against diminishing returns from nature; for Thomas Malthus, it was rapid population growth; and for Karl Marx, it was class conflict. The major problem with Smith’s system is not that wealth is not produced rapidly, but that it becomes unequally distributed. The Good Society wanted everyone to gain fairly. In neoclassical economics, labor is free to search for its greatest reward, which under the neoclassical system is attained where the marginal product of labor matches its real wage rate. This is easily translated into value of

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Introduction and general overview of economic happiness ­3

marginal product by multiplying the marginal product by prices, implying the use of money. While that procedure works well for labor, it is met with resistance with regard to the marginal product of capital, for the simple reason that capital cannot be easily defined. The state of this discussion is still unsettled, taking the form of debates between the Cambridge Schools at MIT in the USA and the University of Cambridge in the United Kingdom. Many questions surround the use of GDP as a measure of the quality of life. According to Arthur Cecil Pigou, two propositions are discernable: namely, that ‘the elements of welfare are states of consciousness’, and that ‘welfare can be brought under the category of greater and less’, for which money is a practical measure (Pigou, 1920, pp. 10‒11). While GDP is only a part of total economic welfare, the part does affect the whole. This can lead to changes in the non-economic part of total welfare to negate the economic effects (p. 12). Today, a major concern is that the cost of economic growth is destroying the quality of life (Beckerman, 1974, p. 2). Economists consider a plurality of concepts when examining income in correlation with happiness. The popular models are absolute income, relative income, and permanent income. John Maynard Keynes related aggregate consumption, C, mainly to aggregate disposable income, Y, defined as income less taxes and transfer payments. This is a psychological law stating that consumption increases with income but not by the same proportion. The slope of Y is called the marginal propensity to consume, which Keynes estimated to be between 60 to 70 percent in the short run (Keynes, 1972‒89, Vol. VII, p. 128). The Keynesian consumption function sparked a new research programme. Milton Friedman’s work on the permanent income hypothesis (PIH), and Franco Modigliani’s work on the lifecycle hypothesis (LCH) (Modigliani, 1980 [1949]) were in large part the catalysts for their Nobel Prizes in 1976 and 1985, respectively. The PIH‒LCH models reconciled anomalies in the prediction of Keynes’s short-run model. A major anomaly was that the average propensity to consume was over 90 percent, whereas short-run MPC was between 60 and 70 percent. Franco Modigliani (1980 [1949]) and James Duesenberry (1949) reconciled the differences by postulating a previous peak income in the consumption function. Whereas Modigliani’s work evolved into his LCH hypothesis, James Duesenberry’s work evolved into his relative income hypothesis (RIH). In more modern research, Robert Frank has expanded and articulated the RIH paradigm in relation to the question of how current relative consumption will dominate future relative consumption (Frank, 2009, pp. 70‒73, 193‒195). Parents who prefer to buy a house in a good school district now may be negatively affecting their future consumption after

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retirement. Conversely, spending now on a suit for a job interview may have a positive impact on future income. The experience of low relative consumption now may also set expectations for low relative consumption in the future. Juliet Schor’s ‘new consumerism’ is also based on RIH, positing that consumers elevate their consumption to unsustainable levels that lead to mounting debts and bankruptcies, as well as longer working hours (Schor, 1998). John Muth introduced rational expectation into permanent income by an exponentially moving average equal to the conditional expected value under rational expectations (Muth, 1960). Robert Lucas expanded the rational expectation concept by shifting the meaning of the consumption function from relating consumption and income, to relating permanent income and observed income (Lucas, 1976). Robert Hall rescued the consumption function from that line of attack by postulating that only surprising events could be responsible for unexpected results. Hall tested his consumption function in the form Ct11 5 λCt 1 errort, a random walk model, which is easy to measure (Granger, 1999, pp. 42‒43).

UTILITY AS A METHOD The early approach of Jeremy Bentham suggested a cardinal measurement of utility. As Stigler puts it, ‘Bentham has indeed planted the tree of utility. No reader could overlook the concept of utility as a numerical magnitude, and the implications for economic analysis were not obscure. But they were overlooked’ (Stigler, 1965, pp. 74‒75). Some salient facts about Bentham’s view of utility include the following: 1. It is of the form of a motto: Actions are good that promote the ‘greatest happiness of the greatest number’ (Bentham, 1843, p. 5). Bentham intended this saying as an axiom in the sense of Euclid’s axiom in geometry, but surmised that it has practical and empirical justifications. 2. Ethical values such as right and wrong are settled by the motto. If private property, for instance, makes the generality of people happy, then it is good; and if it makes then unhappy, then it is bad (Hobhouse, 1965 [1922], p. 15). 3. It is altruistic in the sense that it gives precision to the command: ‘Love thy neighbor as thyself’ (Hobhouse, 1965 [1922], p. 18). 4. Utility is additive. Total (u) 5 u (x) 1 u (y) , where x and y are commodities, and u is utility. In the case of total social utility, Samuelson emphasized that it does not matter if a redistribution ‘will hurt some and help others provided that those who are helped add more to the total utility than those who are hurt’ (Samuelson, 1966a, p. 241).

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Introduction and general overview of economic happiness ­5

5. Later works on utility developed the ordinal utility concept, where u (x,y) . According to John Hicks, Vilfredo Pareto’s work on the scale of preference was the start of ordinal utility. If ‘we know, for the individual in question, how much utility he would derive from any given set of quantities of the goods on the market. Then we can deduce from this function (assuming always that he will prefer a higher to a lower utility) a scale of preferences; we can say of any two sets, whether he will prefer one to the other, or whether they will be indifferent to him’ (Hicks, 1981, p. 6). This approach paved the way for the logic of choice method to utility analysis. 6. The difference between cardinal and ordinal utility is that the first will add up utilities of separate commodities x and y to get total utility, u, while the latter will consider joint consumption of x and y, such as putting butter on your bread before eating it. Is cardinal superior to ordinal? Ordinal makes more common sense, but cardinal is the preferred tool for modern general equilibrium analyses.

JOHN VON NEUMANN’S AND OSKAR MORGENSTERN’S UTILITY FUNCTION In their famous game theory book, these authors presented their expected utility theorem. With a set of axioms, they prove that a utility function exists that implies that decision-makers behave in a way to maximize their expected utility. To be more precise, they ‘prove that those axioms imply the existence of at least one mapping (actually, of course, of infinitely many) of the utilities on numbers’ (von Neumann and Morgenstern, 1953 [1944], p. 617). In order to grasp the essence of this theorem, we look at Figure 1.1. The figure shows, how two outcomes become utility functions, and how a third outcome can be integrated into the framework by considering the attitude of the agent. This involves the use of axioms, such as the complete and continuous ones used in the figure. Such results in Figure 1.1 can be the outcome of games whose end result on a spanning tree can be in the form of money. The money value will in turn map to utilities for a person. Ranking the utilities helps us to select the worst case and set its utility to zero, and to select the best case and set its utility to unity. One can locate different amounts of money, say x and y, on a horizontal line, and measure their utility on a vertical line in the Cartesian plane. Between x and y so configured, one can place another dollar amount, z, between them and consider varying probability weight, ~, to make x and y indifferent to z, written ~ x 1 (12 ~ ) y , z. We can then proceed with

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Fundamentals of happiness


f(v0) f(z) f(u0)




1. Given u0, v0. By the completeness axiom, rank them as u0 < v0. 2. Set the utility function for u0, v0: f(u0) = 0; f(v0) = 1. 3. From a lottery (a probability distribution) with the utility function yielding  f(u0) + (1 – ) f(v0), where 0 <  < 1. 4. One can now use the continuity axiom to change the value of  in order to get the following indifferent relationship.  f(u0) + (1 – ) f(v0)~Z This will make f(z) fall on a line connecting f(u0) and f(v0). All such f(z) points will stand for risk-neutral situations.

Figure 1.1  Von Neumann–Morgenstern utility concept John von Neumann and Oskar Morgenstern’s utility function that joins x and y with a line going through z, which yields a risk-neutral situation with linear utility functions. Other measures of risks include a risk-averse concave utility function from joining x and y with an arc over z, and a risk-loving convex utility function joining x and y with an arc under z. These functions allow us to have an index to measure risk. One such measure is the Arrow‒Pratt measure of risk-aversion by dividing the second derivative of the utility function by its first derivative to get 2 (urr/ur ) . This formula can measure risk due to income, wealth, or a combination of them using wealth as a constant. Utility theory has been used by Daniel Bernoulli (1954 [1738], pp. 29‒20) to explain a paradox in expected money value (EMV) calculation in the famous St Petersburg paradox. The situation arises because most people will choose a $20 certainty equivalent over a lottery that pays $1 for a streak toss of heads in a coin-toss whose EMV 5 $infinite (Bernoulli, 1954 [1738]). Bernoulli proposed the maximization of expected utility rather than EMV. John von Neumann and Oskar Morgenstern have given

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Introduction and general overview of economic happiness ­7

expected utility theory an axiomatic base (von Neumann and Morgenstern, 1953 [1944]). They were able to derive a utility function U:X S R, that is, U takes X to a real number. So, one can use utility and not indifference curves for choice analysis. The axioms they use are: Completeness. It means given two elements of utility, u,v, then either u . v, v . u, or u 5 v (p. 26). Transitivity. It means ‘whenever x dominates y and y dominates z, then also x dominates z’ (p. 38). Continuity. If v is preferable to u, then even a chance 12 ~ of v, alternatively to u is preferable (p. 27). This can be restated as points in the neighbourhood of v are preferred to u. Independence. For every P,Q, R [ L, and if P is preferred to Q, then a linear combination of P with R will be preferred to the same linear combination of Q with R, that is, ~P1 (12~ ) R s~ Q 1 (12~ ) R. Utility theory figures in the second welfare theorem in economics. If some people are not in their equilibrium position, then it is better to put money in their hands and let them choose the commodities associated with utilities to bring them back to equilibrium. To emphasize, the money method is better than giving people food stamps or other in-kind payments, because money will enable their choice of commodities, so that their demand will be incorporated into the market system to make a more efficient and optimal equilibrium system. In general equilibrium welfare economics, indifference curves are extracted from utility curves. Two traders’ curves can be put into a back-to-back relationship in an Edgeworth box, and Pareto’s optimal outcome is sought (Dobb, 1969, p. 14). More modern applications use a net trade diagram (Ellickson, 1997, p. 19). Through computational general equilibrium analysis, welfare benefits under free trade can be computed for various aggregation of countries or regions of the world. One of our studies calculate the benefits of United States and the Economic and Monetary Union (EMU) of the European Union using that method, when the EMU had just formed. It shows that ‘welfare benefit to the EMU as a group . . . exceeded the total benefits of individual countries if they were non-members’ (Ramrattan et al., 2001, p. 263). In another of our studies we estimated the welfare benefit of Latin America versus the rest of the world. The results indicated through various scenarios that Latin America stands to gain welfare benefits via trade liberalization (Ramrattan et al., 2004, pp. 27‒29).

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A METRICAL MEASURE OF HAPPINESS In developing utility theory, Jeremy Bentham made the proposition of the greatest happiness for the most people. He suggested that pleasure should be measured by such variables as intensity, duration, certainty, propinquity, fecundity, purity, and extent. One can follow Robert McNaughton in translating this concept to a metrical measure of p ­ references (McNaughton, 1953). He specified an interval short enough for the experience of happiness to be the same in the moment. We can then compare those moments in experiences with another moment. Given two such moments in ­experiences, x and y, we can have preference, P, and equivalent, E, relationships between them. Then, we can create axioms for metrical measurement as follows. One assumption is that ‘An individual’s experience can be divided into intervals such that his happiness may vary from one interval to the next, but not within an interval. These intervals will be referred to as moments of experience’ (p. 173). Another assumption is to apply the preference and equivalent operators on x and y to get either P (x,y) , P ( y, x) , or E (x,y) . A third assumption is that ordering moments of experiences is irrelevant in measuring happiness. So, given a pleasant and an unpleasant task, one should think that doing the unpleasant first and anticipating the pleasant is a better way to proceed. A fourth assumption holds that ‘when equals are added to equals the results are equal; and when equals are added to unequals the results are unequal in the same order’ (p. 176). For instance, when we have E (x, y) , then for all z and w, if P (z,w) then P (x & z, y & w), if P (w,z) then P (y & w, x & z), and if E (z,w) then E (x & z, y & w). McNaughton’s fifth assumption skirts the hazy areas of consciousness, unconsciousness, and death. A set of unconscious moments, z, does not count. So, given an experience, x, we can write E (x & z, x), which indicates that z 50. Death is such a moment in which happiness and unhappiness do not count. This might be a surprising conclusion for those who think that death is a release from an unhappy situation or a release from the body as a prison, as Socrates likened. A sixth assumption states that ‘if x is happy then no matter how happy y is it can be surpassed by enough experiences like x. If x is unhappy then no matter how happy y is it can be offset by enough experiences like x’ (p. 177). This can be related to the motto that a rolling stone gathers no moss. On the one hand, if one perseveres in one’s task, one will reach the desired goal and be happy. Or if one perseveres and fails, then one can offset a happy state. One is then interested in how comparisons can be measured in such a calculus. A seventh assumption states that, ‘For every two individuals,

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there is a pair of moments, one from each individual, either both happy or both unhappy, which are empirically equivalent . . . An interpersonal calculus will involve sets of moments not all of which are of the same individual’ (p. 179). From the metrical point of view, McNaughton defines ‘a happy experience as an experience preferable to a moment of unconsciousness, an unhappy experience as one to which a moment of unconsciousness is preferable’ (p. 176). There are some parallels here with what the philosopher G.E. Moore said about the relationship of pain and pleasure to desire. A major difference between pain and pleasure is that when one is in pain, one desires ‘to be rid of the sensation in question . . . that so and so should cease to be the case . . . to avoid it’ (Moore, 1962, p. 31). So, Moore’s solution would be similar to McNaughton’s if one were unconscious of the pain. These views are in line with those who exposed consciousness as a method to realization, and perhaps lend support to Sigmund Freud’s theory that the unconscious contains archetypes that upset the conscious states. But they would be at odds with Carl Jung’s theory that the unconscious is a source of creativeness, which seeks an expression. On the economic side stand those who use pairwise preference to reach the maximum statistical happiness, those who use preference relationships to expound a rational ground for decision-making, and those who use them to prove that a democratic society is impossible. An update of McNaughton’s axioms for modern information modeling shows a major inconsistency. It relates to how observers partition information in intervals of time. This work was started by the philosopher David Lewis and was most notably brought to economics by Robert Aumann. These views are presented in ‘Common Knowledge’, by Werlang (1989). Basically, two observers looking at the same accident for instance are likely to give different police reports. The difference is because one partitions the information in small slots, while the other does so in large slots. In economic jargon, one takes a microeconomic perspective while the other takes a macroeconomic perspective. Because of the ‘fallacy of composition’, the micro perspective does not generalize in a straightforward way to the macro perspective. One may question McNaughton’s time moment axioms by arguing for a space axiom as well. The intention of the space‒time axiom is for one to worry more about the one dimension that he used for the time-moment axiom. But there is a question as to whether happiness in the form of bliss, satori, reveries, nirvana, and Brahman as expounded in several spiritual followings are subject to space‒time analysis. One reads that conscious realization is unbounded, and therefore not subject to metamorphosis. It is not uncommon for economists to refer to bliss states. Frank Ramsey

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proposed an early measure of the state of bliss in economics that is still relevant for modern research (Ramsey, 1928). His theory shows how lifetime consumption and savings converge to that state. Two famous macroeconomic models have dominated the economic literature since then: namely, the monetarist and the Keynesian. The monetarists seek to control the economy through monetary rules that would tie the supply of money to the growth rate of productivity. Such a control would stabilize the economy. Keynesians, however, look at the economy as a state of harmony where the activities in different sectors such as the monetary, real, labor, and production are synchronized. Deviation from such a harmonious state would permit government discretionary policies in bad states such as recession and depression, but the market would take over upon recovery. Keynes developed this short-term harmonious model in his famous book The General Theory of Employment (Keynes, 1972‒89, Vol. VII). Prior to that work, Keynes wrote about the long-term view in his ‘Economic Possibilities for our Grandchildren’ (Keynes, 1972‒89, Vol. IX). The longrun view of Keynes, based on science and technology, predicted a four- to eightfold increase in standard of living over 100 years from 1930.

HAPPINESS IN LITERATURE In the novel The History of Rasselas: Prince of Abyssinia, Samuel Johnson (1889) gave an account of the prince’s pursuit of happiness. Rasselas lived in the Valley of Happiness. One day he decided to pursue happiness in the outer world and decided to journey outside the valley. He discovered several truths about happiness. First, we need mental stimulation to confront stagnation of life; second, no one is perfectly happy; third, pleasure cannot gratify the infinite desire of the longing soul, and therefore one should seek some employment (Kalpakgian, 2018). Johnson’s theories of happiness hold that a person should not ‘neglect the study of himself, the knowledge of his own station in the ranks of being, and his various relations to the innumerable multitudes which surround him, and with which his Maker has ordained him to be united for the reception and communication of happiness’ (Probyn, 1978, p. 259). This view is based on modern ethical concerns since John Locke, selfknowledge, and the practice of Christian piety (p. 259). A now popular book on happiness is The Art of Happiness (Dalai Lama and Cutler, 1998). While the book is by a Western psychiatrist and a Buddhist monk, it speaks to all human beings. The opening pages state that: ‘we are all human beings . . . Our physical structure is the same and

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our mind and our emotional nature are also the same’ (p. 2). The solution to unhappiness is sought in gentleness, goodness, compassion, kindness, and a sense of commonality among all humans (p. 8). The Western approach limits their search for happiness to the conscious and unconscious mind in one lifetime, while the Buddhist goes back to many lifetimes and remains optimistic and realistic. The Art of Happiness gives some propositions that seem free of religious dogma. We may take it as a paradigm for happiness. They are based on morals in many historical schools of thought. Observations of compassion and love, as for instance parents for a child or between friends, give one the general idea that humans are by nature capable of attaining happiness. The function of awareness, which we all have, is the primary tool for the mind to attain that state. But one has to invoke determination and the human will and make effort towards progress. As we go through happiness from the economic standpoint, we will look for some of the following propositions at work:   1. The purpose of existence is to seek happiness (p. 16).   2. Happiness is determined more by one’s state of mind than by external events (p. 20).   3. Our feelings of contentment are strongly influenced by our tendency to compare (p. 22).   4. The true antidote of greed is contentment (p. 29).   5. Human bonds can give rise to a sense of worth and dignity (p. 31).   6. Right now, at this very moment, we have a mind, which is all the basic equipment we need to achieve complete happiness (p. 31).   7. Maintain a feeling of compassion, loving kindness, then something automatically opens your inner doer (p. 40).  8. We must develop an appreciation and awareness that our human nature is fundamentally gentle and compassionate (p. 48).  9. To make war or act violently is not genetically programmed into human nature (p. 58). 10. Realizing the value of compassion and then cultivating it is favored over working on social skills or external behavior (p. 71). 11. In relationships, the first stage involves deliberately reflecting on the underlying nature and basis of the relationship; bases of wealth and power versus human feelings of closeness, sharing, and connectedness (p. 99). 12. Transform our attitude towards suffering and adopt an attitude that allows greater tolerance of it (p. 140). 13. We often add to our pain and suffering by being overly sensitive, overreacting to minor things, and sometimes taking things too personally (p. 152).

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14. It is a process of learning, training, and getting used to new viewpoints that enables you to deal with difficulties (p. 176). 15. Learning with awareness leads to conviction, in turn leading to a determination to change, which then needs effort to lead to a new habit pattern (p. 220). 16. If you encounter problems or obstacles, stand back and take a longterm over a short-term view (p. 226). 17. Make a distinction between your ideals and the standards by which you judge your progress (p. 232). 18. We have a capacity to isolate parts of ourselves that we seek to eliminate and do battle with them, based on our capacity to adopt different perspectives (p. 236). 19. Our positive states of mind can act as antidotes to our negative tendencies and delusory states of mind (p. 239). 20. Being honest with oneself and others about what you are or are not capable of doing can counteract a lack of self-confidence. Honesty and self-confidence are closely linked (pp. 280‒281). 21. All individuals sincerely wish for their own happiness (p. 286). 22. In some sense, we have the capacity for and intelligence of mental health, based on our knowledge, awareness, and positive determinations (pp. 289‒299).

SCOPE OF HAPPINESS Ancient thoughts on happiness are linked with the idea of the supreme good. According to the philosopher Immanuel Kant, ‘The supreme created good is the most perfect world, that is a world in which all rational beings are happy and are worthy of happiness’ (Kant, 1963, p. 6). This implies that there are some ethical considerations underlying happiness. If one attains happiness through unjust means, then one will be unworthy of happiness. Seen from the point of the ancient’s concept of the supreme good, wealth and health are needed for well-being, but they must be coupled with merit or well-doing as well. The unity of well-being and well-doing can be traced to the Cynic’s concept of simplicity and the Epicurean’s on prudence. As we shall show in the next chapter, other schools such as the Sophist were linked to Socrates, Plato, and Aristotle and anchored those concepts in knowledge and wisdom. For instance, wise persons hankered after the truth, and grasp things further removed from the senses. This contrasts with the Cyrenaics who seek pleasure. Many schools have considered happiness as a state of mind. One major

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exception is Ludwig Wittgenstein, who held that the world is the totality of facts and not state of mind, which we will examine in Chapter 2. For the state of mind view, we gather data from the gateways of our senses to create images. Many images combine over time into ideas, says Hume (1992 [1740], p. 4). The human mind is constantly going over these ideas, perhaps overacting, being too sensitive, or perhaps not allocating time to love and to be. Out of that process, vice and virtue that make up the classic summum bonum or supreme good arise, not from reason, but from feelings (p. 479). As for the path to happiness, Bertrand Russell wrote: ‘It is a commonplace that happiness is not best achieved by those who seek it directly’ (Russell, 1957 [1917], p. 29). He explained that people seek to know the world ‘through the distorting medium of their own desires’. One should rather seek the facts (p. 29). Russell held a propositional theory of facts, while Wittgenstein held a picture theory. On the one hand, some ancient philosophers such as Heraclitus and Plato taught mysticism, ‘a certain intensity of depth and fillings in regard to what is believed about the universe’ (p. 2). On the other hand, Parmenides’ advice to Plato ‘not to despise even the meanest things’, Russell called ‘the genuine scientific temper’ (p. 7). Russell’s view was that temper involves a marriage of our ideals with the world (p. 7). This view is exemplified in his other work, The Conquest of Happiness, where he gave commonsense guidance to conquer unhappiness relating to family, work, love, health, and charity (Russell, 1939, p. 198). Russell stated that our conception should be related to space, time, matter, and cause (Russell, 1957 [1917], p. 130). We are concerned with cause when we say that happiness depends on our state of mind, which is an ‘assemblage of particulars’ of matter in the mind. Russell thought of entities in the world, particulars, as analogous to notes in a symphony that have time duration. Such matters call for a distinction to be made between mental and physical states. Mental means believing, doubting, wishing, willing, being pleased or pained, and general perceiving (p. 125). Amartya Sen was concerned with some ambiguity with the concept of space and poverty: inequality. There is a problem of the choice of ‘evaluative space’ distributed over many variables: income, wealth, utilities, resources, liberties, rights, quality of life, and so on (Sen, 1991, p. 4). This matter was also broached in his work on ‘The Standard of Living’, where he wrote: ‘Within the general notion of the living standard, divergent and rival views of the goodness of life co-exist in an unsorted bundle’ (Sen, 1998 [1987], p. 1). He wrote of being well off without being well, or being happy without freedom. Generally, Sen looked into the philosophical and economic sides and made two distinctions of utility theory. From the side of revealed

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­ reference, utility is seen as something to maximize, ‘the maximand of a p person’s choice behavior’, while the other view represents ‘the person’s self-interest or well-being . . . (or even the welfare) of a person’ (Sen, 2002, p. 27). It appears that Sen is arguing for a contemporary research programme in the utility and welfare economic area. The utility-based theory in welfare economics has degenerated, but he noted that ‘the decline of utilitarianism has not led to the rise of a freedom-oriented perspective’ (p. 8). Some progress has already been made in measurements in the form of levels of living, base need fulfillment, quality of life, or human development, but they are not well founded on well-being or freedom concepts (p. 8). Frederick Hayek has written a lot against social justice in his research programme of the economic world of physical and sensory order (Hayek, 1976 [1952]). His methodological individualism believes that only the individual has access to information for economic choices. The information for people’s decision-making is stored in a person’s ‘neural order’ which belongs to the brain, a physical domain. A person knows best what is good for their happiness. Injustice occurs when another, a social planner of government, interferes intentionally with a person’s judgment without their consent. Coercion produces injustice, and it is the state’s function to remedy that. Bad luck and misfortune depend on the charity, altruism, humanity, and so on, of others. One of the oldest concepts of happiness is tied up with love. According to Gottfried Leibniz, ‘to love is to take delight in the happiness of another, or, what amounts to the same thing, it is to regard another’s happiness as one’s own’ (Leibniz, 1951, p. 559). Again, ‘Love is this act or active state of the soul which makes us find our pleasure in the happiness or satisfaction of others’ (p. 564). Sometimes we perceive a beautiful object that produces happiness, and those affections become pure love (p. 560), but love of God surpasses all other love because it is divine. It yields the greatest results, is the most beautiful, the worthiest, and has the greatest power and wisdom. ‘Wisdom is nothing else than the very science of happiness’ (p. 560). Such a science is just as well, for ‘Justice is fundamentally nothing else than charity conformed to wisdom’ (p. 560). To sum up his views on love, Leibniz states the following: ‘Justice is the charity of the wise; Charity is general benevolence; Benevolence is the habit of love; To love anyone is to delight in his happiness; Wisdom is the science of happiness; Happiness is durable joy; Joy is the state of pleasure; Pleasure or delight is a sense of perfection’ (pp. 568‒576). The highest state of happiness or bliss is generally stated as a Godly quality. Such a quality or state escapes a definition, but looked at from the point of view of human beings, we can consider it as belonging to a state

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of mind. This work is not just an appraisal of contemporary research on happiness sprouting from utility analysis. It accepts the two strands of utility trends that Sen has identified, including topics in the new direction that the field is tending towards. If happiness is something invented by man, then we can ascertain its limits and originality, but it appears as philosophical or empirical concepts to people. If empirical, we will fail to know its limits or origins. If it is an a priori philosophical concept, we can always doubt its completeness. More and more examples of it can only make it probable, but not certain (Caygill, 1995, p. 153). The concept of happiness in Greek writings seems to be a condition on the good life. Today we are divided between looking for happiness inwardly or outwardly. The former is the preferred approach of the spiritually inclined, and the latter is the preferred approach of most scientists. Early approaches to the utility theory of happiness took a subject approach. Later approaches such as the revealed preference theory tried to make it objective by using consumer choices as data. Earlier, Pareto had taken the whole indifference curve approach as data to set economics on a scientific basis to build the theory of choice (Mitchell, 1969, p. 412).

OUTLINE OF THE BOOK Chapter 1: Introduction and General Overview of Economic Happiness In this first chapter, we painted the background upon which we will draw our economic concepts of happiness. We found the domain of the concept to be an open set of ideas. The concept of utility is prominent in that domain and is of paramount importance in the development of economics. It concerns the happiness of individuals and society, which have measurement challenges. One may take a subjective or objective approach to economic happiness based on one’s inclination. That is the bird’s eye view of the project at hand, which is elucidated in different chapters specializing on the substantial ideas found in the literature. Chapter 2: Ideas (Fundamental) of Happiness and Well-being: Ancient, Medieval, and Modern This chapter builds on some major moral and philosophical theories from the ancient, medieval, and modern schools that form the foundation of utility analysis. Greek thought on happiness had been the foundation for the study of happiness. The thinkings are most linked to ethical aspects, although every other aspect, such as political, legal, and philosophical,

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also matters. We start with the Sophist school, with dialectical reasoning about happiness, which was picked up by Socrates, Plato, and Aristotle. Those ideas are then contrasted with the Cyrenaic, Cynics, Epicureans, and Stoics. A figure is included of the intercorrelation of Greek thought on happiness. Chapter 3: Economics and Happiness In this chapter, we look at some broad sources of the economics of happiness. Starting with a classification of the subject based on psychological, individual, social, and institutional views of happiness, we then move to how the historical schools of thought explicitly or implicitly deal with the matter. Chapter 4: Subjective Studies in Income and Wealth: Can Money Buy Happiness? The objective of this chapter is the study of theories and measurement of subjective well-being. The works of Richard Easterlin and Angus Deaton, using the survey methodology of Hadley Cantril and the Gallup Poll, as well as Daniel Kahneman, take up the study of the long- and short-term structures of the mind. Positive theory such as the prediction by Paul A. Samuelson of consumer preferences from their consumption pattern are studied. John von Neumann and Oskar Morgenstern’s axiomatic utility framework is investigated as the foundation of modern analysis of utility. Chapter 5: Social Welfare and Happiness In this chapter, we direct our study of happiness to that of society and the welfare of mankind. This requires focusing on social relationships and the social skills, ties, and support that may contribute to happiness. Humans find happiness by participating in groups. The concept of group rationality reveals that each individual gets benefits from such membership. For instance, you may not be able to adequately protect yourself and your property, so you turn to society. The will of individuals guards self-interest, but there is a general will which guards common interest, according to Jean-Jacques Rousseau (1978, p. 72). The general will is a compelling force, and may not work in a way to provide individual happiness. There are many theories associated with a happy society.

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2. Ideas (fundamental) of happiness and well-being: ancient, medieval, and modern All Western thoughts have some ideas on happiness rooted in arguments for or against Greek philosophies on the subject. Even the Old Testament is said to be rooted in Plato’s thought, and we know that the schoolmen such as Augustine and Aquinas cherished Aristotle’s philosophy. As we are economists, we will only be concerned with other disciplines that have implications for our subject area. We say this because Adam Smith made moral sentiments the backbone of his economic system, being influenced strongly by the philosopher David Hume. The utilitarian philosophers – Bentham and Mills in particular – build on that foundation, which places utility revolution at the heart of the Marginal Revolution founded by Walras, Jevons, and Menger. In turn, this was foundational material for general equilibrium analysis that reached its height in the Arrow‒Debreu model, which is now being applied to business and economics in regional and global settings. In the West we can classify happiness studies according to the Greek, medieval, and modern times. Figure 2.1 shows the main links between Greek schools of thought on happiness. In the cross-shaped area, we have the core schools that have strong influences on the subject even today. At the head of the cross are the Sophists, who introduced a brand of ­dialectical reasons about happiness, which was picked up by Socrates.

ON THE SOPHISTS Protagoras was a leading figure of the Sophist school. In his book Theaetetus, Plato quoted Protagoras as saying, ‘man is . . . the measure of all things, of existence, of the existence of the things that are and the non-existence of the things that are not’ (Plato, 1913, p. 41). Everything, including happiness, is therefore subjective. Happiness becomes a thing of the ego, for the word ‘man’ in the statement is a substitute for ‘I’ (Heidegger, 1991, pp. 91‒92). ­17

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Cyrenaics: A good life gives pleasure. They started hedonism (WL, p. 94).

Sophists: Asked whether the good life is from nature, customs, or convention. Their motto is ‘Man is the measure of all things’ (WL, p. 93).

Cynics: Good life is independent of desire and satisfaction. Pleasure is not related to goodness (WL, p. 95).

Socrates: Practice sophistry by asking question about conduct. His mottos: ‘Virtue is knowledge’ and ‘Know thy self’, are based on human nature (WL, pp. 93–94). Plato: Nature assigns happiness; it comes from education, just conduct and justice. ‘Desiring the good: it comes with wisdom’ [MS]. He developed the “Idea of the good” (WL, p. 94).

Epicureans: Founded by Epicurus [HS]. Follow the Cyrenaics. Good things satisfy desire.

Aristotle: Happiness is virtue; the end of all action; life with security, property, and pleasantness; prudence and wisdom conjoined with pleasure; pure morals; to do and live well, and have adequate goods for a lifetime [TK].

Stoics: Founded by Zeno. Follow the Cynics. They avoid feelings and rational pursuit of duty; pleasure leads away from rational living. They embrace nature: laws of morality are laws of nature (WL, p. 95).

The cross in the middle shows the basics of Greek ethical thought. The arrows in those boxes indicate: Socrates follows the Sophists; Plato follows Socrates; Aristotle follows Plato and Socrates; Epicureans follow the Cyrenaics and Stoics follow the Cynics. Boxes in the four corners show schools that branched from basic Greek thoughts. [HS] = Sidgwick (1886). [MS] = Stockhammer (1965b, pp. 112‒114). [TK] = Kiernan (1962, pp. 286‒289). [WL] = Lillie (1971 [1948]).

Figure 2.1  Happiness and pleasure in the Greek period, 500 BC to AD 500 In his book Sophist, Plato did not find this school easy to describe, so he compares it to the angler (Plato, 1913, p. 273). Anglers belong to the category of product art, concerned with knowledge, money-making, fighting, and hunting, which are not creative, but instead deal with coercion (p. 275). They are concerned with soul and art merchandising (p. 278). A Sophist is also ‘an athlete in contests of words who has taken for his own the art of disputation’ (p. 319). Protagoras wrote a textbook on wrestling and other arts (p. 323). One finds that even when one Sophist meets another, there is going to be a contest over some idea. They think that a contest is the ‘eternal source of life’ (Nietzsche, 1988, pp. 36‒37). If the contest were to end by declaring a winner, then life may be threatened.

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Sophists corrupt the minds of youth, yet people are willing to pay them for their teachings. One might think that they know the subject they teach. But Plato thinks that ‘it is a sort of knowledge based upon mere opinion . . . not true knowledge’ (p. 325). So, happiness would be different for each person. Schopenhauer described the premise of their syllogism as hasty, as they would lay out their premise, then generalize it, and base their conclusion on the generalized part. For example, if the premise is feelings, then many types of feelings are described. A drawback of this school of thought is that happiness is linked to money-making. As Schopenhauer wrote, ‘The making of money by philosophy was regarded by the ancients as the characteristic of the Sophists’ (Schopenhauer, 1909 [1818], p. xx). Philosophy degenerates into Sophistry when ‘I sing the song of him whose bread I eat’ (p. xx).

ON THE CYRENAICS The school was founded by Aristippus of Cyrene, and named after that place. Aristippus’ daughter, Arete, passed the teachings on to her son, named Aristippus the Younger. Adam Smith credits the Cyrenaics for founding the Hedonists school. ‘Aristippus of Cyrene [was] a companion of Socrates, noted for a combination of sensuality and self-control. He is often said to be the founder of the Cyrenaic philosophy of hedonism, but modem scholars think this is probably a confusion with his grandson of the same name’ (Smith, 1984 [1759], p. 214). For the Cyrenaics, ‘we know infallibly our own experiences but we can know nothing about things in the world’ (Tsouna, 1998, p. 261). One implication here is that only we can know what is pleasurable for ourselves, and therefore can specialize in our own pleasurable activities. To take an example from a modern economic perspective, only a person has access to the information stored in their brain cell. The individual, therefore, will be in the best position to use that information in order to be happiest. Their hedonistic system made pleasure the goal of life. In terms of time, present pleasure is preferred. This means that expected pleasure in future time should be discounted, foreshadowing the concept of time discounting in economics developed by Eugen von Böhm-Bawerk and Irving Fisher.

ON THE CYNICS The main founder, Diogenes (412–323 BC), is today likened to a syndrome. A person with severe lack of self-care and care for others comports with

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the saying ‘don’t be cynical’ in everyday use. Diogenes lived in a wine barrel or jar. His life was simple, and his behavior was shameless. Such a life is truly unhappy if not by choice. But we are told that Diogenes did this for some other end. He wanted to live a natural life with only the necessities. Plato daubed Diogenes a ‘Socrates gone mad’, and Aristotle call him a ‘dog’. But Diogenes wanted to know what a true human was. He carried a lamp around, seeking to find the true human. The Cynics raise the question as to what is the truth about a happy life.

ON THE EPICUREANS Boris Nikolsky argued that Epicurus (341–270 BC) had a static concept of pleasure dealing with states of rest, and a kinetic concept of pleasure dealing with motion (Nikolsky, 2001, p. 440). The traditional explanation is that one receives kinetic pleasure when satisfying a desire, and static pleasure when one’s desires are satisfied. A distinction is made between the pleasure of drinking and that of satisfying thirst: ‘when thirst is being satisfied, it is the gustatory organs that experience pleasure, and when it has been satisfied, it is the stomach that enjoys it’ (p. 442). Epicurus also likens pleasure to the natural state of things. ‘In Epicurus’ opinion, pleasure is experienced when the atoms of a human body, acted upon by a certain force, find themselves in their proper places, i.e., when the organism attains its natural state under the effect of some influence’ (p. 446). This idea justifies why economists seek equilibrium in market analysis. From Adam Smith we get the ideas of natural rights, liberty, prices, wage, and profit. To restore one to its natural or proper place is a happy outcome. Divergent and often complex forces come to rest or are harmonized. Democritus (460–370 BC) was a strong follower of Epicurean philosophy. Democritus believed that ‘delight’ is the highest good. It produces a stable mind, free from the control of desires (Sidgwick, 1886, p. 15). Anger, for instance, should be controlled; and by understanding death, one becomes free of anxiety. Democritus had one foot in rationalism, and the other in humanism. Laws, customs, and language are conventional, not natural, and we should be responsible for them. The philosopher Karl Popper has made a good summary of Democritus fragments (Popper, 1945, pp. 185‒186). They include the following: ●● ●● ●●

Feeling and not fear tells us not to do wrong things. Respecting others is the base of virtue. A person is a little world of their own.

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We should help those who have suffered injustice. Good deeds and not words really count. Better to find a causal law than to be a king.

Democritus discusses matters of moral conduct, which were later picked up by Adam Smith. He held that ‘it is worse to do than to suffer injustice, that not only wrong-doing but wrong-wishing is bad and hateful, etc.’ (Sidgwick, 1886, p. 16). Democritus and Epicurus were the subject of Marx’s materialist conception of society. Marx’s dissertation was titled ‘On the difference between the Democritean and Epicurean Philosophy of Nature’ (Marx and Engels, 2010 [1836‒43], pp. 25‒109). Democritus represents the material side of things, while Epicurus represents the harmonic side of things (Russell, 1945, pp. 72, 243). For the Democriteans, the atom is the basis of the soul and thought is a physical process. For the Epicureans, goods things satisfy our desires with an emphasis on pleasures. For economists, it is ‘the fundamental view of the moralists called Utilitarians in modern times’ (Lillie, 1971 [1948], p. 95).

ON THE STOICS Diogenes Laertius wrote that Zeno, the founder of the Stoic school, was a student of Heraclides (Laertius, 1828, p. 103). Zeno took to philosophy after having read Xenophon’s Memorabilia (p. 259). Thereafter, he became a pupil of Crates. Zeno advised that one should disregard ‘popular kinds of instruction which tends only to the corruption of the morals’ (p. 262). One should follow and aim toward perfect virtue, temperance, modesty, and contentment through cultivating a noble nature of the soul. Zeno was concerned with practical things. One should be ‘ashamed . . . to pick out and recollect anything bad . . . but not to regard or remember whatever is said that is good’ (p. 266). When listening to a good argument, one ‘ought to be so attentive to all that is said as to have no leisure to take notes’ (p. 266). For Zeno, a friend means ‘Another I’ (p. 267). We have ‘two ears and only one mouth, that we may hear more and speak less’ (p. 268). We should be austere particularly in entertainment because ‘it was better to trip with the feet, than with the tongue’ (p. 269). He was the first to recommend ‘a clear enunciation of principles, as the best remedy for error’ (p. 271). Zeno lived until his eighties. His philosophy puts logic first, natural philosophy second, and ethics third (p. 274). He said that the chief good was to live according to nature, since individual nature is part of

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universal nature (p. 291). For Zeno, happiness lies in Virtue, about which he wrote: virtue is a disposition of the mind always consistent and always harmonious; that one ought to seek it out for its own sake, without being influenced by fear or hope by any external influence. Moreover, that it is in it that happiness consists, as producing in the soul the harmony of a life always consistent with itself. (p. 292)

Zeno wrote widely, but none of his original works survived. When he died, he uttered, ‘See, I come, why call me thus impatiently?’ (p. 271). There was a resurgence of Greek Stoicism around the Roman Imperial times. It was popularized by three notable persons involved with matters of practical affairs that would free one from suffering, namely Seneca, Epictetus, and Marcus Aurelius, who were separated by about a century. We summarize the essence of their teaching on happiness as follows. Epictetus (c. 55–135 AD) Epictetus was once a slave, and his owner allowed him to study Stoic philosophy. A model for Epictetus’ thought is set theory. There exists a set of things within us which can make us happy. Similarly, there exists a set of things outside ourselves that can make us happy, but these are not within our control. One should choose the former set of things and not long for the latter. The gods have placed the ‘Reasoning Faculty . . . in our own power; but all other matters, they have not placed in our power’ (Epictetus, 1865, pp. 3‒4). As far as our bodies, properties, desires, and aversions are concerned, they are appearances, of which some are ‘finer mixture[s] of clay’. We should use ‘faculty of exerting the powers of pursuit and avoidance’ of these appearances (p. 4). Epictetus urges us to use our free will to ‘distinguish between what is ours, and what is not ours; what is right, and what is wrong’ (p. 6). We must learn to be content with what is ours. For instance, to place our desire and aversion beyond that of ‘tyranny and chance’. Even death should not disturb us, since we are merely returning what is not ours (p. 7). What is reasonable for one person may be unreasonable for another. Epictetus urges us to withdraw from external things and focus on our own will, training it to conform with nature (p. 15). It is our own opinion and principles that direct our actions, ‘neither death, nor exile, nor pain, nor anything of this kind, is the real cause of our doing or not doing any action’ (p. 39). Epictetus urges us to remember that ‘our souls are thus connected and intimately joined to God, as being indeed members and distinct portions

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of his essence’ (p. 46). He believed that ‘God is within’, so we cannot deceive God (p. 47). Lucius Annaeus Seneca (c. 4 BC–65 AD) A possible model in Seneca is as follows:

Happiness 5 Extinguish or Control of (Anger) 5

k 0 (Your Soul 2 Your expectation of others) 0

We used absolute value signs to indicate that some souls are tranquil. The soul is a virtue but can be submerged. The soul of a person is an anchor point. ‘Greatness of soul is a virtue that is seemly for every human being’ (Seneca, 1928, p. 371). But ‘If the soul could be shown, if it were in some substance through which it might shine, its black and mottled, inflamed, distorted and swollen appearance would confound us as we gazed upon it’ (p. 249). Again, we read that, ‘If the soul is sick and because of its own imperfection unhappy, a man may end its sorrows and at the same time himself’ (p. 295). Your expectation of others should be a conditional one. A person who shows anger at you might be just reacting to their own disappointment. Several quotes attest to this. We should think of k in the equation as an adjustment process. One path to adjustment is to ask, ‘What bad habit have you cured today . . . Anger will cease and become more controllable if it finds that it must appear before a judge every day’ (p. 341). We should ‘give to the soul that peace which is afforded by constant meditation on wholesome instruction, by noble deeds, and a mind intent upon the desire for what is honourable’ (p. 349). Seneca described anger as ‘the most hideous and frenzied of all the emotions. For the other emotions have in them some element of peace and calm, while this one is wholly violent’ (Seneca, 1928, p. 107). Some call it ‘temporary madness’ (p. 107). ‘Anger I say, has this great fault – it refuses to be ruled. It is enraged against truth itself if this is shown to be contrary to its desire’ (p. 157). Therefore, he set out to allay anger perhaps because it is standing in the way of one’s happiness. ‘It is no idle tale that I come to tell you. The road to the happy life is an easy one; do but enter on it – with good auspices and the good help of the gods themselves . . . Anger must be dislodged’ (p. 197). Seneca wrote that anger is contrary to nature (p. 123). Because it is useful to arouse and incite bravery, which is needed in war time, then it is better to

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control than to extinguish it. But ‘the mind – if it plunges into anger, love, or the other passions, it has no power to check its impetus; its very weight and the downward tendency of vice needs must hurry it on, and drive it to the bottom’. So, Seneca suggested to nip anger in its bud: ‘The best course is to reject at once, the first incitement to anger, to resist even its small beginnings, and to take pains to avoid falling into anger’ (p. 125). The remedy for anger comes in two rules: ‘not to fall into anger, and in anger to do no wrong’ (p. 203). For instance, ‘be more just to transgressors, more heedful to those who rebuke us; especially let us not be angry with the good . . . and least with the gods’ (p. 225). Suppose you are angry that someone spoke ill of you, then: consider whether you spoke ill of him first, consider how many there are of whom you speak ill. Let us consider, I say, that some are not doing us an injury but repaying one, that others are acting for our good, that some are acting under compulsion, others in ignorance, that even those who are acting intentionally and wittingly do not, while injuring us, aim only at the injury; one slipped into it allured by his wit, another did something, not to obstruct us, but because he could not reach his own goal without pushing us back; often adulation, while it flatters, offends. (p. 227)

‘The best corrective of anger lies in delay’ (p. 229). This gives us time to judge the situation better. If we need to be angry, we should make it piecemeal so that its impact will not be heavy. We can also delay by asking people who brings bad information to prove or testify to it. So far, we have addressed the point where you receive an injury and how to handle anger. But what if you receive an injury unjustly (that is, you do not expect it) (p. 233)? This is because you have ‘excessive self-love . . . a King’s point of view’ (p. 223). Then arrogance or ignorance will lead us to anger. ‘Always believe that there will come some blow to strike you’ (p. 235). In modern times, we learn that anticipated impact is less than unanticipated impact. ‘We shall forestall the possibility of anger if we repeatedly set before ourselves its many faults and shall rightly appraise it’ (p. 265). ‘There is no surer proof of greatness than to be in a state where nothing can possibly happen to disturb you’ (p. 269). According to Democritus, ‘tranquility is possible only if we avoid most of the activities of both private and public life, or at least those that are too great for our strength . . . Just as a man hurrying through the crowded sections of the city cannot help colliding with many people’ (p. 269). ‘Fight against yourself! If you will to conquer anger, it cannot conquer you. If it is kept out of sight, if it is given no outlet, you begin to conquer’ (p. 287).

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SOME SIMILARITIES AND DIFFERENCES FOR ECONOMICS The picture of the early groups was about making do with your scarce endowment. As one economic historian puts it, ‘If you’re miserable and poverty-stricken, accept your lot as man’s inevitable fate and try to want no more than you have. This counsel of hopelessness and despair was preached by Diogenes the founder of the school of Cynics, and by Epicurus, the founder of the Epicureans. Diogenes and the Cynics pursued this culture of poverty to such length as to adopt the name and the life of dogs’ (Rothbard, 2006 [1995], p. 20). The Stoics differentiate themselves by following self-command. They tend to confront misfortune with fortitude (Russell, 1935, p. 219). The Stoics look for the necessary explanation of things. They are open to religious thinking. They seem to hold simultaneously that people have free will, and that everything has a cause, which appears contradictory. Also, to hold that there is free will, and that only the virtuous is good, seems to rule out that one can be benevolent (Russell, 1945, p. 266). This view sort of foreshadows Adam Smith’s self-interest without benevolence statement: namely, that ‘it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest’ (Smith, 1976 [1776], pp. 26‒27). The great influence of the Stoics on Smith is given in section b of the introduction of his Theory of Moral Sentiments by the Glasgow editors of his collected works (Smith, 1984 [1759], pp. 5‒9). Besides Aristotle, Plato, and Cicero, it is said that ‘Stoicism is given far more space than any other ‘system’, ancient or modern, and is illustrated by lengthy passages from Epictetus and Marcus Aurelius. (The Discourses of Epictetus seem to have been chiefly responsible for Smith’s early fascination with Stoicism.)’ It is well known that the idea of the division of labor was recognized by Plato. One history of economics text stated that Plato was a ‘forerunner of Adam Smith in his recognition of the fact that the division of labor depends for its advance upon a great increase in the size and complexity of the state’ (Trever, 1916, p. 35). Again, Adam Smith seems to have adopted Aristotle’s concept of value in use and value in exchange, but differed from Aristotle in emphasizing the value of use over exchange (p. 82). Aristotle also discussed the role of demand and cost of production that underlines the value concept in the classical school of economics (p. 84). He preceded Adam Smith in distinguishing two forms of wealth: one for consumption and the other for investment (p. 91). Although Plato and Aristotle saw the use of money, Adam Smith is said to elevate money to a theory of interest by viewing it as stored-up capital, which commands an interest rate

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(p. 93). One can argue with Trever that ‘the Greeks were the forerunners of the moral, humanitarian, and social emphasis in present-day economy’ (p. 148). They were working with the small economies of their time, yet they were able to foreshadow much of the foundation of economics and its associated happiness, while stifling other ideas to come. We point out some of these views below.

ON SOCRATES AND PLATO From Plato’s Protagoras, we learn that Protagoras was a visiting Sophist to Athens, who sells doctrine for money. We learn that ‘Sophistry is an ancient art, and those men of ancient times who practiced it, fearing the odium it involved, disguised it in a decent dress’, which includes the poetry of the famous Homer and Hesiod, mystic rights, athletics, and music (Plato, 1952 [1924], p. 117). Protagoras explained the knowledge to be gained from taking his classes: ‘On the day when you join them you will go home a better man, and on the day after it will be the same; every day you will constantly improve more and more’ (p. 121). It seems that nothing can stand in the way of increasing happiness. But one can ask what the limit of such a process is. Is it eternal bliss? Socrates, Plato’s protagonist, was not interested in the teaching of civic affairs. He wanted Protagoras to demonstrate how to teach virtue (p. 129). The demonstration was a genesis fable. God created man and let each be dealt according to their faculties (p. 129). The god Zeus had sent justice and respect to mankind (p. 153). But Socrates wanted to know whether virtue, justice, and temperance are one or many things, and Protagoras replied that virtue is singular with others as its parts. They are parts as the nose, eyes, and ears are parts of a face (p. 154). The analogy was then extended to whether justice is holiness and holiness is justice (p. 159). But Protogoras would grant that they have some likeness. Socrates then brings in his argument of opposites: ‘Which white resembles black, and hard soft, and so with all the other things which are regarded as most opposed to each other’, ending the argument as a contradiction (p. 161). Protogoras then differentiated his teaching from other Sophists. The others, he said, ‘maltreat the young’ (p. 123). He teaches ‘good judgement in his own affairs, showing how best to order his own home; and in the affairs of his city, showing how he may have most influence on public affairs both in speech and in action’ (p. 125). Socrates was also influenced by Pythagoras, Heraclitus, and Democritus. Pythagoras held that precepts mold one into the ‘likeness of God’ (Sidgwick, 1886, pp. 13‒14). His mathematical thought of squares would

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relate to justice; unity would correspond with the good, and harmonies would relate to friendship, virtues, and health (pp. 13‒14). Heraclitus is known mostly for his saying that because of change, one cannot step into the same river twice. But he had equivalent sayings for happiness as well. He held that human laws draw from divine laws, that reason is common to all, and that to be wise is to understand nature. These teachings of divine, rational, and natural points of view have influenced the Stoics as well (pp. 13‒14). Coming now to Plato, we find that he equated happiness with justice for individuals as well as for the state. Plato had both particular and universal classifications for things. Some of Plato’s major thoughts on happiness include the following (Stockhammer, 1965b, pp. 112‒114): 1. Nature, which should be reckoned in the ideal, fixes the proportion of the several classes. 2. Among human possessions, happiness is the most precious. 3. A happy person is not one who is delivered from evil, but one who does not know evil in the first place. 4. The noble and the good are happy. 5. To use good things, and not merely to have them, makes one happy. In his book Timaeus, Plato relates pleasure and pain to the way impressions are produced in us. He wrote ‘we must conceive of pleasure and pain in this way. An impression produced in us contrary to nature and violent, if sudden, is painful; and, again, the sudden return to nature is pleasant’ (Plato, 1892, p. 569). For Plato, the natural state of things is the state of pleasure, which occurs, for instance, when we are not hungry, thirsty, or cold (Nikolsky, 2001, pp. 445, 447).

ON ARISTOTLE Aristotle wrote: Let us then define happiness as well-being combined with virtue, or independence of life, or the life that is most agreeable combined with security, or abundance of possessions and slaves, combined with power to protect and make use of them; for nearly all men admit that one or more of these things constitutes happiness. If, then, such is the nature of happiness, its component parts must necessarily be: noble birth, numerous friends, good friends, wealth, good children, numerous children, a good old age; further, bodily excellences, such as health, beauty, strength, stature, fitness for athletic contests, a good reputation, honour, good luck, virtue. (Aristotle, 1926a, pp. 47‒48)

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Fundamentals of happiness Domain

Range Perfect Life

Political God


Life of Enjoyment


Imperfect Life

1. On the left are three domains of happiness. 2. Aristotle’s mapping indicated by arrows are from particular domains to range of Man or God. 3. Plato’s mapping is reversed: from God or Man to particulars domains. 4. The mapping goes through the perfect life (not the imperfect one) to yield happiness.

Figure 2.2  Aristotle’s map of happiness Aristotle wrote that ‘happiness is at once the pleasantest and the fairest and best of all things whatever’ (Aristotle, 1936, p. 199). In this, he differs from an inscription on the temple of Leto that he cited: ‘Justice is fairest, and health is best, but to win one’s desire is the pleasantest’ (p. 199). In terms of good and bad, ‘happiness is the greatest and best of human goods’ (p. 221). He does not rule out that happiness can belong to God as well. Figure 2.2 summarizes Aristotle’s view of happiness. He perceived three types of happiness within the domains of three types of life: political, philosophical, and the life of enjoyment (p. 215). From particulars in those domains, a map goes to the universals in the range, filtered by either the perfect or the imperfect life. Only acts that go through the perfect filter are conducive to a happy life. In contrast to Plato’s universal view, Aristotle started with happiness in the particular. He examined the good in virtue, and the minimization of vice. The particular good is chosen because it leads to the final end, namely happiness. A good character may need to suffer immediate pain for a better purpose later on. For example, you may leave a party with friends early tonight, in order to go to work the next day. In the first part of his Nicomachean Ethics, Aristotle (1926b) dealt with

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happiness. It is concerned with what makes our life whole. On one side of life we find joy and success, and on the other side of life we find pain and grief. The young cannot be happy since there are many changes in life. In addition to virtue, it is necessary for the young to have a complete life as well. A story of Solon and Croesus told by the Greek historian Herodotus applies here. When Solon visited Croesus, he was asked who the happiest person was. These points were made: 1. A life must be complete, before a judgment of happiness can be made. 2. In between, you can only say that it is becoming a good life. Like one would say at half-time that the football game is becoming a good game, but you would not know until the game is over. 3. Certainly, the future is obscure to us, while happiness we claim is an end and something in every way final. 4. Happiness is one among many good things. But happiness is the supreme or highest good. Economic Interpretation (Aristotle 1) Happiness is the highest good. Likened to a production possibility curve, a happy man has all the things to make him realize his full potentially. A person may have good health but lacks sufficient wealth, or may have health and wealth but lack friends. You may have good knowledge but lack other human protection. A happy person must have all good things such as health, wealth, friendship, knowledge, and virtue. It is like the whole with no constituent part missing. In terms of a series of questions, one can see the syllogistic arguments for why happiness is an end for Aristotle: Why do you seek good health? Because you want to do good work. Why do you want good work? Etc. Conclusion: because you want to be happy. In this line of questioning, one cannot ask why you want to be happy, because happiness is the highest good. You can only answer with an identity, namely, that you want to be happy because you want to be happy. Happiness is final and self-sufficient. Economic Interpretation (Aristotle 2) ‘He is happy who lives in accordance with complete virtue and is sufficiently equipped with external goods, not for some chance period but

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throughout a complete life’ (Aristotle, 1926b). Economists such as Milton Friedman and Franco Modigliani tried to achieve this objective by some average of one’s wealth or income uniformly throughout one’s expected lifetime. Borrowing and saving during moments of one’s life are smoothed to make this achievement possible. One must make a choice between the pleasures of the moment, and a happy life in the long run. Businesses make these decisions for time frames of short and long run all the time. Short and long run are distinctions described by net investment, that is, changes in the capital stock, between actual and expected, and between entry and exit, to which economists employ terms such as ex ante versus ex post, endogenous versus exogenous. For Aristotle, happiness was not the same for everyone. Some identify happiness with obvious things such as honor, wealth, and pleasure. If someone is ill, they think happiness is good health. If someone is poor, they think it is wealth. The main point here for Aristotle is that happiness is not subjective. It is not an opinion that everyone has. All a miser can think about is that accumulation of wealth is his goal. He lives a separate life from others; he does not engage in his country’s affairs; he is afraid and worries all the time. His miserly life can be a miserable one, like Charles Dickens’s Scrooge, who was not happy until he changed his ways. Economic Interpretation (Aristotle 3) For Aristotle, power over others is not happiness. Everyone has the right to happiness, but power will subjugate some people. John Rawls summarizes Aristotle’s view of power versus happiness as the ‘Aristotelian Principle’ (Rawls, 1971, p. 424f). The principle summarizes how Aristotle relates happiness, activity, and enjoyment in his book Nicomachean Ethics (Aristotle, 1926b, Bk VIII, Chs 11‒14 and Bk X, Chs 1‒5). One view is that happiness and enjoyment come from the exercise of our faculties, and not from being in a healthy or normal state. Another view is that the exercise of natural power is a major human good. Finally, the more complex our faculty becomes, the better our happiness and enjoyment becomes (Rawls, 1971, p. 426). Activity as defined in the Aristotelian principle is not specific. It ‘depends upon a large repertoire of realized capacities . . . that are more complex’ (p. 430). If we consider a chain of activities ordered by inclusiveness, then the nth ordered one will contain information of the n-1 ordered one, so that the nth one will be preferred. A person has a propensity based on natural assets and social circumstance to set their preferences. We also find similar ideas in Aristotle’s Politics. He wrote:

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Ideas (fundamental) of happiness and well-being ­31 happiness, whether consisting in pleasure or virtue, or both, is more often found with those who are most highly cultivated in their mind and in their character, and have only a moderate share of eternal goods, than among those who possess external goods to a useless extent but are deficient in higher qualities; and this is not only a matter of experience but, if reflected upon, will easily appear to be in accordance with reason. (Aristotle, 1999, p. 153)

TIMELINE OF UTILITARIAN HAPPINESS STUDIES At different epochs of history, we find certain concepts of happiness as dominant. Timewise, the Greeks set a strong foundation for the philosophy of the subject. In the Middle and Modern Ages, many researchers have grafted their ideas on Greek schools of thought, orthodox and others as well. The Scottish Enlightenment philosopher and economist, David Hume, stood happiness on the foundation of moral sentiments. One of his followers, Adam Smith placed economics on that sentimental moral pedestal. Adam Smith believed that ‘the chief part of human happiness arises from the consciousness of being beloved’ (Smith, 1984 [1759], p. 41). To the question of ‘What can be added to the happiness of the man who is in health, who is out of debt, and has a clear conscience?’, he answered that ‘to one in this situation, all accessions of fortune may properly be said to be superfluous’ (p. 45). Adam Smith translated his moral findings in his book The Wealth of Nations in 1776 (Smith, 1976 [1776]). As a model-builder, Smith cast a wide net to include natural, psychological, and institutional assumptions in his economic vision. That vision was to grow a nation’s wealth continuously, and most rapidly. It that year, Jeremy Bentham, who had admired Smith’s works, began his utility revolution by proposing to measure happiness in an axiomatic way. We can state his proposition as follows: Proposition (Utilitarianism, Bentham): It is the greatest happiness of the greatest number that is the measure of right and wrong. (Bentham, 1962 [1776], p. 227) Bentham adopted the ‘principle of utility’ from David Hume (p. 242) for his ‘greatest-happiness principle’ (p. 272). In the economic world, the utility doctrine holds that people get utility from the consumption of commodities, constrained by their income. Their optimal satisfaction occurs when the last dollar spent on one item gives the same marginal utility as the last dollar spent on another item to its marginal utility. There remains a question as to whether such a measure is cardinal or ordinal.

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Fundamentals of happiness

Technically, Bentham does not distinguish between pleasure and pain (Russell, 1945, p. 775). Happiness is pleasure relative to pain: ‘The happiness of an individual is greater, in proportion as his sufferings are lighter and fewer in number’ (Bentham, 1962, p. 301). One interpretation shows that the view of justice as equality in Bentham’s work is different from the just as virtue views of Plato and Aristotle. Russell wrote that: when two men’s interests clash, the right course is that which produces the greatest total of happiness, regardless of which of the two enjoys it, or how it is shared among them. If more is given to the better man than to the worse, that is because, in the long run, the general happiness is increased by rewarding virtue and punishing vice, not because of an ultimate ethical doctrine that the good deserve more than the bad. ‘Justice, in this view, consists in considering only the amount of happiness involved, without favour to one individual or class as against another.’ (Russell, 1945, p. 183)

On a logical basis, Robert McNaughton claimed that one uses moments of experiences of preferences to measure happiness in the utilitarian concept (McNaughton, 1953). This requires an individual to cut up experiences into intervals or moments in which the experience of happiness is constant. Given two momentary experiences, x and y, one can then consider P (x, y) as indicating the preference of x over y, while P ( y, x) will be the reversed preference. Indifference of equivalent preference can be indicated by E (x, y) . McNaughton went on to show how to combine equivalent relationships with other variables using quantifiers such as ‘for all’. McNaughton continued his measure of happiness, by assigning the number 1 to a happy experience in a conscious state, and 0 in an unconscious one. If the unconscious moment is defined as z, and we assume E (x, y) , then a combination is E (x & z, y) , where z is 0. He gives a definition of happiness in these terms: ‘It is convenient to define a happy experience as an experience preferable to a moment of unconsciousness, an unhappy experience as one to which a moment of unconsciousness is preferable, and an indifferent experience as one which is equivalent to a moment of unconsciousness’ (p. 176). There are also suggestions for incrementing a happy x over a happy y; and offsetting an unhappy x over a happy y. He also discussed how pairs of moments for two people might appear as equivalent to outside observers, an attempt at interpersonal comparison. One reviewer noted that McNaughton’s approach needs ­improvement from the point of view of completeness and ­consistency (Baylis, 1958, p. 351). Proposition (J.S. Mill, from individual to group happiness to morality): ‘Each person’s happiness is a good to that person, and the general happiness,

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therefore, a good to the aggregate of all persons. Happiness has made out its title as one of the ends of conduct, and consequently one of the criteria of morality.’ (Mill, 1969, p. 234) J.S. Mill was a student first of his father, James Mill, who subscribed to Plato’s moral concept of the good. But he was also influenced by his teacher, Jeremy Bentham. He wanted to reconcile: the principle of utility – the doctrine that all things are good or evil, by virtue solely of the pleasure or the pain which they produce – is as broadly stated, and as emphatically maintained against Protagoras by Socrates, in the dialogue, as it ever was by Epicurus or Bentham. And yet, the general tone of Plato’s speculations seems rather to be favorable to the opinion that certain qualities of mind are good or evil in themselves, independently of all considerations of pleasure or pain. (Mill, 1978, p. 61)

Mill made many statements of happiness, which has compelled M.G. Singer to comment that happiness for Mill was such a complex phenomenon that it is not approachable. He listed six sources or elements in Mill’s discussion of happiness, with the condition that one should not expect more happiness than life can offer: (i) moments of rapture, (ii) in an existence made up of few and transitory pains, (iii) many and various pleasures, (iv) with a decided predominance of the active over the passive . . . (v) cultivating a fellow-feeling with the collective interests of mankind, (vi) mental cultivation, developing one’s mind and sensitivities. (Singer, 2000, pp. 45–46)

J.S. Mill offered proof that happiness is the highest goal in life. He stated that: logic is not the science of belief, but the science of proof, or evidence. In so far as belief professes to be founded on proof, the office of logic is to supply a test of ascertaining whether or not the belief is well grounded. With the claims which any proposition has to belief on the evidence of consciousness, that is, without evidence in the proper sense of the word, logic has nothing to do. (Mill, 1970, p. 5)

What Mill proves about the utilitarian doctrine is that ‘happiness is desirable, and the only thing desirable, as an end; all other things being only desirable as means to that end’ (p. 61). One can put this idea logically by letting S be the subject, and P be the predicate. From Plato’s notion that one comes to know what one believes, we can then set out to prove that S knows P. According to a modern view by Edmund Gettier, we have to

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establish that P is true, that S believes P is true, and that S is justified in believing that P is true (Gettier, 1963, p. 121). As Gettier showed in his article, such a proof can be denied through counterexamples. Mill’s proof on the principle of utility and its consequences (general happiness) pivots on consciousness. We illustrate this below: Premise 1. ‘The only proof capable of being given that an object is visible is that people actually see it . . . In like manner . . . the sole evidence . . . that something is desirable is that people do actually desire it.’ (Mill, 1969, p. 234) On the first point, if happiness is an end, then it is desired for itself. It is a first principle for which humans use their faculties of judgment. As we have faculties for seeing and hearing, we have faculties for desire. The end of goodness is what makes us happy. Therefore, we only must show that people desire happiness (p. 234).   That desire is a given faculty is discerned by being conscious of it. This is saying that we cannot show it by reason. In building our economic system on a moral philosophy, Adam Smith held the psychological assumption, without proof, that we all desire to better our condition. Premise 2. ‘No reason can be given why the general happiness is desirable, except that each person . . . desires his own happiness.’ (p. 234) On this second point, the logical fallacy of composition is glaring, namely what is true for one cannot be generalized in a straightforward way for all. Mill restated this argument to make it seem tenable. In a letter to Henry Jones dated June 13, 1868, he wrote, ‘Since A’s happiness is a good, B’s a good, C’s a good, & etc., the sum of these goods must be a good.’ (Mill, 1972, pp. 1413‒1414) Conclusion: ‘This, however, being a fact, we have not only all the proof the case admits of, but all which it is possible to require, that happiness is a good: that each person’s happiness is a good to that person, and the general happiness, therefore, a good to the aggregate of all persons.’ (Mill, 1969, p. 234)

Some Concerns with Mill’s Proof ‘Quality as well as quantity of happiness is to be considered, less of a higher kind is preferable to more of a lower’ (Mill, 1988, p. 663). Some difficulty exists in the interpretation of this statement because the latter clause is unqualified. One suggested interpretation of this remark is ‘a lower pleasure may be more valuable, where it is sufficiently greater in quantity’, and another interpretation is between ‘little of a fine wine and more of a less good wine’(Saunders, 2011, p. 195). A question arises as to whether Mill’s qualitative versus quantitative analyses are consistent with Bentham’s hedonism. The latter is quantitybased. But Mill included quality because he thought that pleasure is not a homogenous thing. The argument turns to whether pleasure is from

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an activity or from feelings. Pleasure associated with an activity may be homogenous, but pleasure associated with feelings varies in intensity (p. 197). Mill made the point that leaving out intensity, the pleasure from one’s faculty, is of a higher kind than those derived from one’s animal nature (p. 198). Another problem is regarding Premise 2 of the proof: there are some problems with the use of the words ‘desirable’ and ‘desire’. This point is taken up in G.E. Moore’s Principia Ethica as a confusion between positive and normative. He was concerned with ‘What is Good?’ and ‘What is bad?’ which are positive statements, and ‘What ought we to do?’ or ‘What ought we to try to get?’, which are normative statements (Moore, 1959 [1903], pp. 3, 26). These are commonplace statements in all of economic literature. For Moore, the word ‘good’ is a simple term, which means that it does not have constituent parts. The term is ‘indefinable’ or ‘unanalyzable’ (p. 17). If one tries to define it by natural terms such as happiness and pleasure, one creates ‘the naturalistic fallacy’. Moore sided with William Sedgwick in holding that Bentham was absurd when he made the following two statements: ‘the greatest happiness . . . as being the right and proper end of human action’ and ‘that he means by the word “right” conducive to the general happiness’ (p. 17). Moore went on to analyze Mill to see whether he committed the naturalistic fallacy, and maintained a clear distinction between ends and means, which are also common terms in the economic literature. His analysis of Mill is regarding ‘that pleasure is the only thing at which we ought to aim, the only thing that is good as an end and for its own sake’ (p. 64). He found that Mill equated ‘desirable’ with ‘pleasant’. It should be the consequence of desire that is pleasant. For Moore, this meant ‘pleasure is the only thing desirable’, and that ‘pleasure alone is good as an end’ (pp. 65‒66). We must keep in mind that ‘the utilitarian doctrine is, that happiness is desirable, and the only thing desirable, as an end; all other things being only desirable as means to that end’ (p. 66). Moore contends that ‘desirable’ is a normative (ought) statement, so we cannot use a positive test such as what is actually desired in the proof. In Moore’s world, ‘desirable does indeed mean “what it is good to desire”; but when this is understood, it is no longer plausible to say that our only test of that, is what is actually desired’ (p. 67). A comprehensive look at Mill’s proof from a historic point of view is given in Necip Fikri Alican’s (1994) book. Alican gave comments made by several philosophers: Henry Sidwick, F.H. Bradley, William Sorley, John Dewey, John Makenzie, and G.E. Moore (Ch. 2). However, we think that John Rawls’ comment also needs to be visited as it adds a pervading economic thought about economic equity.

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John Rawls thought that Mill’s proof is an argument that happiness is the only good. He pointed out that it sidetracks the role of intuition when trying to justify utility based on consciousness. ‘Then as even intuitionists concede, it is at least a prima facie principle of right to maximize happiness. If this principle is not alone regulative, there must be some other criterion such as distribution which is to be assigned some weight’ (Rawls, 1971, p. 562). As we know, equal distribution in the economy is not achievable, because Adam Smith has made inequality an assumption in his model for capitalism. In the bigger picture, Rawls is arguing for distributive justice that follows from the principle of right. Our Extension of Mill’s Proof We summarize Mill’s proof by way of Table 2.1. The first column in the top half of the table shows the faculties Mill relied on as bases of the proof. The last column in the top half shows that the methodology used is mainly positive except for the terms ‘desire’ and ‘desirable’, which are sometimes considered as normative. We extended the list in Table 2.1 to include the terms ‘body’, ‘mind’, and ‘intellect’, generalizing the faculties on which Mill’s proof is based. For the extended items, there exists a being that feels, perceives, and thinks. As indicated at the bottom of the table, the methodology of the faculties are covered by the terms in the extended list. As Mill’s argued that happiness is the end towards which everything is inclined, these terms will include the faculty items in the process. Therefore, Mill’s proof seems tenable without the normative (ought) argument. In support of the extended list of mind, body, and intellect, we note with Kurt Smith that ‘any account of Cartesian sensation at the very least must account for sensations in terms of the ontology. The account must say whether they are modes or not, and if modes, modes of what – mind, body, both, the union, and so on’ (Smith, 2005, p. 564). One also finds ample support from Vedanta philosophy. There is support for not carrying the extended list under logical positivism as well. We read that ‘the logical positivists denounced ontology as a branch of metaphysics that is either trivial or meaningless. Proper philosophy does not make claims about reality. Instead of trying to compete with science, it turns into the “logic of science,” a second-order investigation into the conceptual framework of the special disciplines’ (Glock, 2002, p. 245). One also needs to consider that some philosophers tend to devalue ontology. They include Wittgenstein’s objectual, Ryle’s existential, and Carnap’s linguistic deflationism. Quine, for instance, thinks that only pure sets exist, and that they do not contain individuals (pp. 236‒237).

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Table 2.1  Robustness of Mill’s proof based on methodology Faculties

Proof that



Sight Hearing Desire

Objects are visible Sounds are audible Objects are desirable

See it Hear it Desire it

Extend the List Body Mind Intelligence

Positive Positive Positive for Mill Normative for some

Things we feel Things we think of Things we think of

Feeler Perceiver Thinker

Ontological Ontological Ontological

Ontology: The essence of things. (Runes, 1942, p. 219). Essences are known through reflection with the soul (Stockhammer, 1965b, p. 79). Positive: ‘if the singular conclusions turn out to be acceptable, or verified, then the theory has, for the time being, passed its test: we have found no reason to discard it’ (Popper, 2002 [1935], p. 10). If such a conclusion is falsified, however, we can discard it. Normative: Based on value judgment. If we sandwich ‘desire’ between the positive and ontological, then it need not fall into the category of things we ‘ought’ to do. For there is a feeler, perceiver, thinker, as there is a seer, hearer, etc. Essentially, however, the experience of happiness will be one of bliss, or reveries. But, as there is no known path to it, we have to learn of it from the individual, A, B, C, etc., and Mill generalization is still relevant at the ontic level. Deontology: ‘the knowledge of what is right or proper’ (Bentham, 1934 [1834], p. 21). In this view, duty is subservient to one’s interest, that is, what he approves. To argue that ‘ought’ implies ‘can’ rules out deontologism because our beliefs are not under our voluntary control (Côté-Bouchard, 2019, p. 1641). Kant’s maxims seems to support our take: ‘So act that you treat humanity in your own person and in the person of everyone else always at the time as an end and never merely as means’. • Good ; Happy is governed by the faculty of desire, as sight by the eyes; hearing by the ears, etc. • The top categories are subsets of the extended categories. Then there is an ontological being who desires things, which will override the ‘ought to’ argument.

Extension to the view of possible worlds The economic discipline entertains the notion of possible worlds. To solve the economic problem of limited resources and unlimited wants, economists are forced to make choices that will efficiently use resources that have the maximum alternate outcome. This choice is also grounded in their economic freedom. In one of the most celebrated texts in economics, Milton Friedman wrote:

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Fundamentals of happiness If I do not like what my local community does, be it in sewage disposal, or zoning, or schools, I can move to another local community, and though few may take this step, the mere possibility acts as a check. If I do not like what my state does, I can move to another. If I do not like what Washington imposes, I have few alternatives in this world of jealous nations. (Friedman, 1982 [1962], p. 11)

Friedman is informing us of a real possibility that exists for us in dealing with an economic problem. One has the choice of relocating to another possible world. He assumes that a possible world exists, and also that one may not take the step of moving to it. In their Two Lucky People: Memoirs, Milton and Rose Friedman wrote, ‘We in the West have been living in a rare golden age – a golden age that has combined freedom and prosperity. Is that golden age coming to an end – or can we, by taking thought, make possible a new rebirth of freedom?’ (Friedman and Friedman, 1998, p. 605). Economic freedom is not present in all the possible economic worlds. It must be made the necessary condition of all the possible worlds, and the means to that end is ‘a limited government plus free-market competitive capitalism’ (p. 605). As is known, Friedman and Friedman build on Adam Smith’s model. In The Theory of Moral Sentiments, Smith mentions ‘the view of another world; a world of more candour, humanity, and justice, than the present’ (Smith, 1984 [1759], III.2.13 Duty). Besides the Smithian world, other worlds such as neoclassical, Marxian, Keynesian are also popular. Some subtle worlds include the following: 1. Actual world is the world we live in. 2. Possible worlds are logically and metaphysically true. They include analysis of ‘propositions, the content of belief, the truth of counterfactuals, and so on’. They represent ‘ways things could have been’ (Krakauer, 2013, pp. 989‒990). 3. The impossible world handles statements such as ‘nine is prime’ or ‘I am a married bachelor’, which are impossible. They represent ‘ways things could not have been’ (pp. 989‒990). Arrow’s impossibility theorem, for instance, is found useful in economics. Again, at one time we thought the world was flat, but now think that is impossible. Similar reasoning applies to the geocentric versus heliocentric views of the universe. Besides the possible worlds in economics that come from the fact that economists use scarce resources that have alternative uses, one is sometimes invited to think of the possible world that would have existed if the American revolution had failed, if Hitler was not stopped, if the former Soviet Union did not fall, if we did not have nuclear weapons, and so on.

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We can begin to understand possible worlds by asking what the real nature of the United States (US) economy is. One standard answer is that it is a mixed economy (A), partly in private hands (P) and partly in government hands (G). The dynamics of it is that each side is trying to expand its empire. The ultimate outcome of their dynamics is for one world to generate the other. In symbols:

A(P,G) S G ? ? ? (1. Socialism)

A(P,G) S P ? ? ? (2. Capitalism)

This generated word takes the form as 1. The economic system is socialist, or 2. The economic system is capitalist. While both systems in the end entail a benevolent type of rule, they are not the same. Under 2, we have a benevolent dictator that sides with the people; while under 1, we have proletariat rule with a possible dictator. The logical background to possible worlds During the latter half of the twentieth century, philosophers were discussing the ideas of not just the actual world we live in, say ‘i’, but of other possible worlds, Si (Lewis, 1973, p. 7). Such an idea took root in the works of G.W. Leibniz from the point of view of possible worlds, and from the Stoic philosopher from the point of view of conditional happiness. Today, these views are developed in the conditional, counterfactual, and decisionmaking literature. Gottfried Wilhelm Leibniz (1646–1716) Leibniz made important contributions to the literature of happiness on several fronts. First, ‘Leibniz defined happiness (felicitas) as “a state of pleasure without pain” (status voluptatis since dolore) and misery (miseria) as “a state of pain without pleasure” (status doloris sine voluptate)’ (Brown, 2011, p. 287). Figure 2.3 shows the overlap between the good of others and our good (OG). To the extent that it resembles a ‘master‒servant’ relationship, we can call it calculating, and if it represents a ‘father‒son’ relationship, we can call it love. In the diagram, OG causes us pleasure. Second, Leibniz located happiness in his view of the possibility of other worlds. Leibniz wrote: It follows from the supreme perfection of God, that in creating the universe he has chosen the best possible plan . . . the most of power, knowledge, happiness and goodness in the creatures that the universe could permit . . . the result of all these claims must be the most perfect actual world that is possible. (Leibniz, 1951, p. 528)

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Fundamentals of happiness

OG = Our Good

Calculating Love

GO = Good of Others

Everything pleasurable is desired for its own sake. The good of others, GO, is desired for its own sake. OG is sought for its own sake. We love others whose good is our delight. For its own sake we see the good of those we love for the sake of pleasure which we get from their happiness.

Figure 2.3  Leibniz on our good and good of others In his Theodicy, Leibniz wrote of possible worlds: ‘It is true that one may imagine possible worlds without sin and without unhappiness, and one could make some like Utopian or Sevarambian romances: but these same worlds again would be very inferior to ours in goodness’ (Leibniz, 2005, sec. 129.10). To prove this, one has to understand infinity. Elsewhere, he wrote: ‘We are in the real true world (said the Goddess) and you are at the source of happiness’ (sec. 373.416). One needs a ‘will to which it is natural to choose well deserves most to be commended; and it carries with it its own reward, which is supreme happiness’ (sec. 387). He denies: the inference in the argument, which states that if the will is only actuated by the representation of good and evil our happiness does not depend upon ourselves. The inference would be valid if there were no God . . . if the soul follows reason and the orders that God has given it, it is assured of its happiness, even though one may not find a sufficiency thereof in this life. (sec. 425)

In his PhD dissertation, Gregory W. Fitch distinguished three types of possible worlds in Leibniz’s writing (Fitch, 1974, pp. 3‒4): a possible world with a set of concepts, a real world in which the concepts are realized as substance, and other worlds in which the concept is not realized. The framework has room for three concepts of God, namely, (1) God is apart from these worlds (p. 12); (2) God’s concept is in all the worlds (p. 13); and (3) there are distinct counterpart concepts of God in every possible world (p. 15). If one settles for (2), then one is entitled to argue that God has morally created the best of all possible worlds, and metaphysically God is perfect from the necessary point of view. Some of the modern definitions of possible worlds include: ‘way things might have been’, ‘maximal possible state of affairs’, or ‘spatio-temporal totality’ (Stephanou, 2000, p. 223). For Alvin Plantinga, a possible world

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is ‘a way things could have been; it is a way the world could have been; it is a possible state of affairs of some kind’ (Plantinga, 1974, p. 44). The state of affairs, S, must be maximal or complete, which require a completeness axiom: , Completeness: Given S and S , if for every state of affairs Sr, S includes Sr or S precludes Sr (p. 45). For David Lewis, actual and possible worlds are depicted as concentric circles. The smallest circle, the centre, is labelled i, which represents the real world (Lewis, 1973, pp. 16–17). He adds, ‘I believe . . . in the existence of entities that might be called “ways things could have been.” I prefer to call them “possible worlds”’ (p. 84). These worlds follow an ordering: Ordering: The world, spheres, are order by distance to the real word. An example will be to have concentric graphic representations of the actual world, i, in the centre, and spheres of possible worlds at a distance from the centre, Si, enabling one to take a topological distance measure between actual versus possible worlds. It brings out the notion of ‘closeness’ or ‘most similar’ worlds to our actual world (Gunther, 2018, p. 856). Another way would be to take nested squares, but generating an inner square from the midpoint of an outer one (Klaver, 2006, p. 57). These generated worlds show that one can move from one world to the other via construction. Robert Stalnaker suggested such a movement from one world to the other requires accessible relations, and a selection function (Stalnaker, 1992; Lewis, 1973, p. 77). For instance, let i be an actual world, and P be a proposition in I, then a function f (I, P) is formed to select P in I, and take it to j. So, we get j 5 f (I,P) . Robert Stalnaker and David Lewis on counterfactuals In 1968, Robert Stalnaker had derived the possible worlds for studying conditionals and counterfactuals (Stalnaker, 1968). Conditionals are ‘if . . . then’ statements. In the ordinary walks of life, we consider true or false conditions as to whether the antecedent (‘if’ part) and the consequent (‘then’ part) are true. Independently, we may find the truth value of the antecedent and the consequent, without knowing whether the ‘if . . . then’ condition is true (p. 41). It is like knowing that ‘the FED [US Federal Reserve] cuts the interest rate’ and ‘there is no recession’ are true, but not that the former has caused the latter is true. ‘The falsity of the antecedent is never sufficient reason to affirm a conditional’ (p. 43). Logicians go a step further by considering the connection between the ‘if . . . then’ statement.

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Stalnaker thought that the ‘connection’ is not necessary for the truth-value of the statement. Nelson Goodman’s book discussed counterfactuals from the empirical point of view, starting with conditionals such as the statement: ‘If that match had been scratched, it would have lighted’ (Goodman, 1983 [1954], pp. 8‒9). For this, there needs to be some specification of statements ‘cotenable’ or ‘jointly tenable’ with the antecedent to be true (p. 15). One cotenable statement is that there must be oxygen, a natural, physical, or causal law. But suppose that law was met, but the match was wet, then it would not have lighted. So, there must also be some admissible statements such as the match was not wet. Goodman’s summary says that ‘some problems about counterfactuals depend upon the definition of cotenability, which in turn seems to depend upon the prior solution of those problems. Other problems require an adequate definition of law’ (p. 27). The popular literature on the subject discusses Stalnaker‒Lewis’s model, based on Ramsey’s contribution to probability. According to Ramsey, ‘If two people are arguing “If p will q?” and both are in doubt as to p, they are adding p hypothetically to their stock of knowledge and arguing on that basis about q . . . We can say they are fixing their degrees of belief in q given p’ (Ramsey, 1931, p. 247). Possible worlds and happiness Is happiness necessarily available in all the possible worlds? The answer will be ‘yes’ if we can find happiness in all the possible worlds. Happiness may exist in many but not all possible worlds. In that case, we cannot find necessarily the best possible of all worlds advocated by Leibniz. But it seems that we can fall back on a Benthamism concept of greatest happiness of the most possible world. It will be like saying that happiness will be contingent because it will be true in some world and false in others. One can operationalize such a contingent view by following the template of some existing models in the literature. The expected utility concept is a tool ready at hand for this purpose. Following Leonard Savage, we can use an action (A), state (S), utility (outcome), u, framework for an action. The Savage and Jeffrey formulae are culled from two sources (Jeffrey, 1983; Titelbaum, 2013; Titelbaum, forthcoming, Ch. 7). Letting (Pr) represent probability of belief, the expected utility, (EU), of action A can be calculated as follows:

EU (A) 5 a u (A &Si ) 3 Pr (Si ) ..........  (Savage’s formula) n


In keeping with standard decision-making under uncertainty principles, one can employ maximax, maximin, Hurwicz’s criterion of realism,

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Laplace’s equally criterion, or opportunity loss criterion to find the best outcome. These techniques are described in a standard book on decisionmaking, Balakrishnan et al. (2013, pp. 323‒324). An alternative to Savage’s EU is Richard Jeffrey’s EU that incorporates conditionals into his formula. Instead of Pr (Si) , one would use Pr (ASi) to be read as given that act A has occurred, then state S would occur. Jeffreys’s formula can be written as follows:

EU (A) 5 a u (A &Si) 3 Pr (AuS Si) ..........  (Jeffrey’s formula) n


One distinction between Savage’s and Jeffrey’s formulas is significant. Savage’s formula specializes in showing evidence, or what is called evidential decision theory. Jeffrey’s formula on the other hand specializes in causal relations or what is called causal decision theory. Possible worlds as developed by Saul Kripke shed more light on how possible worlds may be related. Kripke’s ideas are characterized by the triplet (G, K, R) , where there are K possible worlds; G is a real world in K; P assigns truth value in each world H 5 { H1, H2 and so on. } ; and R is the relationship between two worlds, for example for H1, H2 [ H, we read H1RH2 to mean H2 is possible relative to H1. Every world is reflexive if it is related to itself, and R can represent other relationships such as transitive, symmetric, or connective as in forming a tree (Kripke, 1963a, pp. 69‒70). In another article that year, Kripke explained some model structures (Kripke, 1963b). He defined the normal model structure (m.s.) as (G, K, R) , where the variables are the same, and R is related to itself, reflexive. If R is transitive, we get what is called in the literature a S4-m.s.; if R is symmetric, we get a Brouwersch m.s.; and if R is an equivalence relation, we get an S5-m.s. (p. 84). Without restrictions, we get an M-model structure. Those models are to be evaluated. Kripke gave a concrete example on which we can superimpose our application of happiness on possible worlds. This example is found in the preface of his 1980 edition of his book Naming and Necessity (Kripke, 1980 [1972]). The tossing of two dice yields 36 outcomes, which represent 36 possible worlds for that experiment. The actual world is the state of the dice after being tossed, that is, what numbers turn up after the toss. This identity of the dice is obtained from the numbers each die displays, say, die A shows 6, and die B shows 5 (pp. 16‒17). This example also allows one to use the possibility operator to represent another way to get the sum of, say, 11, such as when die A shows 5, and die B shows 6. A virtue of this example is that it can be expressed using the modal logical expressions (MLE) to capture the operations, such as the following:

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Ex,Ey [(Fx &Sy) & e (Fy &Sx) ] ...... MLE1

where E is the existential quantifier, F is first die, S is second die, e is the possibility operator, and x and y are variables. In the first part of the MLE1, we can set x 55 and y 5 6, but a possible world exists in the second part for x 56 and y 55. One can then think of the many ways to permute the two letters in economic parlance. Table 2.2 shows some possible permutations and some tree diagrams of possible models that lead to happiness. In the interpretation of Table 2.2, we need a model. A simple model of the K-type has three inputs we can label as ,W, a,R . . The first letter is a set of worlds, W 5 { W0,W1, ... ,Wn } . The letter a performs the function of assigning a value at a particular world. If p is false (true) in W0, then we can write aw0 ( p) 5 0 (1) . R is a binary relation between possible worlds. If W1 is accessible from Wo, then R will be W0RW1. To apply these rules, consider the first entries in Table 2.2, namely, capitalism (W0), and communism (W1). If you inhabit any one of those two worlds in their pure form, then you do not have access to the other. Let p stand for one who cannot own property. Then, aw0 ( p) 5 aw1 ( p) 5 0 can mean that a person in a W0 cannot own private property in W1 and vice versa. However, today both the USA and Russia are mixed economies, so one world is accessible from the other, which makes aw0 ( p) 5 aw1 ( p) 5 1. To evaluate happiness, let us say that you are not happy in capitalism (W0), but can access communism (1) where you think that you will be happy, then the truth value can be represented by aw0 ( p) 5 0, aw1 ( p) 51, W0RW1, and therefore, aW0 (ep) 5 1. The first two terms are already explained. From the economic point of view, the latter term means that ‘possibly’ p is accessible from W0. This meaning might not work for the other definition of p, for the nominal, natural, or logical, for moral, natural, and logical law may not be the same for different worlds. The most popular entry in Table 2.2 is for ‘Economic agents 2’. Some economists follow economists such as J.B. Say in declaring that only the possible world of supply exists. They call themselves supply siders. Some economists argue that only the possible world of demand exists. They are mostly Keynesians. Others would like to argue with Alfred Marshall to the effect that demand and supply are like the blades of scissors, and you cannot tell which blade is doing the cutting (Marshall, 1982 [1890], p. 675). The two tree graphs at the bottom of Table 2.2 show the logical results one would get when using the code at the bottom for K-class models in the LocTrec2.0 programme. For the SW graph, the top tree shows Say’s result, while the bottom tree shows the other world graphed by R for Keynes’s result. The SE graph shows relationships between production, distribution, and exchange. Sometimes one deals only with production and

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Table 2.2  Application of possible worlds to economic happiness Descriptions

Values for F

Values S

Other values

Economic systems: Economic categories: Elements of systems: Control of economy: Global economy: Economic agents 1: Economic agents 2:

Capitalism Microeconomics Production Centralized Polycentric Self-centered Demand for F

Communism Macroeconomics Distribution Decentralized Regionalism Altruistic Supply for S

Or any other -isms Or micro to macro Or exchange Or monopolistic Or one world Indifferent Hoarding

Note:  One can think of a logical space, such as a grid that shows the outcome of the toss of two dice, and treat the pairs for F & S as ordered pairs for a cell. A cell will contain (5,6) for instance. The graph below illustrates two models listed in the table. Distribution & Exchange Distribution Exchange

Supply & Demand & (Demand & Supply) Supply & Demand (Demand & Supply) Supply Demand Classical vs. Keynesian Possible Worlds


Demand & Supply Demand Supply and Supply Demand pos and Demand Supply

R Production & Distribution & (Production & Exchange) & (Distribution & Exchange) Production & Distribution & (Production & Exchange) (Distribution & Exchange) Production & Distribution (Production & Exchange) Production Distribution

Marxian vs. Neoclassical Possible Worlds

R Production & Exchange Production Exchange

and Production Distribution pos and Production Exchange pos and Distribution Exchange

exchange as in Arrow‒Debreu’s general equilibrium model. Joan Robinson wrote that ‘the theory of value and distribution . . . consists of a variety of systems, each appropriate to the model of a different kind of economy’ (Robinson, 1974, p. 1). The debate on economic systems runs through economic history. One looks for whether primitive society, slave society, command economies, feudalism, capitalism, socialism, or communism can produce the most abundant wealth at the quickest pace. Looked at from the point of view that wealth produces utility, Adam Smith chooses capitalism. But everyone knows that this market system does not distribute wealth in a just and fair way, which brings in the possible world of a better distribution system,

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such as in modern social democracy, and post-Keynesian economics. The latter is famous for its controversy over the definition of capital, which tends to undermine neoclassical economics. In terms of our MLE1 formula, once one is committed to a version of the first part, then one is unwilling to explore the possible part. An individual may say that there is no alternative to their real world. At best they will discuss elements in the protective belt only, leaving their hard-core belief untouched. A recent study on the web has looked at the global economy from the possible worlds point of view (Nguyen, 2014). Nguyen draws conclusions over a cosmopolitan view for a few possible worlds, the neo-Kantian realism in all possible worlds, and the law of peoples concerning peace, justice, and liberty working towards a decentred world. In summary, one can seek happiness in possible worlds, which includes the actual world one is in. An ideal situation would be for one to select a happy world and access it. We have been basing the discussion on morals and metaphysics, but the way some counselors speak, both psychologists and religious, you may think that this can be done mentally. According to David Lewis: ‘The familiar analysis of necessity as truth at all possible worlds was only the beginning. In the last two decades, philosophers have offered a great many more analyses that make reference to possible worlds, or to possible individuals that inhabit possible worlds’ (Lewis, 1986, p. 3). One hope is that there ‘are not different possible ways for the world to be; rather, they are different possible ways for an individual to be, and many of them may coexist within a single world’ (p. 29). On the one hand, the idea of possible worlds works better when economists do not see the ideals. If capitalism is pure, then communists will not have access to it, which may lessen world happiness. This possibility can be generalized for all countries. So, it does not point to free trade as the driver of happiness, by accessibility in the form of mixed economies. A possible paradox lies here because free trade enhances gain of output, which is tied to utility and happiness. Perhaps Professor Bhagwati is correct in pronouncing free trade areas (FTAs) as disguised preferential trading areas (PTAs). Grounding and happiness The philosopher Kit Fine has introduced the concept of ‘ground’ which we can use as another view of happiness (Fine, 2001). For physical objects such as a chair, particles are arranged to form the ground for the chair. We can say that the particles act as a grounding for the chair. We may not have similar examples for metaphysical entities. Kit Fine gives the following example of ‘ground’: ‘It being the case that the couple Jack and Jill is married consists in nothing more than it being

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the case that Jack is married to Jill’ (p. 15). In a canonical form, one can substitute S for ‘the couple Jack and Jill are married’, and variables like T, U, and so on for ‘the case that Jack is married to Jill’ to get: ‘It being the case that S consists in nothing more than it being the case that T, U, . . .’ (p. 15). Some philosophers distinguish between scientific laws and grounding. Marc Lange wrote that: ‘If E scientifically explains . . . F and D grounds . . . E, then D scientifically explains . . . F’ (Lange, 2013, p. 256). Economists will recognize this as a transitive principle from D to E, E to F, and therefore from D to F. However, Lange stated that transitivity does not hold in some pathological cases (p. 257). This means that grounding is different from scientific explanation in some senses. The idea of the one and the many created the grounding problem. Take a lump of clay (Lumpl) and a statute made of clay (Goliath). The Monist says they are the same, and the Pluralist says they are different (deRosset, 2011, p. 173). Note the asymmetric and irreflexive relations: ‘Lumpl constitutes Goliath, and Goliath does not constitute Lumpl’ (p. 175). The idea of layered truth requires asymmetry such that some truths are ‘less fundamental’ than the others (deRosset, 2017, p. 512). We look at layers of truth next. This type of problem shows up in the micro approach to macroeconomic problems. What is true for one does not generalize in a straightforward way to all. People might be happy with their self-centred individual road to happiness, which may not be welfare-maximizing. DeRosset has developed a layered truth of factual grounding which is relevant to this argument (deRosset, 2017). Facts are ‘metaphysically thick’, and like many layers of a cake are ‘constitutive of’ reality (p. 537). For instance, a depressed economy can lower or extinguish one’s happiness. The premise of that statement has many layers of facts: wage rigidity, liquidity trap, interestinelasticity, which are three Keynesian facts that were present during the Great Depression, without trying to say one caused another. Grounding is further explained by the dice throwing example in regard to probable worlds. It shows up as a finer grid than the coarse grid we used to show P&Q occurring in a cell. This fine grid is occasioned by the possibility of using disjuncts, PVQ. A disjunct is an example of a metaphysically thin use of ‘fact’ in ordinary English on which P entails: ‘it is a fact that P’ (p. 537). In explaining the Great Recession of 2008, some will utter the word ‘greed’. During the many recessions of the 1970s, economists have reverted to such a one disjunct truth to explain the phenomenon of stagflation. Most economist favored the ‘supply-shock’ explanation, while the monetarists pointed to the ‘demand-shock’ explanation. One needs to look at truth-making in contrast with ground. DeRosset presented a diagram under layered truth in which one non-physical fact, f,

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can make many non-physical disjunct truths, P, C, and B (deRosset, 2017, p. 544). This is a dependence and determination model in conditional form. A case in economics is where subjective utility theory leads to the ordering of a farmer's output of various uses that leads to diminishing marginal utility (DMU), which we will develop below (Wicksell, 1949, p. 31). In order to further develop the theory, however, we have to add the ordering on P, C, and B to turn them into asymmetric truths. This is done by the idea of DMU. Further analysis requires one to fuse together truth-making and ground to have layers in facts, f. Congeries of facts such as g and h are formed vertically above f, and P, C, and B are related to f, g, and h on a one-toone basis. The relations from f, to g, to h are called unmediated grounds. Economists have to abuse geometry which seems to appeal to congeries of facts. A disjunction of either the goods or money market is taken as the true fact, f. Congeries of facts relating to production and labor market are simulated from the true fact for, say, f and g. The relations between f, g, and h are different for the classical and Keynesian schools. The classics start from the labor market to determine employment, and then through the production function determine output. The Keynesians let output be determined in f, and throughout the production function determine employment. The congeries of fact model closely explains the hardcore dispute between the two schools. They have different paths to full employment and output, and by extension to utility theory, maximal happiness. In his ‘Guide to Grounding’ article, Kit Fine introduced the notion of ‘one thing holding in virtue of another’, illustrating a direct role of happiness (Fine, 2012, p. 40). He considered a disjunction of R representing an act is right, and ¬ R representing that it is not right, namely (R ∨ ¬ R). R is said to ground this relation. In the sense of ethics, we can say that it is ‘(normatively) explained by the fact that it maximizes happiness (Rr)’ (p. 40). Rr is taken as a ‘generic’ explanation. Similarly, from a metaphysically necessary point of view, we can use the modal operators to write: (` (R ∨ ¬ R)), that is, metaphysically necessary that the act is right or not right.

(` (Rr ) R ∨ ¬ R)), that is, metaphysically necessary that if the act maximizes happiness then it is right or not right.

The problem that the act maximizes happiness does not metaphysically ground that it is right or not right. So, it appears that the ‘generic’ explanation does not ground. DeRosset’s congeries of facts above appear as further work in this direction of grounding. For other considerations besides truth-making and ground, one is referred

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to a more comprehensive book, Metaphysical Grounding (Correia, Fabrice and Benjamin Schnieder, 2012). There a distinction is made between Bernard Bolzano’s predication view, and Fine’s operational view (p. 11). If P grounds Q, then we seem to have sufficient reason for grounding, and if P depends on Q, then Q necessarily grounds P. For disjunctive fact, the true disjunct grounds it. A conjunctive fact depends on its disjunction, but is not grounded by it (Leuenberger, 2014, p. 150). With these few notions of grounding, we have been able to justify the way Keynesian economics fits together for the prediction of full employment and full output, and therefore, our efforts to make a depressed system turn around to maximum happiness. The happiness paradox We have been considering what David Lewis calls modal realism (Sainsbury, 1991, p. 281). Joe Salerno has developed a logic of happiness based on anti-realism, focusing on propositions of the form that ‘s is happy that p’ (Salerno, 2018, p. 463). As stated, the proposition implies that anything we put in for p can make one happy, which can include ‘contingent and necessary truths, and things that they should or shouldn’t be happy about . . . even that Trump is president’ (p. 243). The following two propositions show the generalized happiness principle (Hp) form of the principle, and a bounded form in which it is restrictive to facts, that is, happiness is factive (HF): If p is true, then it is possible for someone to be happy that p . ...... (Hp) Necessarily, if s is happy that p then p . ...... (HF ) The restriction to facts in HF is to rule out the notion that one can be happy about falsehood, such as that 2 1 2 5 5, or that one is happy about not being happy. To state that one can only be happy about truths, one can replace ‘happy that’ with ‘happy about the fact that’ in the original proposition. The following rules for a modest modal logic can be formulated:

(AHP) .4p ( p S Hp) ...... (Actual happiness principle; AHP)

(PHP) .4p ( p S Hp) ...... (Possible happiness principle; PHP)

(HF) .Hp Z p ...... (Infer p from the truth of Hp)

(CD) .H ( p & q) Z Hp & Hq ...... (H distributes 2 Conjunction)

By the application of these rules, Salerno has shown that that AHP 5 PHP. The possible is logically equivalent to the actual, which he called the new

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paradox of happiness (NPH) (p. 465). In the background of this paradox is the work of Jaakko Hintika, who worked on modal logic of attitiude (p. 457). Hintika focused on what one knows on a consistent basis from the epistemological viewpoint. Another researcher, Fredrick Fitch, focused on what is possisible to know from the metaphysical viewpoint. The NPH rides on Fitch’s knowability paradox (p. 459). Fitch’s knowability paradox ‘threatens to collapse the thesis that every truth could be known (at least in principle) into the thesis that ever truth is in fact known’. The equivalence is seen by replacing ‘H’ for happiness in AHP and the PHP expression above with ‘K’ for knowledge, and then forming their equivalent relationship. Salerno gave a proof of what he called an easy proof for the Church‒Fitch hypothesis in a 2010 article (Salerno, 2010, pp. 2‒3). David Lewis’s principal principle (PP) and happiness In 1980, Lewis unveiled the principal principle (PP) about subjective and objective probability, and their implications for happiness (Lewis, 1980). While the happiness paradox above was trying to connect actual and possible happiness, the PP is trying to connect subjective with objective probability. Lewis provided a section on ‘Chance as a Guide to Life’, which directly bears on happiness (p. 287). The section opens with the statement that ‘it is reasonable to let one’s choices be guided in part by one’s firm opinions about objective changes or, when firm opinions are lacking, by one’s degree of beliefs about changes’ (p. 287). The initial set up of PP can be viewed on a tree diagram marking out past, present, and future. Worlds with a common past and common theories of chance make up the path of the tree. The PP idea was developed in two stages, now carried as the old PP (OP) and the new PP (NP) (Lewis, 1994, p. 488). Lewis stated them as follows:

C (A/HT ) 5P (A) ...... (OP)

C (A/HT ) 5P (A) ...... (N P)

where the forward slash introduces conditional probability; H is understood as subscripted with the complete world history, w, up to and including time, t; the letter T stands for a complete theory of chance of the worlds, so it is subscripted with w; and P is the chance distribution of w and t. We want to find the probability of the proposition A at t and w. We notice that OP 5 NP if P(A) 5 P(A/T). This will happen if the value of T 5 1, meaning that it is perfectly admissible, which means that P (A/T) /P (A) is close to one. Lewis gives an example where this ratio is

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1.00015. The example requires some tedious calculation of the following formula with large factorials. But this can be drastically simplified using Sterling’s approximation of ln N! 5NlnN 2N, for large N, and Log 5 Ln/2.3 approximately. The example is important to understand PP, so we list its assumptions and equation as follows. Assumptions: let two-thirds of Jacks be Kings. The true frequency of T will be established at that probability over worlds and time. We sample 10 002 5 6668 Jacks 1 3334 Kings. The next sample is 4 5 3 Jacks 1 1 P (AT ) King. Checking for admissibility, P (A ) , requires the following computation, noting that in some cases the true T will sometimes diverge from the subjective one, which will require one to keep the OP and NP distinction (Lewis, 1994, p. 488):

2 4 P (A) 5 a b 3

2 6665 1 3333 9998! P (A) a b a b a b ( 3 3 6665!) (3333!) A P (AT ) Pa b 5 5 5 1.00015 T P (T) 2 6668 1 3334 10002! a b a b a b (6668!) (3334!) 3 3

In the rest of this chapter, we continue to consider some other philosophical thoughts on happiness. A propositional form is adopted to capture the varied literature on the subject.

PROPOSITION I Proposition I (what-being and that-being approaches): What-being starts with questions such as what is happiness, while That-being takes happiness as something for granted. (King, 2007, p. 282) Etymologically, these two distinctions ‘seek to recover the whole range of historical meanings of a word’ (King, 2007, p. 278). We then seek to analyze them, in order to narrow their meanings. This approach existed since the time of the Greek philosopher Plato. For technical and scientific purposes, we may seek to define the term conceptually. In this sense, language can be called a tool. This will be different from a language definition (p. 278).

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PROPOSITION II Proposition II (Immanuel Kant): Happiness is ‘the state of a rational being in the world in the whole of whose existence everything goes according to his wish and will’, and rests, therefore, on the harmony of nature with his whole end as well as with the essential determining ground of his will. (Kant, 1996, p. 240) In his Groundwork of the Metaphysics of Morals, Kant places happiness as a gift of fortune, which can be used for bad ends. He wrote that happiness can be boundless, ‘unless a good will is present’ (Kant, 1964, p. 61). The good will adjusts elements of happiness towards a universal end. The philosopher Herbert James Paton thought that reason plays two roles in Kant’s views on happiness. On the one hand, it helps us to conceive of happiness as an end. On the other hand, it guides our choices to means to ends. He then explains that happiness depends on the good will, as follows: ‘The happiness thus sought is, however, a conditioned good: its goodness is relative, as we have seen, to the goodness of our will, and it is also relative to our desires and needs’ (Paton, 1946). In his Groundwork of the Metaphysics of Morals, Kant wrote of an idea of happiness (Kant, 1964, p. 67). It combines all of one’s inclinations as a sum total. If the universal inclination falls short of what one wills, then one should fall back on doing one’s duty. Kant also wrote that ‘happiness is an ideal, not of reason, but of imagination – an ideal resting merely on empirical grounds’ (p. 86). Kant argued that happiness should reflect ‘a maximum of well-being in my present, and in every future, state’ (p. 85). This view has a ring of utilitarianism in the Bentham sense of getting to the greatest happiness possible, or in Mill’s sense of pleasure without pain. In his Lectures on Ethics, Kant wrote that ‘man has in himself a source of happiness’ (Kant, 1963, p. 171), but he is not ‘completely independent of his needs and external circumstances’. He must act on the things he can obtain, and curb his inclination towards things he cannot obtain. External things should be looked at from a point of view of ‘necessaries and a­ menities’ that support life and bring comfort, respectively. He urged that we should not be ‘monkish’ by avoiding comfort, but should not make those things necessary for life. He quotes an old maxim, ‘Sustine et abstine’: ‘learn to dispense with comfort and to bear discomfort’ (p. 172). In his Critique of Pure Reason, he wrote that ‘happiness is the satisfaction of all our desires, extensively, in respect of their manifoldness, intensively, in respect of their degree, and protensively, in respect of their duration’ (Kant, 1966, p. 516). He called the practical motive of fulfilling

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our desires a ‘rule of prudence’, dealing with experience, and other motives making us worthy of happiness a ‘law of morality’, dealing with reason.

PROPOSITION III Proposition III (Arthur Schopenhauer, 1788–1860): ‘(T)he happiness of any given life is to be measured, not by its joy and pleasure but by the extent of which it has been free from suffering.’ (Schopenhauer, 1982, p. 219) Schopenhauer draws the concept of phenomenon and noumenon from Kant to develop his system of thought on which the proposition stands. His epistemology is that we can know the external world of phenomena through the senses. This means that we cannot know the-thing-itself, but only have a representation of it through perception. To know the essence of a thing, the noumenon, we must use our internal knowledge. We have this internal power called the will. A demonstration of the will is that we can will to raise our hand. Schopenhauer concludes that ‘the subjective element in life is incomparably more important for our happiness and pleasure than the objective’ (p. 5). Again, ‘the first and most essential element in our life’s happiness is what we are – our personality’ (p. 6). It is wiser, therefore, ‘to aim at the maintenance of our health and the cultivation of our faculties, than at the amassing of wealth’ (p. 8). One should cultivate ‘a genial flow of good spirit’ (p. 12). To underscore his system of internal thoughts, he quoted Epictetus saying, ‘Men are not influenced by things but by their thoughts about things’ (p. 14). To attain happiness, the intellect must put it into force or motion. Schopenhauer wrote: ‘intellect is absolutely nothing more than the means by which the motive power of the will is put into force’ (p. 21). If the will is at rest, then boredom will happen. The question then turned to who is happiest, the narrow-minded or intellectual person. Schopenhauer points to a dilemma in this regard. He cites the Old Testament as denouncing both points of view (p. 36). He was referring to the two statements: ‘The life of a fool is worse than death’, and ‘In much wisdom is much grief’ (p. 36). So, people’s struggle for happiness must lie beyond intelligence and the will. The Influence of Music on the Will and Happiness Schopenhauer wrote, ‘music acts directly upon the will, i.e., the feelings, passions, and emotions of the hearer, so that it quickly raises them or

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changes them’ (Schopenhauer, 2012 [1909], p. 227). It does not have to express an idea like the other arts, but expresses the will itself. Therefore, music is ‘the most powerful of all the arts’ in influencing happiness (p. 227). Composers of music may delay the effect of a tone by creating a suspension. They may start with a tone in the first bar but must return to it in the last bar to give a consonance (p. 236). In between these first and last two bars, a suspension of harmony can be felt, and therefore the highest harmony is not achieved. People influenced by Schopenhauer have tried to describe the process by which one can transcend the intellect and will that both involve suffering. Two of those people who have looked for the transcendental answer in their respective disciplines are Richard Wagner, the musician, and T.S. Elliot, the poet. In the rest of this section, we will consider Richard Wagner. Richard Wagner’s Interpretation of Schopenhauer Schopenhauer distinguished a special place for music compared to the other arts, as follows: It stands alone, quite cut off from all the other arts. In it we do not recognize the copy or repetition of any idea of existence in the world. Yet it is such a great and exceedingly noble art, its effect on the inmost nature of man is so powerful, and it is so entirely and deeply understood by him in his inmost consciousness as a perfectly universal language, the distinctness of which surpasses even that of the perceptible world itself. (Schopenhauer, 1909 [1818], p. 334)   It never expresses the phenomenon, but only the inner nature, the in-itself of all phenomena, the will itself. It does not therefore express this or that particular and definite joy, this or that sorrow, or pain, or horror, or delight, or merriment, or peace of mind; but joy, sorrow, pain, horror, delight, merriment, peace of mind themselves, to a certain extent in the abstract, their essential nature, without accessories, and therefore without their motives. (p. 341)

The renowned musician Richard Wagner took Schopenhauer’s concept of music to another height, one that transcends the intellect and will with what he called ‘absolute music’. In a speech that was delivered on Beethoven’s one-hundredth anniversary in 1870, he alluded to Schopenhauer’s influence on him (Wagner, 1966 [1870], pp. 61‒126). We learn that consciousness has two sides. On the inner side is the consciousness of ‘one’s own self’, which is the will, and on the other side is the consciousness of ‘other things’ (p. 67). For Wagner, music faced the inner side of consciousness. The inner side has something like a dream-organ, which perceives the light-world and sound-world (p. 68). Here is how the sound-world works: ‘From the most terrifying of such dreams we wake with a scream, the immediate expression

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of the anguished will, which thus makes definite entrance into the soundworld first of all, to manifest itself without’ (p. 69). But the dream-organ does not always transmit matters of the anguished will to the area. We can think of gentler, more atomic matters being transmitted. It seems that when our dreams are calmed down from the screams to ‘the gentler cry of longing, as the root-element of every human message to the ear’, the consciousness can be diverted from the agitated will and we can develop artistic creations (p. 69).

PROPOSITION IV Proposition IV (Soren Kierkegaard, 1813–1855): Happiness is an idea that I will get what I will. (Fremstedal, 2011) According to Roe Fremstedal, Kant’s idea of happiness is that things happen according to one’s will and wishes while Kierkegaard’s idea of happiness is that one gets what one wills. He explains the difference in the two views this way. If one asks a jinni to bring a glass of water, and instead the jinni brings the best bottle of wine, then one would fire the jinni because it does not know that pleasure comes from when one gets one’s own way and not in what one enjoys (p. 157). Happiness, for Kierkegaard, can be presented from a model one creates from one’s relationship to God. One can present such a model built around the concepts of a hero, expectation, and love as its main pillars. As these are fundamental elements for happiness, we look at each. On the hero: Abraham was one of Kierkegaard’s heroes. The story is that God asked Abraham to sacrifice his son Isaac (Smith, 2013). Abraham had faith in God that things will turn out well in the end (p. 813). Indeed, Abraham is the father of a faith, which allows us to find meaning in life when our source of happiness is insecure. ‘Faith is: that the self in being itself and in willing to be itself is grounded transparently in God’ (Kierkegaard, 1941, p. 132). More so, it saves us from despair. Another hero of Kierkegaard was Job. Job was a man of action who exemplified the saying that ‘The Lord gave, and the Lord hath taken away. Blessed be the name of the Lord’ (Kierkegaard, 1958, p. 67). For Kierkegaard, ‘Job walks by the side of the race and guarantees it its happiness, combats the apprehensive dream that some horror may suddenly befall a man and have power to destroy his soul as its certain prey’ (p. 69). Job understood that the Lord is the giver, and he surrendered everything he had to the Lord, including all his sorrows. Then ‘only praise remained in the incorruptible joy of his heart’ (p. 83). For happiness, Kierkegaard

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encourages us to ‘fix your eyes upon Job . . . no man knows the time and the hour when the messengers will come to him, each one more terrifying than the last’ (p. 86). On love: Kierkegaard begins his Works of Love with the saying that every tree is known by the fruits it bears, but one may ‘mistake and call that love which is really self-love’ (Kierkegaard, 1949 [1847], p. 7). There is temporal and eternal love. The love of Christianity has the truth of the eternal in it, which must be believed and lived. It is hidden from us, but it is in motion (p. 9). Words and verbal expression reveal only the immature and deceptive love (p. 10). We can only believe in love, which is the first and last thing to say about love (pp. 11, 13). Kierkegaard developed the idea of loving others as the self. He thought that this was a way to break self-love. He also developed the familiar idea that God is love (or God as love). From person-to-person love, if we add God as a middle term, we get person‒God‒person love, creating a ­possibility of pure love (Smith, 2013, p. 815). In Adam Smith’s theory of moral sentiments, the deity acts as the spectator or invisible hand to harmonize individual self-interest. God as the middle term creates the possibility of loving our neighbor as ourselves, creating a unity of self. This attainment of the law is called freedom, which is not achievable without God. In Works of Love, Kierkegaard draws a distinction between human consolation and that of eternity. The consolation of eternity or heaven is ‘not a compensation for the loss of happiness, since it is happiness’ (p. 53). In ‘the individual life: first comes suffering and pain and loss of joy, and then later, sometimes after a long time, comes the consolation’ (p. 53). But the consolation of eternity precedes temporal happiness. It is called gladness. It swallows up the pain and loss of joy (p. 53). In his Sickness Unto Death, Kierkegaard gives a contrasting view of human consolation as follows: happiness is not a characteristic of spirit, and in the remote depths, in the most inward parts, in the hidden recesses of happiness, there dwells also the anxious dread which is despair; it would be only too glad to be allowed to remain therein, for the dearest and most attractive dwelling-place of despair is in the very heart of immediate happiness. (Kierkegaard, 1941, p. 38)

On expectation: for Kierkegard, the past is gone, the present is now, and expectation can only be of the future. He praises expectation this way: ‘those who have expectations are the happy and the successful’ (Kierkegaard, 1958, p. 12). While our concern with the future is at the expense of the present, the future is good because it establishes that there is a present, and without the future and present, ‘man be enslaved like the

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The Eternal is the foundation of the Future. Faith is the Eternal in Man. Therefore, Faith is the foundation of man’s Future.

(Faith brings Victory/ Success of the Future) or (Faith bring Loss/Failure in the future.) (Experience shows Victory in the Future) or (Experience shows Losses in the Future). Rule 1: Experience can negate Victory and Losses. Rule 2: Experience in Victory prepares one for Losses, and Experience in Loss prepares one for Victory. Therefore, V for Victory and L for Loss are bi-conditional: V L

~V ~L


V ~V ~L L

(Eternal —> Future) & (Faith —> Eternal) Eternal —> Future Faith —> Eternal ~Eternal v Future ~Faith v Eternal Future Eternal

(Faith —> Victory) v (Faith — >Loss) & (Experience —> Victory) v (Experience — >Loss) ((Faith —> Victory) v (Faith — > Loss)) & (Experience — > Victory) — — (Faith > Victory) v (Faith >Loss) (Experience —> Victory) ~Experience —> Victory Faith — > Loss ~Faith —> Loss Victory Loss

Notes: The top half of the figure shows the logical relationships between Faith, Eternity, and the Future. The bottom half of the table shows Either/Or logical relationships between Faith, Experience, Victory, and Losses. The result is Either/Or in the latter two. Rule 2 is a practical way to get a determinate choice over Victory or Losses. One can use Lotrec2.0 Codes: & = and, —> Imply , v = or, ~ = not. The code for the upper half is: and imp ETERNAL FUTURE imp FAITH ETERNAL The code for the lower half is: or and or imp FAITH VICTORY imp FAITH LOSS imp EXPERIENCE VICTORY imp EXPERIENCE LOSS

Figure 2.4  Kierkegaard logic: eternal faith, victory, and future happiness beasts, his head bent toward the earth, his soul ensnared in the service of the moment’ (p. 13). We should approach the future through faith, which is the eternal in us (p. 16). One who expects victory in the future conquers that future, then one needs only belief in the present to gladden the heart. One who does not expect victory in the future thinks that the future will bring peace for his loss (p. 17). However, those two modes of conduct are disproved by experience. Experiences teach that success and failure follow each other in time. But one should behave in a way that ‘there is an expectation which all the world cannot take from me; it is the expectation of faith, and this is victory’ (p. 22). The logic of this argument is hard to follow; therefore, we present it in symbolic logic form in Figure 2.4. The top left of Figure 2.4 shows a syllogism depicting the relationship between faith, eternity, and the future. The adjacent results indicate that

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the future is eternal for us through his faith. The bottom half indicates some either/or possibilities between victory and losses in the future. This indeterminacy of choice can be guided empirically from experience. Continuing the narrative on expectation, if the successful or failed person were to order their goods, they stand to lose the goods that will bring them happiness. Therefore, they should fall back on the expectation based on the eternal faith in themselves. This is like opening a new world of possibility, whose results will be subject to modal logic. Depending on one’s definition of love, such as ‘love for’ or ‘love of’ God, one can decide whether to introduce symmetry from the modal point of view. However, it seems futile to follow up on symmetric or other proofs, for Kierkegaard wrote that neither time nor experience can prove happiness (p. 27). Instead of quod erat demonstrandum (that which was to be demonstrated), Kierkegaard repeated the phrase, ‘and so at last be saved’ (p. 27). In his The Expectation of an Eternal Happiness, Kierkegaard held one’s first wish to be for eternal happiness (Kierkegaard, 1958, section VI, p. 111). Eternal happiness has become a ‘loose and idle word . . . like an aged and infirm petitioner’ (p. 112). But one should wish it, for it makes the impossible possible (p. 117). Like the apostle Paul, one should make eternity their goal, and eternal happiness their measuring rod in the temporal world (p. 122). When ‘demands of life exceed the judgment of experience, then life becomes confused and comfortless, unless the expectation of an eternal happiness regulates and calms it’ (p. 124). One can add to this statement that expectation of an eternal happiness performs like the invisible hand of markets. It ‘consoles beyond all measure’ (p. 124). One can also look at expectation from the heroic point of view. Abraham, for instance, expects his son Isaac will be returned to him. But if this expectation is not continuous, then other gifts of God might suffice, such as that Ishmael might pick up the slack. One might think it possible that Abraham might think it a small thing to do at the request of God. But we most likely will think that he had genuine love for Isaac. Still, we can expect that he will be anxious, for he might think that he had to abandon a moral code in killing Isaac. With faith in God, our expectations are possible. Also, what is impossible for us can be made possible. To take a quote: ‘the expectancy of an eternal salvation [Salighed] is able (which otherwise seems impossible) to be in two places at the same time: it works in heaven and it works on earth’ (Fremstedal, 2011, p. 169). We now look at Kierkegaard’s view of happiness as equated to the Danish word ‘salighted’ (Kahn, 1985). According to Kahn, this was a Christian concept that Kierkegaard revived (p. 2). In his Concluding Unscientific Postscript, Kierkegaard was concerned with the question

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as to how he can participate ‘in the happiness (salighted) promised by Christianity . . . spelled out in terms of other concepts: passion, interest, pathos, faith, guilt, suffering, truth, and paradox, for instance’ (p. 2). Khan traced the term and its variation through several of Kierkegaard’s texts, using a computer model and statistical methods to factor the difference in use of highly correlated terms in the texts. The result, from Kierkegaard’s Eighteen Edifying Discourses, suggests that ‘expectation of the happiness of the heaven regulates and calms life’ (p. 29). What one expects can be actualized in one’s life (p. 32). Although the expectation here is about heaven and not one’s senses, it is meaningful to one’s life since one is looking for enduring happiness. It influences behaviour and builds one’s character (p. 38). In general, one is better off with interest in personal eternal happiness than with speculative interests (p. 45). One cluster of terms from Concluding Unscientific Postscript suggests the historical interest is gains in happiness when it is carried from thought to action (p. 42). When one holds on to historical datum with the highest passion, one invites, ‘the paradox of God becoming man, the eternal becoming temporal’ (p. 53). Hoping for happiness puts one in this historical context, which has paradoxical results (p. 54). Another cluster of terms suggests gains in happiness from moving from objective to subjective interests. This result is likened to the activity of wood cutting where the lighter the pressure on the saw gives better results (p. 42). Yet, another cluster suggests that pathos should be related to guilt and guilt-consciousness (p. 43). Guilt is underscored because one can more easily remember that one has put oneself in a guilt relation to happiness than if one were to entertain some other relationships such as suffering, faith, renunciation, or repentance. Guilt, therefore, should bear an essential difference from those other alternative acts. From Kierkegaard’s spiritual texts, namely Edifying Discourses in Various Spirits, Works of Love, and Christian Discourses, it is not surprising to find that the main cluster of terms are around suffering, love, and grace. We read that ‘the highest and greatest happiness is occasioned through love’ (p. 56). But ‘the highest happiness is to love without the reward of requited love’ (p. 61). One may need to choose personal suffering to obtain God’s love, and therefore obtain the highest happiness. The happiness we can know is in regard to fear and trembling. Without the grace of God, one does not know the highest or the eternal happiness (p. 62). One can love God through loving one another, a practice that invites suffering, which is an implied possibility that one should choose to suffer oneself (p. 68). Kierkegaard’s ideas are still being applied to guide daily living, even though they are described in a Christian religious setting. We used some

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logic to show that the reasoning behind his argument is sound. Happiness, however, is not the main premise, since it is based on eternal and heavenly concepts, which can throw one into despair. It appears that one must fall back on faith as the eternal in oneself to invite heavenly consolation for one’s suffering and loss of joy. As Sigmund Freud puts it, ‘The price we pay for cultural progress is a loss of happiness, arising from a heightened sense of guilt’ (Freud, 2005 (1929), p. 71).

PROPOSITION V Proposition V (Nietzsche: happiness comes from beliefs): ‘The internal happiness and misery of men have always come to them through their belief in this or that motive – not however, through that which was actually the motive!’ (Nietzsche, 1910, p. 81) In a June 11, 1865 letter he wrote to his sister Elizabeth, Nietzsche explained his newly perceived ideas of faith versus truth. Investigative studies have truth as their goal. Investigating truth is a newer path than what one has grown up with. Seeking truth is often uncomfortable and uncertain, and comfortless. For instance, 2 3 2 5 4 cannot be proven but is considered true. On the other hand: Every true faith is infallible. It performs what the believing person hopes to find in it. But it does not offer the least support for the establishing of an objective truth. Here the ways of men divide. If you want to achieve peace of mind and happiness, have faith. If you want to be a disciple of truth, then search. (Nietzsche, 1996, p. 7)

Nietzsche wanted to go to the origin of faith as one might say Darwin went to the origin of species, and as Marx went to the origin of societies. This took him to the Greek philosophers. Plato was for him the foundation of Christianity. The problem for us is whether we should choose life or the truth. Nietzsche wrote that he was proud of seeing happiness differently from Epicurus, who would look at the sea and perceive tranquility. ‘Such happiness could only have been devised by a chronic sufferer, the happiness of an eye before which the sea of existence has become calm’ (p. 82). One take on this point of view is that one must go through the perils of life to achieve happiness. It is as though one must cultivate miseries of life to reach happiness. In ordinary life, we seem to want to pass over existence: ‘All great noise causes one to place happiness in the calm and the distance’ (p. 99). Nietzsche placed faith over the virtue concept of Aristotle and Plato.

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Virtue requires faith to work. It is ‘faith that saves . . . not virtue’ (p. 213). However, profound people act like the flying fish that find joy in the face of the waves, thinking that ‘what is best of all in things is their surface’ (p. 207). About the way to happiness, Nietzsche related a conversation. A sage asked of a fool the way to happiness. The fool answered, ‘Admire yourself, and live on the street!’ ‘Hold’, cried the sage, ‘you require too much; it suffices to admire oneself!’ The fool replied: ‘But how can one constantly admire without constantly despising?’ (p. 198). In his book The Will to Power, Nietzsche wrote, ‘man does not want “happiness”’; ‘Pleasure is a feeling of power: if one excludes the affects, then one excludes the states that give the highest feeling of power, consequently of pleasure’ (Nietzsche, 1968, p. 238). He was writing against what he foreshadowed to be the outcome for the next two centuries, namely, nihilism – in Christianity and Buddhism. So, he proposed a ‘revaluation of all value’ to counter that decaying trend, which he sourced to ‘God is truth’ (pp. 3, 7). Morals are built on those truths, and ‘Moral value judgments are ways of passing sentence, negations; morality is a way of turning one’s back on the will to existence’ (p. 11). The will to power makes a person ‘to be able to believe in his own value’ (p. 12). For Nietzsche, if one were to follow the truth laid out by religion, then one ‘cannot endure this world though one does not want to deny it . . . the categories “aim”, “unity”, “being” which we used to project some value into the world ‒ we pull out again; so the world looks valueless’ (p. 13). Something must be said about value, which is not used here in the economic sense in classical political economy. According to Heidegger: Value for Nietzsche means a condition of life, a condition of life’s being ‘alive’. In Nietzsche’s thinking life is usually the term for what is and for beings as a whole insofar as they are. Occasionally, however, it also means our life in a special sense, which is to say, the Being of man. (Heidegger, 1991, p. 15)

This can be expressed conditionally, where E 5 Expected, and the bar expresses condition, as follows: E(life| I will) 5 being alive (p. 15) E(life| thou shalt) 5 being subordinated to Beings We see the following syllogism in Heidegger’s thinking (p. 18): World 5 Being as a whole 5 Life. The essence of Being 5 Will to Power. Therefore, this world is Will to Power. Life is Will to Power. Since you are Life, you are Will to Power.

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The will to power is thought of as a consummation of metaphysical thinking from the ancient Greek to Nietzsche’s time. In that sense, Nietzsche would be the ‘last metaphysician of the West’ (p. 8). Such metaphysical thoughts as the Christian idea of causation as first cause, and the Enlightenment idea of governing all individuals through a cosmic reason, have subordinated the individual beings to all Beings (p. 7). By the consummation of the metaphysical age, the essential power of beings is fully and unimpededly developed. But Nietzsche left us only ‘paths and trains and leaps of thought’ in this unfinished work (p. 13). What implication is there for happiness? In the old tradition that is being usurped, one expected true bliss. With the new tradition, ‘What must I do to become blissful? I don’t know, but I say unto you: be blissful and then do what you feel like doing’ (p. 17). It looks as though bliss is just a choice that we were not making all along. We were letting the past and present weigh us down. We should stop those ‘thou shalt’ and replace it with ‘I will’. We just need to choose bliss as our future goal. In his book Thus Spoke Zarathustra, Nietzsche stated a profound aphorism to the effect that God is dead, namely, ‘Dead are all gods: now we want the overman to live’ (Nietzsche, 1988, p. 191). The word ‘overman’ suggests that people have the potential to be a super-human being while remaining a human being. The people in Zarathustra’s audience did not take him seriously. They were laughing (p. 128). So, he appealed to something they were proud of, such as their culture and education: ‘Education they call it; it distinguishes them from goatherds’ (p. 128). We read in Nietzsche about the superman and the ‘last man’. The last man opined, ‘We have invented happiness’ in his investigation of ‘What is love? What is creation? What is longing? What is a star?’ (p. 129). The last man is posited as an alternative to the superman because of the death of God. Between the superman and the last man are posited spirits relating to creativity (p. 303), revenge dealing with revenge for suffering (p. 252), and gravity in which ‘all things fall’ (p. 153). The objective is to find the ideal, the will to power. Man traverses these phases characterized by the camel, the lion, and the child. As a camel, one carries the weight of nature and culture that says, ‘thou shalt’ do this or that. Enter the lion who preys on the ‘thou shalt’, asserting ‘I will’ conquer my own freedom (p. 138). The lion has the power to create freedom for itself and can say ‘no’ even to ‘duty’, but it cannot create new values (p. 139). New value is in the spirit of the child, with these faculties: The child is innocence and forgetting, a new beginning, a game, a self-propelled wheel, a first movement, a sacred ‘Yes’. For the game of creation, my brothers, a sacred ‘Yes’ is needed: the spirit now wills his own will, and he who had been lost to the world now conquers his own world. (p. 139)

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He shows the proper place of spirit and virtues in our lives is as follows: In a hundred ways, thus far, spirit as well as virtue has tried and erred . . . Let your spirit and your virtue serve the sense of the earth, my brothers; and let the value of all things be posited newly by you. For that shall you be fighters! For that shall you be creators! (p. 189)

Nietzsche published Beyond Good and Evil (Nietzsche, 2002), just after Thus Spoke Zarathustra. He took up a psychological perspective on how we are to live and endure life. If we can find values of life externally, then we must look within. This is a task suited for only real philosophers, rare founders of religion, and creative individuals in the arts and sciences. It requires a genealogical method that combines the psychological, causal, historical, and linguistic viewpoints. That task would not be a logical one necessarily, but rather one that considers many ‘what if’ scenarios that yields different perspectives. We can look at happiness from two main perspectives of life: namely, a dynamic struggle of creation and decay. From this, we discern that a power struggle is going on between things that have some power that they can assert through their will. Therefore, a will to power is driving the way we live. In inorganic matter, the will to power seems to be paralyzed or ­impotent in static conditions. In organic matter, the will to power can lead to transcendental realization of happiness and bliss in dynamic conditions. Nietzsche was against the utilitarian view of happiness in economics. He would join pain and pleasure rather than maximize pleasure or minimize pain. The two move together: ‘happiness and misfortune are brother and sister, and twins, who grow tall together, or, as with you, remain small together!’ (p. 267). The only time the two can move together is if they come to a saddle-point, as in the min-max solution in game theory. People who have looked at Nietzsche’s happiness as a game, think that it cannot have happiness as an end. First, one cannot choose not to play the game. Second, the game keeps repeating, as though when some happiness is reached, one is ploughed back to attain more happiness. Third, it is a play of resistance and victory (Urstad, 2010, p. 133).

PROPOSITION VI Proposition VI (Heidegger: happiness happens to human beings): ‘Happiness has to do with the role of human being in the happening of being.’ (King, 2009, p. 1)

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Heidegger was not concerned with a utilitarian view of happiness. The reason is that such a view is consistent with the statement that ‘the devastation of the earth can easily go hand in hand with a guaranteed supreme living standard for man, and just as easily with the organized establishment of a uniform state of happiness . . . for all men’ (King, 2009, p. 2). Rather, for Heidegger, the self or an I is ‘an activity that ranges beyond the here and now into the world and into the past and future’ (Inwood, 1999, p. 105). An essential difference between humans and animals is that humans can think abstractly but animals cannot. By being aware of the being of beings, humans can be happy. Several ideas engulf this view. We can expand from two paradigms: one that puts knowledge and ethics as the base; the other that works with nature without an ethical base. For Aristotle, man has the desire to know. From his De Anima, knowing man’s soul is the first principle to all knowledge, including happiness (Aquinas, 1967, p. 56). For Plato, these ideas are likened with the good, virtue, and justice. But the difference between them is that Aristotle started with the particular, while Plato started with the universal form or ideas (p. 63). Heidegger looked at these pre-Socratic philosophers, and through the views of Descartes, Kant, Kierkegaard, Schopenhauer, and Nietzsche, as well as his teacher Edmund Husserl, he developed his view of being. From Descartes, we get the notion that to be, to exist, is based on the proposition ‘I think, therefore I am’ (cogito ergo sum). Heidegger was concerned with this saying as it started the beginning of modern philosophy. Descartes posited ‘I’ and then made the inference ‘I am’. We read that ‘this proposition has the peculiarity of first positing that about which it makes an assertion’ (Heidegger, 1993, p. 302). What is wrong with this is that ‘the meaning of the Being of the “sum”, the “I am”, is undetermined’ (p. 68). Kant looked at transcendental categories and found that the ‘thing-initself’, the noumenon, cannot be known. Schopenhauer advocated that it is known, through what Nietzsche is said to have discovered, that humans are technical beings. Heidegger picked up on technology, claiming that we try to extract from nature the energy to project our happiness and that this energy just happens to us. Perhaps a good way to illustrate this is to consider that all modern technologies were imparted to us by some alien power. But there are other ideas that tend to extract these thoughts. One idea is that if different specialists, say a businessman and a farmer, were to visit an open field, then the businessman will frame what he observes in terms of a casino he wants to build on the site. The farmer will have a different frame, say about irrigation for agriculture. We saw that Kierkegaard likened the concept of happiness to knowing the self or the soul in a religious framework. According to a recent study, Heidegger built on that concept, but from a more experiential and factual

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point of view (Geter, 2016). That study compared Kierkegaard’s ‘concept of anxiety’ with Heidegger’s ‘being and time’. Kierkegaard was concerned with theology and the eternal, while Heidegger was concerned with the finite world inhabited by finite persons. While the former focused on the eternal, the latter focused on state-of-mind. The former relied on faith of the individual, while the latter relied on confrontation of the individual (p. 206). To get a feel of Heidegger’s views, we have created Figure 2.5. This figure starts with the term ‘being’. In his book Being and Time, he looks at how the term was used by his predecessors, and named three ways as follows (Heidegger, 2001): 1. ‘“Being” is the “most universal” Concept’ (p. 22). 2. ‘“Being” cannot have the character of an entity. Thus, we cannot apply to Being the concept of “definition” as presented in traditional logic’ (p. 23). Ground Concept: Beings defined as ‘All that is’ [BC, p. 10]


Nothing: ‘The nothing is the complete negation of the totality of beings’ [BW, p. 98]

Beings can take one of Three Modalities [BC, p. 22] Possibility



Dasein is attuned to moods that comes from being-in-the-world, and not from inside or outside. [HD, p. 172] It confronts two modes of affectedness [HD, p. 175] Fear, which can paralyze Dasein [HD, p. 176]

Anxiety, which can make Dasein a public dependent [HD, p. 177]

1. ‘Why are there beings at all instead of nothing?’ [ITM, p. 22]. 2. ‘Why are there being at all? ... They are given to us’ [ITM, p. 29]. 3. ‘The totality of beings must be given in advance so as to be able to fall prey straightway to negation – in which the nothing itself would then be manifest’ [BW, p. 98]. 4. Dasein is the human way of being, namely, being there. A Dasein is a human way of being there [HD, p. 14]. We can speak of historical, our, or human Dasein, or the Dasein of the people [ITM, p. xii].

Sources: [ITM] 5 Heidegger (2000). [BC] 5 Heidegger (1993a). [BW] 5 Heidegger (1993c, pp. 93‒110). [HD] 5 Dreyfus (1991).

Figure 2.5  Heidegger’s view of happiness as being and beings

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3. ‘“Being” is of all concepts the one that is self-evident . . . just as everyone understands “The sky is blue,” “I am merry,” and the like’ (p. 23). The suggestion about ‘nothing’ in the upper right-hand side of the figure goes to say that we cannot falsify total being; for one thing, that it cannot be grasped. But it does not preclude a way for us to question its meaning. The questioning should be done from a hermeneutical point of view, that is, from man’s situation. In the question ‘What is being?’, we tend to focus on the ‘is’ for the meaning (p. 25), which is to focus only on the language aspect of the question. Heidegger builds on this, reasoning that we understand entities that surround us even when we do not use the copula ‘is’. We see entities around us and understand them through ‘any way of comporting oneself towards entities as entities’ (p. 24). The second layer of Figure 2.5 shows how we encounter being. Heidegger wrote, ‘I pursue various possibilities for my future, bear the weight of my own past, and act or drift in the present’ (Heidegger, 1993, p. 22). R. Polk wrote, ‘we are considering something when we consider possibilities’ (Polk, 1999, p. 3). Beings exist, like an economist exists; are present-at-hand: like gold; have readiness-to-hand, like when we use tools; are non-humans, like animals. Artworks are special beings, and ‘the most real being is . . . God’ (pp. 3, 45). Towards the end of Figure 2.5 we exact some understanding of the human being. Heidegger uses the word ‘Dasein’ as a surrogate for human existence. We read that ‘Dasein always understands itself in terms of its existence – in terms of a possibility of itself: to be itself or not itself’ (Heidegger, 2001, p. 33). Among all beings, humans alone can ask questions concerning being-in-the-world. Dasein operates with a network of references in the world. Networks have arcs and nodes. Nodes can be tools (ready-to-hand things), work (towards which we apply tools), possibility of Dasein’s being (for the sake of which we produce a commodity). Arcs are directed line segments showing movements from a starting node, through intermediate steps, to the final product in the hands of others. Essentially, the network is a social process of being-in-the-world with others, and not an isolated one such as defined by Robinson Crusoe shipwrecked on an island. This interpretation is derived from Polk’s diagram (Polk, 1999, p. 61). For our thesis on happiness from the economic point of view, Figure 2.5 shows that such a network of social activities can result in fear that paralyzes Dasien, or in anxiety that would make Dasein socially dependent. But this is not seen as a criticism of an economy under, say, a capitalist regime tending to create the maximum use value. Rather, we find one’s appraisal of Heidegger that points to its failure because ‘it is still caught

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in the kind of “representational-calculating thinking”’ (Guignon, 1983, p. 241). Another assessment suggests that Heidegger should have ‘started his discussion of affectedness with cultural sensibility rather than individual mood’ (Dreyfus, 1991, p. 169). Dreyfus thought that ‘moods vary with the current situation but cultural sensibilities do not’ (p. 170). One way to look at Heidegger’s view is that from the Greeks to Descartes, we have seen the dual aspect of subject and object. Being is not an object to be analyzed, but is to be understood within a network of ordinary experiences. According to Matthew King, Heidegger is concerned with a ‘deep’ kind of happiness that is related to ‘the role of human being[s] in the happening of being’ (King, 2009, p. 1). It is not the kind of happiness that deals with ‘desire-satisfaction’ (p. 2). Rather, deep happiness consists ‘in our dwelling in our fitting together with being’ (p. 5). Historically, happiness has been concerned with this fitting together. Mortals were related in an environment of earth, sky, and divinities. Deep happiness happens when we get closer to what Heidegger called the ‘history of being’ (p. 5).

PROPOSITION VII Proposition VII (Wittgenstein): In his Tractatus Logicus-philosophicus (TLP), Wittgenstein identified goodness with happiness. (Wittgenstein, 2001, sec. 6.43) Ludwig Wittgenstein was influenced by Gottlob Frege’s and Bertrand Russell’s works on proposition logics. Frege’s influence was about finding determinate propositions, and Russell’s influence was about starting with atomic propositions (Glock, 1996, p. 16). Wittgenstein provided a picture theory of facts on which his propositions are based. He wrote: ‘We make to ourselves pictures of facts’ (Wittgenstein, 2001, sec. 2.1). Wittgenstein started with facts: ‘The world is the totality of facts, not of things’ (sec. 1.1). Then he reached the conclusion that ‘the world of the happy man is a different one from that of the unhappy man’ (sec. 6.43). An article by Maria Balaska presented some interpretation of this statement along with some thoughts in Wittgenstein’s Notebooks 1914–1916 (Balaska, 2014). The conclusion was that Wittgenstein’s view on happiness ‘does not involve any particular content or states of mind’ (p. 404). Another article examined this proposition along with the TLP and Notebooks entries from two other works in the literature (Mosmer, 2019). There are two interpretations based on a distinction between the actual and the possible worlds, as follows:

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Fundamentals of happiness According to the first interpretation, happy and unhappy individuals see the same possibilities in the actual world, except that the happy person would accept them as the only possibilities, whereas the unhappy individual would look for more possibilities. For the happy person, the actual world is the only possible world that could have occurred. The second interpretation entails that the happy individual is aware of more possibilities in the actual world, than unhappy people. (Mosmer, 2019, p. 295)

Wittgenstein’s views on happiness can also be seen from his later writings, namely A Lecture on Ethics (Wittgenstein, 1965 [1929]), Philosophical Investigations (Wittgenstein, 1986 [1953]), and diary notes during the 1930–32 and 1936–37 periods. A recent study looked at these texts from the transcendental point of view (Philstrom, 2019). For Wittgenstein, ethics, aesthetics, and logic are considered transcendental, as opposed to factual things that are accidental (Glock, 1996, p. 107). Since the world is a totality of fact, happiness is ‘at the limit of the world, structuring the world into a totality to which we (or I) can have an ethical attitude’ (Philstrom, 2019, p. 24). In his lecture on ethics, Wittgenstein defined ethics as having value. What we experience in the world are facts. These facts are like vessels. They can contain and convey natural meaning and sense. But ethics is supernatural, beyond natural, and cannot be conveyed by words like ‘vessels’. He said: ‘It is the paradox that an experience, a fact, should seem to have supernatural value’ (Wittgenstein, 1965 [1929], p. 10). We run into the same problem with religion; it cannot be explained absolutely.

PROPOSITION VIII Proposition VIII (Saint Augustine of Hippo, 354–430): ‘If a man desires what is good and has it, he is happy.’ (Augustine, 1966, p. 193) Augustine explained this proposition in a footnote which he credited to one of his earlier works, The Happy Life or De Beata Vita. But he continued the topic in his Confessions. He explained that happiness can be attained through one’s will and one’s hope (Augustine, 1966, p. 222). He painted a hierarchical view in that the latter ‘have it in a lower kind, than they who have it in very deed’ (p. 222). But people who reach happiness with both deed and hope are better off than those who reached it without. We then read that, ‘there is a joy which is not given to the ungodly but to those who love Thee for thine own sake, whose joy Thou Thyself art’ (p. 224). This confession makes the case that love of God is the highest happiness. If one’s desire does not aim at God, the happiness that results is not the true one.

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St Augustine had also commented on happiness in his other writings. His most voluminous works are the City of God in which politics is prominent, On Free Will where justice and law dominate, and some letters (Fortin, 1973, p. 154). Fortin has pointed out that ‘divine grace rather than human justice is the bond of society and the true source of happiness’, according to Augustine (p. 159). We also learn that membership in the city of God, which has a relationship to a higher order, makes it possible to attain ‘the peace and happiness’ to which we aspire (p. 171). St Augustine is often said to follow Plato’s philosophy. While Plato distinguished between sense perception and forms, Augustine distinguished between natural desires and divine order (MacIntyre, 1971, p. 117). It is claimed that he did not have access to Plato’s work directly, but indirectly through the works of Cicero whose version was ‘Roman and stoicized’ (Fortin, 1973, p. 155). Much of the other writings of St Augustine were considered by St Thomas Aquinas. We list some main ones as follows from St Thomas Aquinas’s Treatise on Happiness (Aquinas, 2011 [1983]). These are quotes outlining St Thomas Aquinas’s first five propositions about happiness, which we shall consider in a separate section below. ‘All men agree in desiring the ultimate end, which is happiness’ (p. 13). But we then learn that more than happiness is involved in the end, namely, that ‘man’s ultimate end consisted in four things, pleasure, tranquility, gifts of nature and virtue’ (p. 10). Also, ‘Augustine says that the happiness of man consists in peace’ (p. 31). ‘Accordingly, as the end is blameworthy or praiseworthy, so are our works blameworthy or praiseworthy’ (p. 7). ‘What we here call the end that is a good is not that which is consumed so as not to be, but that which is brought to completion so as to be fully’ (pp. 10‒11). ‘That is the object of our good for the sake of which we love other things, whereas we love it for its own sake’ (p. 12). ‘That which constitutes a life of happiness is to be loved for itself’ (p. 24), and ‘from the very happiness of the soul . . . there will come about a certain overflow in the body and the bodily senses such that they will be perfected in their operations’ (p. 31). ‘Happy is he who has all that he wills and wills nothing . . . He approaches being happy who wills well whatever he wills, for good things make him happy and such a man already possesses something good, namely, a good will’ (p. 32). ‘Augustine says, happiness is “joy in the truth,” because joy itself is the fulfillment of happiness’ (p. 33). ‘To attain God by the mind is great happiness, but to comprehend Him is impossible’ (p. 43). ‘If the body be such that the ruling of it is difficult and burdensome, for as flesh it is corruptible and weighs upon the soul, the mind is turned away from the vision of the highest heaven’ (p. 50). ‘Augustine says, the soul “has

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a natural desire to rule the body,” the result of which is that it is held back in a certain way from wholly tending to its journey to heaven’ (p. 46). ‘God made the soul so powerful in nature that from its fullness of happiness the vigor of incorruption flows over into the lower nature’ (p. 50). ‘Spiritual creatures receive no other intrinsic aid to happiness than the eternity, truth, and charity of the Creator. But if they can be said to be helped extrinsically perhaps it is only by their seeing each other and rejoicing in their fellowship of God’ (p. 52). ‘In my Father’s house there are many mansions’ (John 14.2), of which Augustine says, “signify varying degrees of merit in eternal life”’ (p. 56). None of the blessed lacks any good that should be desired, since each possesses the infinite good itself, which is ‘the good of all good’ (p. 56), as Augustine says. ‘He who knows Thee, and others as well, is not happier for knowing them but is happy for knowing Thee alone’ (p. 56).

PROPOSITION IX Proposition IX (St Thomas Aquinas, 1225–1274): ‘The contemplative life gives one already an intimate taste of future happiness’. It ‘longs to see only its Creator, namely God.’ (Aquinas, 1967, pp. 220, 225) This proposition is comprised of two quotes from St Thomas, which will suffice to characterize his thoughts on happiness. ‘St. Thomas held that there was a sphere of natural reason, and above this, a region known by faith through revelation’ (p. vii). His view of faith is compatible and continuous with natural reason. He wrote in a very logical manner, being influenced by Aristotle’s ethics and syllogistic logic. His proof of God was rendered in logical form, as was his notion of sacred doctrine, which is his first proposition in his Summa Theologiae (Anders, 2012; Porwolik, 2013). The first 21 questions of Part 1 of the second part of Summa Theologiae is referred to as St Thomas Aquinas’s Treatise on Happiness (Aquinas, 2011 [1983]). Although St Thomas was a theologian, he was also steeped in the doctrines of philosophy. The treatise looked at happiness from a natural as well as a supernatural point of view of seeing God. This is the subject matter of questions 1‒5. Man can act to attain his happiness. His actions are voluntary, which sets man apart from animals (questions 6‒10); are willed, such as enjoyments, choice, consent, and other powers (questions 11‒17); and are concerned with good and evil (questions 18‒21) (p. xiv). The first question of his treatise considers happiness as ‘the ultimate end of human life’ (p. 3). St Thomas Aquinas used the word ‘beatitudes’

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recurrently in his text, which is translated as ‘happiness’. We can contemplate God to attain that happiness. Beyond that we can work towards the supernatural or ultimate happiness of seeing God (p. 3). The second question concerns what happiness consists of. The spectrum of things considered here are wealth, honor, fame or glory, power, some goods of the body pleasure, goods of the soul, and created goods. Wealth, whether natural that meets needs, or artificial such as money, falls short of ultimate happiness because they are for the sake of other things (p. 15). Honour is owed to God (p. 17). Fame and glory may be false (p. 18). God’s power is His goodness, but not so with men (p. 20). Some animals surpass man in bodily goods, and the body is for the sake of the soul (p. 21). Experience shows that pleasure can have a sad ending (p. 22). What is in man should be loved for the sake of God (p. 24). Only God can satisfy the will of man, not created goods (p. 26). The third question concerns what happiness is. Is it uncreated, an activity, of the senses or intellect, of the intellect or the will, of the speculative or practical, of scientific knowledge, of the angels, of the vision of the divine? God is happy by His own essence (p. 27). Activity is transitory (p. 28). Sense activities are common to man but happiness is not (p. 30). Love of God is an activity of the will, which is superior to knowledge (p. 32). Practical is to the good as intellect is to the true (p. 34). Man’s ultimate perfection is beyond the human intellect (p. 36). Ultimate happiness consists only in knowledge of God (p. 37). Ultimate and perfect happiness can only be in the vision of the divine essence (p. 39). The fourth question looks at what is required for happiness. It is distributed over delight, vision of delight, comprehension, rectitude of the will, necessity of body, perfection of the body, external goods, and necessity of friends. Delight can hinder our attention to happiness (p. 42). Vision is to faith as delight is to charity, and charity is better (p. 42). It is impossible to comprehend God (p. 43). To be clean of heart is better than rectitude of the will (p. 45). The soul does not have perfect being when separated from the body (p. 46). The body can be a hindrance to the vision of God’s essence (p. 50). External goods are required for imperfect happiness, but not for perfect happiness (p. 51). Friends are needed for good activity (p. 52). The fifth question is about the attainment of happiness, considering if man can attain happiness, if one is happier than another, if one can be happy in life, if can one lose happiness that is attained, if natural powers lead to happiness, if there is a higher creature that leads one to happiness, if good deeds are necessary, and if everyone desires happiness. The senses cannot teach the end that is required for true happiness, and man cannot go beyond the angels in grade of nature (p. 55). Each is equally endowed with eternal life so one person cannot be happier than another (p. 55). But

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one can be happy in this life, for in hope we are saved (p. 57). Happiness once attained can be lost, because man is changeable in nature (p. 58). There are natural powers such as will and virtue that can lead to happiness (p. 60). Angels can enlighten man’s intellect and help man to attain happiness (p. 62). One can attain happiness through grace (p. 65). Some people consider it impossible to see God in His essence, so not everyone desires happiness.

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3.  Economics and happiness In this chapter, we look at some broad sources of the economics of happiness. Starting with a classification of the subject based on psychological, individual, social, and institutional views of happiness, we then move to how the historical schools of thoughts explicitly or implicitly deal with the matter.

PSYCHOLOGICAL DIMENSION OF HAPPINESS A statement by the psychologist Sigmund Freud captures what most people think is the purpose of civilized life, which is widely practiced by economists: It is simply the pleasure-principle which draws up the programme of life’s purpose. This principle dominates the operation of the mental apparatus from the very beginning; there can be no doubt about its efficiency, and yet its programme is in conflict with the whole world, with the macrocosm as much as with the microcosm. It simply cannot be put into execution, the whole constitution of things runs counter to it; one might say the intention that man should be happy is not included in the scheme of Creation. (Freud, 2005 [1929], p. 8)

Most economists would credit Jeremy Bentham with this principle, but we can find this as the core psychological assumption made by Adam Smith, the father of economics. Along with the propensity to procreate, to truck and barter, Smith postulated the overall psychological assumption that we have the desire to better our condition. This desire puts into motion a self-regulated system. But like a tree, economics has developed into many branches, mostly ignoring Smith’s psychological core assumption. In fact, only one major economist since Smith has made such a prominent assumption. He is John Maynard Keynes, who speaks of the propensity to consume at the aggregate level of society that creates a demand-side economy. Also, one major economist resisted the Smithian economy. He is Karl Marx, whose assumption might be stated as the desire to free oneself from the chains of capitalism. ­73

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INDIVIDUAL VERSUS SOCIAL HAPPINESS The economics of happiness sometimes takes an individualistic and sometimes an economy-wide point of view. The smallest economy one could have is a one-person economy. Older classical economists use this to explore the possibility of life, which is often one of survival rather than one of happiness. The most popular example is the story of Robinson Crusoe, shipwrecked on an island. Economists refer to this example as the Robinsonian economy. Others are quick to point out that modern living is social, since no one person now produces for all their wants. For Marx, the Robinsonian economy is one in which ‘personal dependence (entirely spontaneous at the outset) are the first social forms, in which human productive capacity develops only to a slight extent and at isolated points’ (Marx, 1973, p. 96). In Capital, Volume I, he states that ‘of his prayers and the like we take no account, since they are a source of pleasure to him, and he looks upon them as so much recreation . . . All the relations between Robinson and the objects that form this wealth of his own creation . . . those relations contain all that is essential to the determination of value’ (Marx, 1975 [1887], Vol. 1, p. 76). Pleasure and recreation here apply to man and nature, and at best, a relation of one man, Robinson, to another man, and Savage at a later stage. This social form must develop by two more sequential stages: namely, one of personal independence founded on material dependence, and one of free individuality (Marx, 1973, p. 96).

UNITS OF MEASUREMENT OF HAPPINESS The cardinal and ordinal scales of happiness have been proposed in utility theories. One popular measurement is the unit theory. This view made its appearance from an invariable standard for measuring value. Students of economics are familiar with Adam Smith’s water‒diamond paradox. Water has high utility but low exchange value, while diamond has low utility but high exchange value. This led Smith to use a labor theory of value in the early and rude stage of society, and one of labor command for high stage of value. In a hunter nation, if the labor (L) to kill a beaver (B) is twice that of killing a deer (D), then one beaver will be worth two deer (Smith, 1976 [1776], p. 65) Smith goes on to show that a part of the labor must pay for the advance of stock in the form of profit, and land in the form of rent. Therefore, ‘Labor measures the value not only of that part of price which resolves itself into labor, but of that which resolves itself into rent, and of that which resolves itself into profit’ (pp. 67‒68). David Ricardo expanded Smith’s measurement to include labor used to

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make the hunter’s capital goods as well. ‘Suppose the weapon necessary to kill the beaver, was constructed with much more labor than that necessary to kill the deer . . . one beaver would naturally be of more value than two deer’ (Ricardo, 1951, p. 23). Ricardo’s vacillation about this theory was covered by Maurice Dobb (1973, pp. 78ff.). With the marginal revolution around 1870, the measure of happiness moved from labor theory to utility theory. The early concerns were whether one can measure utility by using cardinal numbers, which tells how many things there are with the use of counting numbers. Then a switch was made to ordinal numbers, which point to the position of things in a list using first, second, third, and so on. In general, Edgework wrote that ‘utility, then, has three dimensions; a mass of utility, lot of pleasure is greater than another when it has more intensity‒time‒number units. The third dimension is doubtless an evolutional acquisition; and is still far from perfectly evolved’ (Edgeworth, 1881, p. 8). In the first, a unit of pleasure-intensity will count for one, to which we apply the idea of a greater or less pleasure-unit. We will treat intensity‒ time‒number units in the way energy is treated in physics. For the third measure we will rely on census (p. 8). According to Joseph Schumpeter, ‘The word “unit” is never strictly correct’ (Schumpeter, 2006 [1954], p. 877). The founders of utility theory have used many different words or phrases such as ‘marginal utility’ by Wieser, ‘final degree of utility’ by Jevons, ‘rarete’ by Walras, and ‘desire for one more unit’ by Fisher (ibid.). We will look at the works of Jevons, Menger, and Walras, the three who are often credited with the marginal revolution in economics.

STANLEY JEVONS We start by noting a view of Jevons on happiness as follows: We may safely call that man happy who, however lowly his position and limited his possessions, can always hope for more than he has, and can feel that every moment of exertion tends to realize his aspirations. He, on the contrary, who seizes the enjoyment of the passing moment without regard to coming times, must discover sooner or later that his stock of pleasure is on the wane, and that even hope begins to fail. (Jevons, 1965, p. 35)

Jevons accepted a definition of utility from Says and Bentham, which states that: by utility is meant that property in any object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness (all this, in the present case,

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Fundamentals of happiness comes to the same thing), or (what comes again to the same thing) to prevent the ­happening of mischief, pain, evil, or unhappiness to the party whose chief,  pain, evil, or unhappiness to the party whose interest is considered. (pp. 38‒39)

Utility is ‘measured by, or even as actually identical with, the addition made to a person’s happiness’ (p. 45). Jevons stated a general law about utility: General Law (Jevons): ‘[T]he degree of utility varies with the quantity of commodity, and ultimately decreases as that quantity increases.’ (p. 53) Jevons emphasized that ‘utility corresponds to the production of pleasure, or, at least, a favorable alteration in the balance of pleasure and pain’ (p. 58). Intensity and duration of feeling about pleasure is the measure of utility: ‘The intensity of feeling must mean, then, the instantaneous state produced by an elementary or infinitesimal quantity of commodity consumed’ (p. 65). He then translates this to: ‘so much commodity producing a certain amount of pleasurable effect per unit of time’ (p. 66). To show correspondence of this measure with physical measures, let U be utility of consumption, M be mass of the commodity, and T be time period, then MUT 21 gives the instantaneous state of feeling (p. 66). Jevons then equates exchange value with the final degree of utility: ‘final degree of utility, as meaning the degree of utility of the last addition, or the next possible addition of a very small, or infinitely small, quantity to the existing stock’ (p. 51). In summary, ‘the theory merely expresses that, when a man has purchased enough, he would derive equal pleasure from the possession of a small quantity more as he would from the money price of it’ (p. 13). We find this results in today’s textbooks in microeconomics that show maximization of utility as subject to budget constraints. They show the way consumers ‘maximize happiness by purchasing pleasure, as it were, at the lowest cost of pain’ (p. 23).

CARL MENGER Menger emphasizes that satisfaction of human wants is the aim of consumption. Goods must have the capacity to satisfy that want. For him, ‘Utility is the capacity of a thing to serve for the satisfaction of human needs, and hence (provided the utility is recognized) it is a general prerequisite of goods-character’ (Menger, 2007, p. 119). Because wants are satisfied directly by consumption good, he labelled those goods by first order. Factors of production satisfy wants only indirectly by being used to produce consumption goods, so they are goods of a higher order

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(pp. 67‒70, 123‒126). On this method of classification, he enunciated the ­following theorem: General Law of Imputation (Carl Menger): In terms of character, ‘the economic character of goods of higher order depends upon the economic character of the goods of lower order for whose production they serve.’ (p. 107) In terms of value, ‘The value of goods of higher order is always and without exception determined by the anticipated value of the goods of lower order in whose production they serve’ (p. 150). We see that our happiness through consumption regulates the way our factors of production are used. We can produce our happiness when we determine what goods we want. This also has a time dimension: ­gunpowder today may not have the same value as gunpowder three months hence. Therefore, ‘the principle that the value of goods of higher order is ­governed, not by the value of corresponding goods of lower order of the present, but rather by the prospective value of the product’ (p. 151). In some cases goods, such as ice water in winter, do not have any value in the present. Marginal utility has a unique meaning for Menger. It is demonstrated by a subject ranking of utilities. The neoclassical economist Knut Wicksell demonstrates this view by an example of Menger and Bohm Bawerk (Wicksell, 1949, p. 31). A colonist has five sacks of corn, after providing for seed for next year. The first sack he uses to sustain his life. The second, he eats to strengthen his body. The third, he feeds to chickens to procure meat. The fourth sack he uses to make alcoholic drinks. The fifth sack he uses to feed parrots and wild birds for his amusement. This last sack, although identical to the other four sacks, is used in a way that least attend to his needs. He will prefer to sacrifice this last sack, if he must, than he would the previous four. This demonstration is said to unify utility with scarcity. For the colonist, exchange value is determined by ‘technical circumstances: by sacrificing the direct consumption of so many kilograms of corn he can, if he wishes, obtain one kilogram of eggs or fowl’ (p. 36). In terms of utility, the last sack can be thought of as having negative or zero value of utility for the colonist, but can be exchanged for something, eggs or fowl, with positive utility for him. He can do this sort of exchange for a sack with higher utility than the last sack. Such exchange will incur diminishing returns and he must come to a point where it is not possible to do further exchanges. The stopping point is where the ‘marginal utility, the utility of the last kilogram consumed directly and of the last converted into animal food, must, in economically regulated consumption, be the same’ (p. 37). By this method, maximum satisfaction or happiness is attained.

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LEON WALRAS (1834–1910) Walras used the term ‘utility’ in many senses. The two parameters of the demand curve capture two concepts of utility. Extensive utility is the quantity intercepts, that is, consumption of goods when prices are zero. Intensive utility is the slope of the demand curve. He then ‘assume[s] the existence of a standard measure of intensity of wants or intensive utility’ (Walras, 1969, p. 117). Walras reached the correct result for utility maximization that is carried out in modern practice where a utility function is constrained by a budget. His general law is as follows: General Law of Utility Maximization (Leon Walras): ‘Given two commodities in a market, each holder attains maximum satisfaction of wants . . . when the ratio of the intensities of the last wants satisfied . . . is equal to price.’ (Walras, 1969, p. 124) In the general equilibrium setting, he uses the price of a commodity as a numeraire, by setting its value to unity. Let MU be marginal utility, p be price, and i 51, 2, . . ., n be the index of commodities. Then letting p1 5 1, the modern formula for utility maximization is (Stigler, 1950a, p. 315):

MU1 5

MU3 MU2 5 5... p2 p3

According to Milton Friedman, the numeraire concept is helpful in the measurement of utility. He wrote that: if a consumer’s preferences can be validly represented by a sum of one-variable functions, a convenient measuring rod for utility is at hand; one need only take the utility added by some specified unit of one commodity, say the utility added by the tenth slice of bread, as the basic unit, and the utility of all other commodities can be expressed in terms of it. (Friedman, 1955, p. 903)

But Friedman went on to criticize a one-variable utility function because it would imply that if income increases, one will spend it proportionately on the utility function, ignoring that some goods may be inferior (p. 903). Despite the numeraire concept, a unit of pleasure is still a controversial concept. In a letter to J.L. Shadwell, on October 17, 1872, Jevons argued for a unit of measure of utility that foreshadows Friedman’s numeraire idea. The letter states that ‘the ordinary or average good occasioned to a man by an ounce of bread after 3/4 lb. of bread have already been eaten might be taken as a unit of pleasure, remembering of course that the pleasure derived from any commodity is not proportional to that commodity’ (Jevons,

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1886, p. 269). This idea is underscored by another letter to Walras on May 12, 1874, demonstrating that what Jevons called ‘degree of utility’ is what Walras called ‘rarities’ (p. 303). In regard to happiness, we must be clear about the equilibrium to which the theories of the marginalists apply. Knut Wicksell, the well-known neoclassical economist, made this statement in regard to Walrasian marginal findings: ‘under competition, each of the exchanging parties can and does go on exchanging up to the point of what we have called relative satiety – relative, that is, to the existing system of prices – so that at those prices none of them wishes to exchange any more’ (Wicksell, 1969, p. 75). In real life, competition does not set all prices. As Wicksell mentioned, during most of history prices were set by decree, and in the modern economy, many prices are regulated. At decreed or regulated prices, ‘there will then always be persons who, on ceasing to exchange, have not yet reached the point of satiety’ (p. 75).

AN ECONOMIC TOUR BEFORE AND AFTER THE MARGINALIST In Search of the Primitive Happiness Humans are born into a family. They take up the culture of that immediate environment. We read that ‘village communities were found to be, or to have been the primitive form of society everywhere from India to Ireland  . . . With the dissolution of these primeval communities society begins to be differentiated into separate and finally antagonistic classes’ (Marx and Engels, 2010, Vol. 6, p. 509). For Marx and Engels, family, based on capital and private gains, existed mainly for the bourgeoisie, and not for the proletarians (Stockhammer, 1965a, p. 87). The founders of society were ‘a man and a woman, who found a family, the simplest and first form of association for the purpose of production’ (Engels, 1894, p. 112). This early society was patriarchal, with women being placed in a subordinate position (p. 113). This position was characterized by Rousseau’s ‘Discourse on the Origin of Inequality among Men, 1754’, and the idea ran through the economic thoughts of Adam Smith and David Ricardo (p. 113). The celebrated example of Robinson Crusoe and Savage forming a society comes up as illustrative of this early form of society. They are two equal wills in the Kant‒Schopenhauer‒Nietzsche sense, but are not so from the materialistic point of view. Savage will remain in servitude to Crusoe; and this condition prevailed in the Middle Ages (p. 114).

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Primitive society for the Marxist, therefore, does not have class conflict. This much Engels has clearly stated in Anti-Dühring: ‘It was seen that all past history, with the exception of its primitive stages, was the history of class struggles: that these warring classes of society are always the products of the modes of production and of exchange – in a word, of the economic conditions of their time’ (Russell, 2009, p. 478). The vicissitudes of family life were noted in the Heroic age by Hesoid as follows: But whoso partaketh of the lot of marriage, and getteth a good wife congenial to his mind, for him evermore evil contendeth with good. For whosoever hath gotten an evil family, he hath unabating grief within his breast in heart and soul while he liveth; and it is an evil thing beyond remede. (Hesoid, 1908, p. 53)

One study of the primitive greatly attracted the interest of Karl Marx and Frederic Engels. According to that study: we owe our present condition, with its multiplied means of safety and of happiness, to the struggles, the sufferings, the heroic exertions and the patient toil of our barbarous, and more remotely, of our savage ancestors. Their labors, their trials and their successes were a part of the plan of the Supreme Intelligence to develop a barbarian out of a savage, and a civilized man out of this barbarian. (Morgan, 1877, p. 563)

Morgan studied ancient societies in ethnical periods based on inventions, discoveries, and primary institutions. The institutions he looked at include government, religion, family, language, and property (p. 4). He used the ‘successive arts of subsistence which arose at long intervals’, creating distinct ethnical periods (p. 9). The alternative classificatory system – Stone, Bronze, and Iron Ages – is ruled out because of significant overlaps of periods (p. 8). Morgan’s ethnical periods start with savagery, which led to barbarism, and then to civilization. The last of these period started with the ‘Invention of a Phonetic Alphabet, with the use of writing, to the present time’ (p. 12). Engels looked at Morgan’s work in his The Origin of the Family, Private Property and The State (in Marx and Engels, 2010, Vol. 26, pp. 129‒276). Engels underscored the centrality of subsistence in Morgan’s ethnical period, with Morgan’s point of view that mankind is the only being that gained control over its food supply. The epochs are the results of mankind enlarging this source of subsistence (p. 134). Engels also drew from Morgan’s work and his own research that the type of family also changes with the level of subsistence. Three forms of marriage correspond to Morgan’s three ethnical epochs: ‘For savagery – group marriage; for barbarism – pairing marriage; for civilization – monogamy,

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supplemented by adultery and prostitution’ (p. 182). The underlying prediction is that family will continue to change as society advances, ‘until the equality of the sexes is attained’ (p. 190). Marx and Engels also looked into the works of Sir Henry Maine and other studies of ancient societies to examine the transition of primitive communism to capitalism. Sir Henry Maine wrote that ‘the happiness of mankind is, no doubt, sometimes assigned both in the popular and in the legal literature of the Romans’ (Maine, 1906 [1861], p. 48). He viewed equality in law, threatened by politics, as a contribution to the happiness of mankind: ‘The proposition that independent communities, however different in size and power, are all equal in the view of the law of nations, has largely contributed to the happiness of mankind, though it is constantly threatened by the political tendencies of each successive age’ (p. 56). Maine’s position is built around the Codes of Manu, and the Justinian Code. Customary laws and themises in ancient societies predate those codes. The latter were judgments laid down by rulers (kings) that hold some divine principles (Redfield, 1950, p. 579). For Maine, society and its laws transition from status to contract, which was accepted by Marx (Marx, 1974, p. 36). Reading Morgan and Maine, Marx surmised that property in the primitive society was collective, and not impersonal or personal as in Morgan (p. 9). This is a necessary argument that goes to his preference of primitive communism over gens in Morgan’s work and joint family in Maine’s. Engels also tied in his ideas of family with Maine’s view that society advance from status to contract, meaning ‘from an inherited state of affairs to one voluntary [sic] contracted’ (Marx and Engels, 2010, Vol. 26, p. 186). The contract requires people with freedom and equality. The Lutheran and Calvinistic religion played a part in establishing such freedom and equality. In Maine’s sense, marriage is an example of contract since according to ‘bourgeois conceptions, matrimony was a contract, a legal transaction, indeed the most important of all, since it disposed of the body and mind of two persons for life’ (Marx and Engels, 2010, Vol., 26, p. 187). Are we to suppose that the primitive life was happy? As society progresses, Maine taught that ‘greater or less happiness of a people depends on the degree of promptitude with which the gulf is narrowed’ between ‘social necessities and social opinion’ (Maine, 1906 [1861], p. 27). Morgan’s ‘successive arts of subsistence’ seems to suggest a limit in the long run at which society converges due to invention, discoveries, and primary institutions. For Marx the ultimate limit is what is necessary for the highest happiness, for limits in the long run look like stepping stones, as socialism is to communism. The truth about the primitive society cannot be observed. If there ever existed a situation of one person versus nature in primitive times, then that person had to use good instincts or survival strategies to survive. It

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is tempting to say that such learning may have roots in doing things and learning from mistakes. If someone was a rule-giver, then we have the root of a command system. If people just evolved, then it would have been a fair random process for survival. For example, a casino game such as Baccarat gives the player a 49 percent chance to win, but it is possible to go broke playing that game over time. The primitive must have had a propensity towards happiness. They could gather food anywhere, as they were born with that right and freedom. But there must have been some checks to that right and freedom associated with environmental dangers. Nature can provide nothing more than survival from such a basic beginning. If things became scarce then the primitive may become mobile or nomadic. If scarcity continues, then one needs to develop a survival will. But a survival will is not enough for happiness. This might be the impetus to strengthen the will by forming larger groups. Having many children will be a logical step, but forming villages and communities seems a more attractive way to go. Primitive Accumulation is Conducive to Social Happiness According to the eminent economic historian Ronald Meek, Montesquieu ‘distinguished more precisely than any of his predecessors between societies based on hunting, pasturage, agriculture, and commerce’ (Meek, 1977, p. 29). These stages were tied to the model of subsistence, and with other causes such as government and climate. Meek stated that Smith and Turgot built on Montesquieu’s stages of society theory. For Adam Smith: in that rude state of society in which there is no division of labour, in which exchanges are seldom made, and in which every man provides everything for himself, it is not necessary that any stock should be accumulated or stored up beforehand in order to carry on the business of the society. Every man endeavours to supply by his own industry his own occasional wants as they occur. (Smith, 1976 [1776], p. 276)

Smith wrote that some ‘rudest age of society admits of any considerable inequality of fortune . . . The first period of society, that of hunters admits of not such inequality. Universal poverty establishes there universal equality’ Smith, 1976 [1776], p. 712). For Karl Marx: a certain accumulation of capital, in the hands of individual producers of commodities, forms therefore the necessary preliminary of the specifically capitalistic mode of production. We had, therefore, to assume that this occurs during the transition from handicraft to capitalistic industry. It may be called

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Economics and happiness ­83 primitive accumulation, because it is the historic basis, instead of the historic result of specifically capitalist production. (Marx, 1975 [1887], p. 440)

Primitive accumulating for Marx had two types of people: the elite and the lazy. Marx compared their situation to the aftermath of original sin in the Bible. The lazy people were condemned to sell their labor for a living, while the elite people accumulated wealth (Marx, 1975 [1887], p. 713). This marks the date that the majority were in poverty. Primitive communism is an early social relation that Marx holds out as promising for freedom and happiness. In some notebooks, Marx commented on some studies on ancient society. One point is that ‘in the ancient collectivities there existed the characteristics of society which man must reconstitute if he is to overcome the distortions of his character in the civilized condition’ (Marx, 1974, p. 14). This reconstitution will be done by ‘a human effort, of man by and for himself . . . liberty and equality of the ancient’ will overcome the distortion of property relationships (p. 14). We read that ‘the primitive community as it was conceived by Marx established the content as well as the form of man’s primordial existence and his consequent and subsequent social character’ (L. Krader, ‘Introduction’, in Marx, 1974, p. 73). The next step is to consider larger group living. One understanding is that the evolutionary perspective dates humans from 6 million years ago. If we assume that they are gregarious animals, then their early life must have been in a group we may call a family. About 6000 years ago, city life evolved, which today is about half of the world’s population (Diamond, 2019, p. 17).

MERCANTILISM The economic interpretation of mercantilism is developed around Adam Smith’s and John Maynard Keynes’s interpretations. Smith thought that the mercantilists confused money with wealth. Keynes laid out ‘the element of scientific truth in mercantilist doctrine’ in two determinants that link up with his theory of effective demand (Keynes, 1972‒89, Vol. VII, p. 335):

Home Investments 5 f (domestic rate of interest) (3.1) Foreign Investments (including accumulation of precious metal ) 5

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f (size of the favorable balance of trade) (3.2)

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Keynes advocated this scenario to induce accumulation: if exports exceed imports the balance of payments (BOP) will be favorable, which will cause an inflow of precious metals. Then, the inflow of money will lead to a fall in the domestic interest rate and more domestic investment. Keynes built a system to show how investment translates to output via a multiplier (p. 336). A later interpretation looked at the mercantilist model in term of aggregate supply and demand (Eagly, 1974, pp. 10‒17). For the early mercantilists (1500–1650), aggregate demand (D) is composed of domestic demand (D ) and trade balance (B). So, one could write D 5 D 1 B. Aggregate supply (S) will be determined by labor inputs, such as population (P), unemployment rate (U), and the wage rate (w). Equilibrium conditions will require:

D 1 B 5 S (P,U,w) (3.3)

For the later mercantilists (1650–1720), paper money will be added. This will break the link between specie and money supply. The foreign trade component of D will change the money stock, and D will be determined by money supply, independently, D 5 f (Ms) (p. 15).

THE PHYSIOCRATS According to this school, surplus or net product is a gift of nature. In 1758, Francis Quesnay published the Tableau Economique (see Marx and Engels, 2010, Vol. 31, p. 605), showing how commodities circulate between three classes – agriculture, artisans, and manufacturing ‒ and how capital advanced by the agricultural sector reproduces itself. Only the agricultural sector produces a surplus; the other two sectors consume what they produce. This has implications for their expansion policies, namely, trade and taxes should not be a burden on the agricultural sector. The production function will include capital and entrepreneurs, F (K, E) . Land and labor are assumed abundant. The entrepreneurs are rich farmers who do not work. They make advances to cultivate the land and hire peasants (Eltis, 1975, p. 174). There are three ways to produce. The most productive way is by horse-drawn ploughs, the next is by ox-drawn ploughs, and the least productive is with labor alone. The work of labor alone produces for the laborer’s own consumption, and therefore does not yield a surplus. The system foreshadows the modern division of capital into fixed and circulating. Fixed capital includes horses, oxen, ploughs, and so on, which are not used up in the production period. Circulating capital includes

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Table 3.1 Rate of return (in million arpents of land, and million livres of A and O) Culture



Annual advances (A)

Output (O)

Return (O-A)/A

Ox-drawn (la petite) Horse-drawn (la grande)











Notes: Labor data is not given, but we can assume 1 for a team. These laborers have been trained for the respective culture. Annual advances are circulating capital: investments in raw materials, wages, etc. Original advances are fixed capital: horses, ploughs, farm buildings, etc. Source:  Quesnay’s original numbers cited in Eltis (1975, p. 172).

wages and raw materials. They are replaced each year, so the term ‘annual advances’ is used. Table 3.1 also foreshadows that better technology and maybe investments in research and development have higher payoffs. As Marx pointed out, the physiocrats ‘have not yet reduced value in general to its simple substance – the quantity of labor or labor time’ (Marx, 1954, p. 46). The ‘1L’ in Table 3.1 can be interpreted as Piero Sraffa suggested, namely ‘as fractions of the total annual labor of society, which we take as unity’ (Sraffa, 1960, p. 10). Since agriculture is the only sector that produces surplus, then it is of the form of use-value produced over usevalue consumed by the laborers (Marx, 1954, p, 45). Profit is in the form of higher rents paid to capitalists. Interest on money will be due to usury. Profit and interest are different division of rents. Table 3.2 represents the customary input‒output table to explain surplus and reproduction that tries to explain Quesnay’s Table Economique, a rather complex table. Table 3.2 follows a form used by Phillips (Phillips, 1955, p. 140); (Maital, 1972). It shows three classes: agriculture, landlords, and manufacturers; and two flows: annual advances by the landlords to farmers and artisans, and a zigzag flow between the classes. Happiness in the Quesnay system is at its highest level when the proportions between consumption and production are optimal. Quesnay’s table divides total product into advances, which are inputs made for the next round of production, and net products or surplus for consumption. Attempts have been made to set up a dual system in terms of price and quantities. A quantity system follows an input‒output structure. It is an alternative

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Table 3.2  Input–output table: Quesnay economic table

Farmers Artisans Proprietors Total output




Total consumption

2 {2/5}(100) 1 {1/5}(0) 2 {2/5}(100) 5 (200)

2 {2/5}(50) 0 {0/5}(0) 0 {0/5}(0) 2 (50)

1 {1/5}(50) 1 {1/5}(50) 0 {0/5}(0) 2 (50)

5 (200) 2 (50) 2 (100) 9 (350)

Sources:  Unbracketed numbers are from Phillips (1955, p. 140). Curly brackets show input‒output coefficients, Aij, for Phillips data. Common bracketed numbers are from Samuelson (1986, p. 641).

to the tableau that shows initial advances followed by a zig-zag multiplier flow system that converges. One way to summarize the input‒output system is by today’s spreadsheet. The dimensions are money values. The first column, which reads as the area codes for New York, indicates that farmers produce 5 units, keep 2 for consumption, sell 1 to an artisan, and 2 to proprietors. The other columns are read similarly. The first row shows the farmers’ consumption, namely 2 units of their output, 2 units of artisans’ output, and 1 of proprietors’ output. The farmers and artisans consume what they produced, so no value is added. Proprietors supply rental services to farmers and artisans. They create 2(50) value-added. The value-added in fact comes from rents they receive from the farmers, because only farmers produce surplus in this system. We can obtain a spreadsheet of input‒output coefficients by naming a spreadsheet Ai, j to represent all the rows and columns obtained by dividing by the classes’ respective outputs. This will yield the number in the curly bracket for Phillips data. Now, we can write our quantity and price data as two s­ preadsheets: X 5 (Ai, j) .X . . .. . .. . . (Output system) .

PT 5 PT. (Ai, j) ...... (Price system) .

These output and price systems are considered an open system. Treating a bundle of goods in money terms where one bundle equals 1 unit of money and considering only the farmer and artisans sectors as fixed yield is one way to close the model (Steenge, 2000, p. 185). This way, we can extract a small fixed-coefficient spreadsheet without the last row. Now we have:

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Ari, j 5 c

0.4 0.2

1 d , with eigenvalue 0 Ar 2 λI 0 0

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Economics and happiness ­87

5 c

0.4 2λ 0.2

1 d 5 (0.4 2 λ) (2λ) 2 0.2 5 0. 0 2λ

1 0.8 Or λ2 2 0.4λ 20.2 5 0, which implies that λ 5 0.4 6 !0.16 . The two roots 2 are 0.69 and 20.58. Since there exists a positive eigenvalue, the system can be solved for positive x and p. Also, it can be shown using these spreadsheets that only landlords produce a surplus. One explanation is directly from the numbers:

Farmers use 5 units of raw materials (2 1 2 1 1) to produce 5 units of output; their value added is thus (5 2 5) 5 00. Artisans use 2 units of raw materials to make 2 units of output; their value added, too, is zero. Landowners supply 2 units of output (rental services) but purchase no inputs; their value added is 2, or, as a fraction of output, 2/2 5 1. (Maital, 1972, p. 506)

In vector form, the surplus is shown as [0, 0, 1]. Implications of Physiocracy for Happiness It was assumed that better techniques should be adopted because nature bequeaths more productivity through them. But the spectra of exploitation were then recognized. To quote Marx: ‘Comfort are unknown to those whose hands it is accomplished’ (Marx, 1954, p. 64). All wealth comes from land and cultivation by workers. Political economists from Quesnay to Ricardo supported free trade, which allows competition to fix the natural price of labor to a minimum wage rate. So, subsistence wages are paid: wages that allow the workers to just reproduce themselves and production (Marx and Engels, 2010, Vol. 6, p. 462). Quesnay’s table has many features that were later imitated. The table can show growth or decline if the proportion between consumptions are not optimal; for example, if landlords’ propensity to invest falters, or if prices fall (Pressman, 1993, p. 309).

ADAM SMITH Adam Smith opened The Theory of Moral Sentiments with the statement that however selfish we may be, there is something in our nature that makes us interested in seeing the ‘fortune of others, and render their happiness necessary’ to us (Smith, 1984 [1759], p. 9). We read in his other work that ‘no society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable’ (Smith, 1976 [1776], p. 117).

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There is a suggestion in these statements that tend to make wealth and its distribution if not equal to, then congruent with, happiness. Stoic Influence on Adam Smith In The Theory of Moral Sentiments, Smith draws frequently from the Stoic school. He quoted from Epictetus and Marcus Aurelius, and his source was Plato, Aristotle, or Cicero (Smith, 1984 [1759], p. 5). He had a funny way of combining Stoic thought with Christian beliefs of benevolence. One such great combination is: ‘to love ourselves only as we love our neighbour, or what comes to the same thing, as our neighbour is capable of loving us’ (p. 6). Knowing that when self-interested people meet, there is a potential for conflict, Smith postulated a spectator principle to alleviate that problem. The principle prevents self-interested people from communicating directly, by postulating an invisible spectator present and looking over their transactions. The principle can be summed up by the popular phrase of putting oneself in the other’s shoes. This way, two self-interested persons can transact their business with mutual gains and be able to walk away with smiles on their faces. As Smith is famous for his equilibrium system, we are not surprised to find this stated in the making of happiness as well. For Smith wrote: ‘happiness consists in tranquility and enjoyment. Without tranquility there can be no enjoyment; and where there is perfect tranquility there is scarce anything which is not capable of amusing’ (p.149). We can write his ideas of tranquility over time in the form of an equation, as follows: Tranquility 5 k (Prosperity 2 Adversity)

Or, in short:

Tt 5 k (Pt 2At ) (3.4)

Equation (3.4) is supported by a quote from Smith, namely: But in every permanent situation, where there is no expectation of change, the mind of every man, in a longer or shorter time, returns to its natural and usual state of tranquility. In prosperity, after a certain time, it falls back to that state; in adversity, after a certain time, it rises up to it. (p. 149)

One cannot help noticing that this equation spelled out the dynamic relations where displacement from the natural equilibrium level will be selfcorrecting.

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The equation foreshadowed John Maynard Keynes’s short-run process but without intervention, and Paul A. Samuelson’s dynamic price adjustment schema, by over 200 years. In his Tract on Monetary Reform, Keynes postulated his short-run stance in his famous saying, ‘In the long run we are all dead’ (Keynes, 1972‒89, Vol. IV, p. 65). But in Economic Possibilities for our Grandchildren, Keynes looked at expectations of economic living over the long term (Keynes, 1972‒89, Vol. IX). Samuelson made his dynamic contributions to long-run economic adjustments by postulating a price differential equation. Samuelson analyzed price stability through the expression: dp/dt 5 H(qD – qS), where the term on the left is the rate of change of prices, dp, with respect to changes of time, dt. H is a proportional constant; q is quantity; S is supply; and D is demand (Samuelson, 1966a, p. 544). Stability is, therefore, assured if as time goes to infinity the solution of the differential equation breaks down, which in economic terms means that ‘the supply curve cuts the demand curve from below’ (Samuelson, 1974, p. 18). Le Chatelier’s principle relaxed assumptions from the grip of the Marshallian ceteris paribus assumption that holds all other variables constant in equilibrium analysis. Samuelson explained that if you squeeze a balloon, its volume will decrease more if you keep its temperature constant than it will if you let the squeezing warm it up (Samuelson, 1966a, p. 626). The spectator principle was translated into the next book, The Wealth of Nations. It became the invisible hand that regulated the market mechanism. Smith’s psychological assumptions work along with natural and institutional assumptions to predict continuous increases in wealth for a nation under a capitalist-market regime. One can start with a preliminary hypothesis expressed in equation (3.5) as follows:

Accumulation of Wealth and Technology S c Better prospect for creating more Wealth S s Possibilities for increasing Happiness


Accumulation, Technology, and Happiness To develop equation (3.5), Adam Smith stated that happiness is attained in the progressive state of society. He wrote: It deserves to be remarked, perhaps, that it is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the laboring poor, of the great body of the people, seems to be the happiest and the most comfortable. It

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Fundamentals of happiness is hard in the stationary, and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining, melancholy. (Smith, 1976 [1776], p. 99)

Happiness from the Accumulation Point of View In this section, we look at some accumulation models before and after Adam Smith. Smith sided with the Stoics who held that God planned every event of the universe to ‘promote the general order and happiness of the whole’ (Smith, 1984 [1759], p. 36). The spectator principle that prevents chaos in society in The Theory of Moral Sentiments became the ‘invisible hand’ in The Wealth of Nations that manages distribution in society. One should not find it surprising, therefore, that inequality is an assumption in his distribution system that is based on nature to the extent that nature itself discriminates. Smith on accumulation Smith’s economic vision was to show that capitalism allows the possibility to grow wealth the fastest. In this wealth creation process, people invest a part of their happiness as capital. We read that ‘in his ordinary state of health, strength and spirits; in the ordinary degree of his skill and dexterity, he must always lay down the same portion of his ease, his liberty, and his happiness’ (Smith, 1976 [1776], p. 86). This idea of happiness was correlated with Smith’s real measure of exchange value (Peach, 2010). Adam Smith was well aware of the Physiocratic system. But in his model, surplus is not only from rent on land as for the Physiocrats, but rent, profits, and interest are also surplus. Farmers pay rent to landlords, manufacturers pay rent also, and interest for advances. In general, rent and profits are deductions from the produce of labor. The way it works is that all the produce belongs to labor in the early and rude stages of society. But when stocks are accumulated, the surplus must be shared with the other participants of production. Many Strands of Smith’s Model In his appraisal, Ronald Meek gave the following explanation of Smith’s work: For Ricardo and Marx, Smith provided a new and vitally important framework of class stratification; an equally new and important emphasis on the role of production relationships between socio-economic groups in the process of the ‘determination’ of economic phenomena; a new concept of surplus (in value

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Economics and happiness ­91 terms) which Smith developed as a substitute for the Physiocrats’ concept, and a theory of the ‘cause’; or ‘real measure’ of value . . . other aspects of Smith’s work . . . less easy to fit in . . . his generalized picture of the interdependence of the elements in the economic system . . . oriented by ‘demand and supply’ (and later towards demand alone) . . . the non-Ricardian stream. (Meek, 1977, p. 156)

On the Ricardian side, Smith is said to confuse the categories of fixed and circulating capital which belongs to circulation, with constant and variable capital which belongs to production (Luxemburg, 1968, pp. 64‒75). This amounts to a confusion of ‘the value of the product with the newly created value: the latter does indeed resolve itself into variable capital and surplusvalue, whereas the former includes constant capital in addition’ (Lenin, 1977, p. 49). So his product model deals only with V 1 S, and not C 1 V 1 S. This led to contradiction between production and consumption. Individually, Smith has capitalists and workers on the side of wage of output. Socially, he has output as belonging to wage and surplus. Constant capital is in the category of surplus on the social side, but it is left out (p. 153).

DAVID RICARDO David Ricardo’s concerns with value and distribution are said to provide a new foundation of economic analysis. One of his major propositions can be stated as follows: Theorem (David Ricardo): ‘(A) rise of wages would not raise the price of commodities, but would invariably lower profits; and . . . that in fact the value of the medium only in which prices and profits are estimated would be lowered.’ (Ricardo, 1951, p. 127) Ricardo uses elaborate ways to demonstrate this point. Table 3.3 simplifies the demonstration, following the spirit of his principles (Ricardo, 1951, p. 113) and a modern interpretation (Stigler, 1965, p. 190). Ricardo is concerned with values and not riches. He wrote: The labor of a million of men in manufactures, will always produce the same value, but will not always produce the same riches. By the invention of machinery, by improvements in skill, by a better division of labor, or by the discovery of new markets . . . a million of men may produce double, or treble the amount of riches, of ‘necessaries, conveniences, and amusements’. (Ricardo, 1951, p. 273)

We present Figure 3.1 as a customary diagram that usually follows Ricardo’s distribution theory in the literature (Samuelson, 1986, p. 618; Hicks, 1983, p. 34). For a modern illustration, if a1 5 0.1 labor per ton of

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$180.00 $190.59

Value output



10.00 10.00




5.00 5.00

Wage unit


Sources:  Adapted from Ricardo (1951, p. 113) and Stigler (1965, p. 190).



$5.00 $5.00

Extra wage

Notes: Rate of profit on marginal land sets the rate of profit on all land items (E6‒J7). Profits 5 Value of Output − Wage Bill. Rents 5 Value of Output − Profits.



Unit price

$1.00 $1.06


Land type





Grade I Grade I &   II prices Grade II


Table 3.3  Ricardo marginal land and falling profits


$10.00 $10.29

Wage rate



$100.00 $102.94

Wage bill



$80.00 $77.06




$0.00 $10.59




1 2



Economics and happiness ­93

output; b1 5 5 acres per ton of output; c1 5 4 tons of corn per labor; and L 51 million acres, then 2000 laborers are needed: [ L/ (a1 /b1) ] to produce 20 000 (L/b1) tons of output, from which 8000 tons (2000c1) are used as subsistence wage and the rest, 12 000 tons, for land or rent (Samuelson, 1966a, p. 382). Figure 3.1 displays the Ricardian production for land and labor input, and their corresponding average and marginal products curve. The labor supply curve is considered infinitely elastic. As production increases, the profits are squeezed. Implications of Ricardo’s View on Happiness In his Essays, Ricardo demarcated between money and commodity as causing happiness. He wrote: ‘a nation is rich, not according to the abundance of its money, nor to the high money value at which its commodities circulate, but according to the abundance of its commodities, contributing to its comforts and enjoyments’ (Ricardo, 1951–1973, p. 22). One finds similar expressions in his Principles (Ricardo, 1951, pp. 70, 77‒79, 93‒94). This dichotomy appears as a check to those who hold that money can bring happiness, for that would be leaving out the distribution of choices over commodities. A major concern would be the familiar stationary state condition that is so popularly expressed in textbook accounts of Ricardo’s model. Luigi Pasinetti presented a one-factor model of Ricardo, the so-called corn model, which follows from the information of Figure 3.1. Essentially, ‘the system is unstable unless the wage is equal to what has been called the “subsistence wage”’ (Pasinetti, 1977, p. 10). Ricardo incorporated the Malthusian endogenous view which holds that when the two wages are unequal, then the tendency will be for them to adjust towards equality, bringing the system to a natural equilibrium. By adopting Malthus’s population doctrine, wages will be forced to a subsistence level. In the natural equilibrium, wage is considered a means of production, like a wage fund which is advanced before production. Rent and profits are then regarded as surpluses. The use of the surpluses will determine the state of the system. If they are all consumed by landlords and capitalists, the system will repeat the current state over and over again. If the capitalists accumulate a part of their profits and make it available as circulating capital, then the system will tend to evolve. If wages are kept at a subsistence level, a stationary state will result where profits will tend to zero or a minimum. Pasinetti stated that ‘this is a genuine theory of the growth of an economic system through the accumulation of capital, albeit a rather simple, rudimentary, and highly pessimistic theory’ (p. 12). The stationary state is unavoidable even in a two-sector or multisector

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Fundamentals of happiness Output Labor

Marginal = Derivative

Ave =

Rise Run Fixed K/L

Average and Marginal Product.

Average Product

Rents Profits

Labor SS Inf. Elas. Wages N

Marginal Product Labor

1. If labor increases, then rent share falls; wage share rises, and profit share is squeezed. 2. It is a two-factors model: labor variable and land fixed. 3. If elasticity of sub. of factors 1, rent share decreases. 5. Plentiful land relative to labor implies zero marginal product of land, which is not illustrated here. 6. Competitive equilibrium: when any two factors of (wage, rent, profit) are higher, the other must be lower, which follows from the equation: 0 = profit rate + f(real wage, real rent), or in symbols: 0 = p + f(w, r). SS = supply, Inf. Elas. = infinite elasticity, sub. = substitution, Ave = average.

Sources:  Hicks (1983, p. 34) and Samuelson (1986, p. 618).

Figure 3.1  Ricardo’s factor share model model. Consider a two-sector model with corn (X1) as a necessary good, and gold (X2) as a luxury good. The same assumptions are kept for the corn goods as in the one-sector model. But now the gold product is subject to constant returns to scale. Now we have a value system, which focuses on the determination of the prices, P1 for corn, and P2 for gold. This gives us an opportunity to determine the value or natural price of the two

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­commodities, N1 for corn, and N2 for gold. Values turn out to require a cost of production rather than a labor theory of value of the two factors. It is attained from equation (3.6):

p2X2 p1 (X1 2 Rent) 5 (3.6) N1 N1

One still does not need money to solve equation (3.6) for the prices. Despite the postulation that gold is money, this two-sector model uses corn as a numeraire by setting its value to unity. So, we have now: (1) a theory of distribution of wage, rent, and profits based on the one-sector model; (2) a theory of value determination based on equation (3.3) and a numeraire; and (3) an implied theory of demand, which follows from the equation that the output of corn and rents are functionally determined, namely, p2X2 5 p1 (Rent) , which gives the value of gold, as corn is a numeraire. However, this two-sector system will also tend towards a stationary state (pp. 14‒15). In fact, similar results would follow for a multisector model with many wage-goods and luxury goods, if we make the Ricardian assumption that the capital‒labor ratio is the same for every sector (p. 16). One problem with the Ricardian model is that the wage rate will be the subsistence level one, based on the Malthusian consideration we stated. One witnesses divergences in wage income in industrial societies, which suggests that wages may be exogenous. Ricardo adopted an endogenous view of population in his Principles: ‘The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution’ (Ricardo, 1951, p. 10), and in his essay on Profit: ‘that capital and population advance in the proper proportion, so that the real wages of labour continue uniformly the same’ (p. 11). Another problem is that the model ignored increasing returns, such as we witness in modern technological processes. By enhancing productivity, technological advances can alleviate many problems by postponing the stationary state. A third problem is that capital intensity is not constant across all industries. There are many industries that uses different techniques of production. Changing techniques alter the structure of prices. Ricardo proposed that if one were to find an ‘invariable measure of value’ the problems could be redressed. This measure will account for the following: 1. It will be a commodity that ‘at all times requires precisely the same quantity of labor to produce it’ (Ricardo, 1951, p. 17). 2. An invariant standard that changes in the distribution of income will not change the commodity’s value.

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Piero Sraffa, who has edited the collective works of David Ricardo, has proposed such an invariable standard called the ‘standard commodity’ (SC) to address the second point (Sraffa, 1960). This is achieved by using a fixed technique of production. Pasinetti attempted to provide a ‘dynamic standard commodity’ (DSC) that operated before wage and profits are ­distributed, and showed how it changes through time (Pasinetti, 1993, p. 74). Pasinetti had a prelude to the DSC system, with what was called ‘proportional dynamics’ in which he allowed only population to grow (Pasinetti, 1977, p. 190). His view of wealth creation, and therefore happiness, considered wealth as a stock of endowment or as a flow of income (p. 2). Income flows over time Y (t) depend on consumption flows, C (t) and investment flows, J (t) (p. 194). This makes consumption growth the proportional driver of all physical quantities of the system (p. 195). ‘For every given exponential evolution of consumption, C (t) , thorough time . . . the ­physical quanities Q (t) which are requred – as direct, indirect, and we might add, hyper-­indiret requirements (meaning by the last the requrements for new ­investment) – to keep the economic system in dynamic equilibrium’ (p. 196). In his DSC system, Pasinetti postulated the ‘production of commodities by means of labor alone’ (p. 16). One can determine the equilibrium, prices, quantities, and the wage rate. Coefficients for labor expended per unit of output and per capita demand are determined. Labor expended is extracted from a marriage of Ricardo’s and a Keynesian framework. Growth in productivity depends on a declining labor embodied in commodities. Divergence between the sectorial labor and demand coefficients determine the path of growth. Sraffa’s Model Some prerequisites for understanding Sraffa’s model are: 1. Production of commodities by means of commodities. Sraffa started with wages as an equivalent amount of goods consumed by wage earners (Amin, 1978, p. 11). This can show that all surpluses go to capital, the only factor of production. But he has shown how wages can be treated explicitly as well. 2. One can now work directly with the prices of production (p. 15):

Prices 5 a [ Inputs consumed 1 wages distributed 1 profit sproportional to capital advance ]

3. Each Sraffian system is likened to a physical system of ‘n bodies falling in an atmosphere’ (p. 16). In that system:

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a.  Relative prices can be determined by the distribution of income. b. When measured by and invariable standard, real wage is inverse to the rate of profits: r 5 R (1 2 w) ,

where r is rate of profit and R its maximum, and w is wages (Sraffa, 1960, p. 22). Note R 5 r when w 5 0. Sraffa’s Simple Surplus Model In the first chapter, Sraffa (1960) modeled a subsistence economy. It has two commodities: wheat and iron. Each commodity is produced by means of commodities. The wheat sector requires 280 quarts of wheat and 12 tons of iron to produce 400 quarts of wheat. The respective numbers for the iron industry are 120, 8, and 20. The original form of equation (EqS1) in matrix A and vector p is Ap 5 p. It is not solvable because when written in the form [ A2I ] [ p ] 5 [ 0 ] , the inverse of [ A 2 I ] does not exist. An explicit representation is equation (EqS1):


(280 2 400) 120

12 p1 0 d c d 5 c d (EqS1) (8 2 20) p2 0

where p1 is the price of wheat, and p2 the price of iron. To solve equation (EqS1) in that form implies division by zero, which is not allowed. So, one must fall back on what the classical economists were thinking about in wanting to solve such an equation. The classical economists wanted to make people happy. One way to do that is to set a just price of exchange (POE) between wheat and iron, which will say that X quart of wheat 5 Y tons of iron. But that expression gives two unknowns in one equation. The breakthrough they made was to set the price of one commodity to unity. This was called a ‘numeraire’ by Leon Walras. It amounts to setting p2 5 1. So, from the first equation we find that 2120p1 1 12 5 0, or p1 5 10. The POE sought is, therefore, 10 quarts of wheat 5 1 ton of iron. Sraffa extended the numeraire method to three commodities. These results are in the upper part of Table 3.4 (Sraffa, 1960, p. 4). These models are self-replacing in that they can continue year by year in a steady way by consuming all they can produce. What is more interesting is how these models can show a surplus. The classical economists were concerned not only with the price ratio of exchange between commodities as a source of happiness, but also with how the prices are distributed among the factors of production; land,

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Table 3.4  Sraffa models Input of Input of Products Wheat Iron Pigs

Input of





240  90 120

12  6  3

18 12 30

450  21  60

Wheat in quarts Iron in tons Number of pigs

Grouping wheat, iron, and pig prices together by subtracting the output column from elements of the main diagonal, and setting p3 5 1, as the numeraire yields:

Wheat Iron Pigs


X p1

2210 90 120

X p1 X p1 X p1

1 1 1


x(p2 5 1)


X p3

12 215    3

x(p2 5 1) x(p2 5 1) x(p2 5 1)

18 12 230

X p3 X p3 X p3

50 50 50

We can now solve for p1 and p3, having set p2 5 1. The equations to solve are: 2210 p1 1 18 p3 5 212 120 p1 2 30 p3 5 23 The answers are: p1 5 0.1 and p3 5 0.5, and p2 5 1.

labor, and rent in particular. Adam Smith left the distribution aspect up to the market mechanism. He assumed inequality in his system in the sense that given a natural law, if one breaks the law, then one ought to face the consequences. David Ricardo was much more concerned with value of factors of production (VOF) than with the POE as the source of happiness. This translates to what the different classes get of the products of industry. It is not clear that the distribution concerns were between the rich and poor, for Ricardo was concerned with the corn problems of 1813–1815, which was a distribution between classes: between landowners, and the commercial and manufacturing class. Afterwards the distribution between interest on capital and wage of labor would happen under different principles that do not change the POE. Rent was not considered as part of the cost of production for him. But the story changed with the growth of manufacturers and machinery. The conflict shifted to wage and capital, with labor becoming the standard of value. Sraffa’s next purpose was to create a surplus and show how the POE and VOF are affected. He introduced a surplus of 175 units of wheat into the

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equation; all of it goes to capitalists, as wages had to be kept to a subsistence level. Production with a surplus takes the following simple matrix form (Sraffa, 1960, p. 6): Ap (11 r) 5 Ap(EqS2)

where A is the input matrix, p is the price vector and r is a scaler for profit. Here, labor inputs, L, and subsistence wage, w, are elements of A. But we can show them explicitly as (p. 11): Ap (1 1 r) 1 Lw 5 Ap(EqS3)

For the simple surplus model, equation (EqS1) places the surplus in the wheat sector (400 1 175) and added in the rate of return to give:


280 120

12 p1 575 p1 d c d (1 1 r) 5 c d c d (EqS4) 8 1 20 1

The prices are 1 ton of iron 5 15 quarts of wheat. From that, we find the rate of return from the equation of output/input, that is: (1 1 r) 5 (575*151 20) / (400/15 12015 1.25, or r 5 25%. Sraffa then introduced another system with three commodities, namely, iron, coal, and wheat, with labor in explicit form (p. 19). The system is as follows:

90 C 50 40

120 125 40

60 p1 3/16L 180 p1 150 S C p2 S (1 1 r) 1 5/16L 5 C 450 S C p2 S (EqS5) 200 p3 8/16L 480 p3

The profit rate is found from the ratio of outputs/inputs, given in the two-commodity system, namely, (1 1 r) 5 (180p1 1 450p2 1 480p3) / (180p1 1 285p2 1 410p3) . That ratio will change with different price vectors, indicating the rate of expansion of the economy in price terms (Sinha and Dupertuis, 2009, p. 497). However, one can construct a subsystem from equation (EqS5), where the proportion of the output will be maintained as proportion for the inputs. It requires a reallocation of labor to the different inputs to get that proportion. Sraffa gave an example where the proportions of output are 1 ton iron to 1.5 tons coal to 2 quarts wheat (Sraffa, 1960, pp. 19‒20). He called it the ‘standard system’. The standard system obviates the problem of getting differences in the ratio of return when prices are allowed to change. It is also offers an answer to the Ricardian effort to come up with an invariable standard to measure value. It confronted Adam Smith’s thought with the labor theory of value for all

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stages of society. It can handle direct and indirect labor which come together in a stationary system. Building on the outline of a subsystem approach, one can follow Pasinetti in growing the system through differences in the consumption and input structure. As consumption and increased inputs drive productive capacity, the system can grow. Productivity in consumption goods also produces capital goods, implying a need for vertical integration. One can then look at the implication of growth through standard models.

THOMAS R. MALTHUS The macroeconomist John Maynard Keynes wrote that, ‘if only Malthus, instead of Ricardo, had been the parent stem from which nineteenthcentury economics proceeded, what a much wiser and richer place the world would be today’ (Keynes, 1972‒89, Vol. X, p. 144). A modern scholar on Ricardian economics framed the Ricardian misunderstanding in three ways: ‘Ricardo’s naïve view of population growth, his under-estimation of technical progress, and his inability to grasp the importance of effect demand’ (Pasinetti, 1974, p. 29). Malthus on Population, Technology, and Effective Demand Malthus held the early view that ‘increasing population is the most certain possible sign of the happiness and prosperity of a state; but the actual population may be only a sign of happiness that is past’ (Keynes, 1972‒89, Vol. X, p. 115). In a sense, the first part of this statement is still true today. When a census in the United States (US) reveals that a certain state has a decline in population, it means that its benefits from the Federal Reserve such as for entitlement purposes declines. Most underdeveloped countries are losing population because of a lack of economic opportunities at home, and better prospects abroad. This has created immigration problems for developed countries in both North America and Europe. When Keynes stated that Malthus ‘believed that he had found the clue to human misery’ (Keynes, 1972‒89, Vol. X, p. 119), he was referring to Malthus’s most popular work, An Essay on the Principle of Population (Malthus, 1976 [1798]). Malthus’s prediction in this regard has given economics the bad name of a ‘dismal science’. Malthus’s population theory takes the position that as food supply becomes scarce relative to population, it will limit capital accumulation. He translated this concept into numbers by postulating that ‘population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio’ (Malthus, 1976 [1798], p. 71). Extending this logic shows

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that the system is unstable and will collapse in disaster. The mathematics of this is easily worked out. If a population, x, grows at an exponential rate, c, over time, t, then dx/dt 5 cx. If food supply, y, grows at a constant rate, k, over time, t, then dy/dt 5 k. Then the ratio of y/x 5 (y0 1 kt) /x0ect) will break down as t approaches infinity, implying misery (Hirsch, 1984, p. 14). On Effective Demand Malthus held that prices and profits are determined by effective demand, and not by money, or the real cost such as labor, and the theory of distribution of products (Keynes, 1972‒89, Vol. X, p. 122). A later discovery of correspondence between Malthus and Ricardo revealed that Ricardo believed in monetary neutrality, while Malthus was concerned with the reality of a monetary economy. Ricardo described distribution of output, while Malthus described the determination of output in ordinary business life (p. 138). Overall, Ricardo is grounded in theory, and Malthus in practice. More to the point, Ricardo is a supply-side, and Malthus a demand-side economist. A simple preview of this is to consider that effective demand may fail to keep pace with output (p. 128). The potency of effective demand is now a standard procedure in macroeconomics to argue against the classical economists that the labor market will clear automatically. A fall in money wage rate according to Keynes will lead to a proportional fall in prices, leaving the real cost of labor unchanged. The missing logic of Malthus was provided in Keynesian economics which explains that the proportional fall in prices is due to the marginal propensity on the demand side being less than unity so that all new output will not be consumed, creating excess supply over demand. This argument made room for Keynesian special cases, rejoined by the Pigovian concept of the wealth effect. Malthus is disposed to a proper distribution argument that will raise effective demand. If rapid accumulation is the goal, as in the classical view, then savings will be made at the expense of unproductive consumption which will ‘check the progress of wealth’ (Keynes, 1972‒89, Vol. X, p. 142). Malthus goes on to say that the fall in demand will occasion ‘a less degree both of happiness and wealth than would have occurred if the unproductive consumption of the landlords and capitalists’ did not prevent progress of wealth (p. 144).

KARL MARX In his doctoral dissertation, Marx examined the relationship between the Epicurean and Democritean philosophies of nature. Democritus gave an

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atomic explanation to things before Epicurus. They gave similar overall explanations of physics. However, ‘Epicurean philosophy is taken as a syncretic combination of Democritean physics and Cyrenaic morality’ (Marx and Engels, 2010, Vol. 1, p. 34). The link of Epicurean views with the subject of human happiness, peace, and tranquility was well discussed in Sowell’s book (Sowell, 1985, pp. 37‒38). In the preface of his collected works with Engels, we read that: in his doctoral dissertation Marx faced up squarely to problems that were to play a major part in the subsequent formation of his view of the world. He became clearly aware of the need to solve the problem of the relationship between philosophy and reality. The strong atheist views that he had already adopted facilitated his subsequent transition to materialism. (Marx and Engels, 2010, Vol. 1, p. xxvii)

We do not wish to develop Marx’s view of accumulation as a deterministic economic problem. Rather, it is fair to place it as a process that involves many moments in capitalism. Some of the major elements that are active in a dialectic process are therefore worth pointing out at the outset. They are as follows. Naturalism: one view is that the natural sciences developed two axioms prominent in their models. One is autonomy, and the other is order. ‘Only with the classical and neoclassical notion of a competitive equilibrium did economics adopt the natural science axioms’ (Lowe, 1980, p. 250). The mercantilist school did not adopt them. However, Marx has denounced any sort of ‘immutable law of economic motion’ (p. 251). Daniel Little has recently reviewed the differences of opinion on that view (Little, 1986, pp. 11‒39). Modes of production: while Adam Smith wrote of different ‘mode[s] of subsistence, namely hunting, pasturage, agriculture, and commerce’, Karl Marx wrote of different ‘mode[s] of production’ (Meek, 1977, p. 15). Marx’s mode is defined in terms of the social relations in society for the extraction of surplus value. Those modes occurred at specific times in history: slavery (slave‒master), feudalism (serf‒lord), and capitalism (capitalist‒worker). Social relation: The value of commodities has a purely social reality, and that they acquire this reality only in so far as they are expressions or embodiments of one identical social substance, namely, human labour, it follows as a matter of course, that value can only manifest itself in the social relation of commodity to commodity. (Marx, 1975 [1887], p. 47)

Social reproduction: writing about ‘simple reproduction’, Marx stated that ‘a process of reproduction, produces not only commodities, not only surplus-value, but it also produces and reproduces the capitalist relation

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itself; on the one side the capitalists, on the other the wage-labourer’ (Marx, 1975 [1887], p. 578). Mental conception: Marx wrote that ‘the price or money-for of commodities is . . . a purely ideal or mental form’ (Marx, 1975 [1887], p. 95). Labor-power is comprised of ‘the aggregate of those mental and physical capabilities existing in a human being’ (p. 167). Marx stated that ‘what distinguishes the worst architect from the best of bees is this, that the architect raises his structure in imagination before he erects it in reality’ (p. 178). This way, his will and purpose are in consonance. Technology: for Marx, ‘technology discloses man’s mode of dealing with nature, the process of production by which he sustains his life, and thereby also lays bare the mode of formation of his social relations, and of the mental conceptions that flow from them’ (Marx, 1975 [1887], p. 372). We read in the Grundrisse that: nature builds no machines, no locomotives, railways, electric telegraphs, selfacting mules, etc. These are products of human industry; natural material transformed into organs of the human will over nature, or of human participation in nature. They are organs of the human brain, created by the human hand; the power of knowledge, objectified. (Marx, 1973, p. 638)

One way to illustrate the workings of these moments is to consider the effect of technology during the Industrial Revolution. On the one hand it will continue accumulation and growth, and on the other hand it will displace workers (Lowe, 1965, p. 183). At full utilization of the new resources, output will rise, and some of the displaced workers will be re-employed (p. 185). Institutions Marx wrote about simple reproduction with constant capital stock, and expanded reproduction with accumulating capital. Reproduction means ‘repetition, renewal of the process of production’ (Luxemburg, 1968, p. 31). In primitive agrarian settings, the reproduction is the decision of the whole community of workers. In slave societies, reproduction decisions are made by the masters who dominate the slaves. In power control societies, such as the building of the pyramids in ancient Egypt, the building of the Suez Canal in modern Egypt, and the building of the Great Wall of China, reproduction was determined by the commander. Even today, we find that some societies use religious codes to determine reproduction. In capitalism, however, an impersonal force, the invisible hand through the market mechanism, decides reproduction. Karl Marx set out ‘to lay bare the economic laws of motion of modern society’ (Marx, 1975 [1887], p. 10).

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Simple reproduction Simple reproduction is not of a real economy, since reproduction of neither a capitalist nor a socialist economy is envisioned. In Marx’s Capital, Volume II, we start with a two-department schema: Department I, means of production; and Department II, articles of consumption. Department I produces only means of production, tools, and so on, that both departments need for production. So, some exchange between them is necessary for reproduction. Marx used the following annual output schema (Marx, 1975 [1893], p. 397):

I. 4000c 1 1000v 11000s 5 6000 Means of production

II. 2000c 1 500v 1 500s 5 3000 Articles of consumption

where c is constant capital or the contributions of material and capital stock made to annual output, v is variable capital or annual wage bill, and s is surplus or annual rent, interest, and net profit. Exchange between the two departments pivots on two points. One point is that in I, 4000c of constant capital will be used up and replaced by its output, leaving 1000v and 1000s to be exchanged with II for consumption goods. Another point is that in II, 500v 1 500s of its output will be used up for its producers and workers, leaving 2000c to be exchanged with I capital goods used up in II. Correlation between the two points gives the condition for reproductions as: 2000c in II 5 1000v 1 1000s in I. This model and its built-in proportion are still relevant for today’s development process. Often, departments are added, and recourse is made to build in proportions. To see the proportions built into this model, let Y(I) 5 6000, output of Department I, and Y(II) 5 3000, output of Department II. Then, they are distributed in the sectors with the following ratios: I

2 1 1 c 1 v 1 s 5Y (I) 3 6 6


1 1 1 c 1 v 1 s 5Y (II) 2 4 3

Marx on the capitalist investment function The capitalist investment function model needs a specification for analyses of growth. Surplus will have to be re-invested to change the capital stock. In modern analysis, this procedure is called the ‘integrated consumption-good industry’, meaning ‘the proportion I of the C (production) industry to the A (consumption) industry is the one which ensures the replacement of

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the capital goods consumed in the composite industry’ (Garegnani, 1972, p. 249). The notation given is I 5 cad/ (1 2 cad) , where d is the annual rate of mortality (p. 249). Using change in the capital stock for investment, the procedure Marx followed can be defined as: K 5 S(I) 5 c(I) 1 c(II) 5 6000

ΔK 5 I 5 0.5S (I) 4 Δc (I) 5 a b (0.5) (I) 5 Δc (II) 5 (0.5) I 2 Δc (I)

Paul Sweezy described a possible investment function based on Otto Bauer’s works (Sweezy, 1970 [1942], pp. 186‒189). Earlier, Henryk Grossmann had given a tabular form with values for S(I) (Grossmann, 1992 [1929], pp. 68, 75). An open-ended relation can exist between the rate of investment ( g) and the rate of profits (r), linked by the capitalist propensity to save, (si) , namely, g 5 si.r (Kurdas, 1995, p. 59). As the saving propensity increases, a maximum rate of accumulation will be attained driven by the degree of prodigality, exhibition of wealth, sources of credit, business necessity, and rate of exploitation. Comments on simple reproduction Simple reproduction describes a system that can sustain itself. The surplus that is produced in I and II are used up, so there is no growth or expansion. The capitalist wants to expand his capital by converting a portion of his existing capital into more capital, so he creates more surplus value, and this process goes on and on. Just as it is appropriate to talk of Smith’s psychological law, a desire to better one’s condition, or Keynes’s psychological law, the marginal propensity to consume, we can speak of Marx’s psychological law of capitalist accumulation, a desire to accumulate capital. As Paul Sweezy puts it, ‘Marx takes the position that to accumulate capital. That is to say, to increase one’s wealth, is a positive end and has “pleasures” attached to it quite as much as consumption does’ (Sweezy, 1970 [1942], p. 82). Classical economists, in defense of the status quo, postulate that pain is involved in the process. David Ricardo was on the pleasure side, when he wrote, ‘Consumption adds to our enjoyments, accumulation to our power, and they equally promote demand’ (pp. 83‒84). The impatience school invoked the pain involved in forgone consumption by the capitalists in the process of accumulation. According to Paul Samuelson, there was an ‘impatience school – akin to Frank Fetter and the earlier-day Nassau

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Senior’ (Samuelson, 2011b, p. 606). As developed by Irving Fisher, the impatience theory asserts that ‘the rate of interest expresses the degree of human impatience for future dollars (or dollars’ worth of enjoyable goods) as contrasted with present dollars (or dollars’ worth of enjoyable goods)’ (Fisher, 1916, p. 244). This postponement of consumption is a sacrifice, and is used to explain why surplus in the form of interest is justified for this school. The same effect is attributable to the concept of Alfred Marshall’s theory of waiting. Marshall wrote that ‘the accumulation of wealth is generally the result of a postponement of enjoyment, or of a waiting for it . . . it is waiting rather than abstinence, which is rewarded by interest and is a factor of production’ (Marshall, 1982 [1890], p. 193). Marshall changed the terminology to accommodate the Marxian idea that the poor spend all their income and therefore do not abstain from consumption (p. 193). Extended reproduction For extended reproduction, part of the surplus produced must be saved, and then invested as constant and variable capital. When this is done, we need to show that the condition for reproduction will hold. Marx did not show this. One attempt at it was by Bukharin’s Imperialism and the Accumulation of Capital. It requires that the produced surplus be split into three parts: one part for consumption (α), one part for incrementing C (βc), and one part for incrementing V (βv) (Rosdolsky, 1977, pp. 477‒478). The followers of Marx are divided as to whether such an abstract model for the economy can explain capitalist reality. Some such as Rosa Luxemburg argued that Department I is made to dominate Department II, leaving the latter to take an ‘erratic course’ (Luxemburg, 1968, p. 122). Joan Robinson thought that Luxemburg was concerned with ex ante questions such as how the producers know that demand will exist for the new output produced by new capital (p. 20). This might be accommodated if producers are ‘assured of an ever-expanding market’ (p. 21). In general, three main points characterize problems with expanded reproduction. One is that different proportions in departments and across industries occur in real production. Another is that the means of production can grow faster than the demand for consumer goods, because real wages tend to lag behind productivity. A third point is that as technology advances, it might displace labor, that is, result in labor saving (Evenitsky, 1963, p. 166). The Fundamental Marxian Theorem (FMT) One cannot leave out of the analysis the power struggle that goes on between workers and capitalists. This is best captured in a fundamental theorem:

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Table 3.5  The Leontief process Variable



A x y λ p w r L b

Input matrix Output vector Net product vector Value vector Price vector Wage rate Uniform profit rate Labor vector Subsistence vector of commodity

n3n n31 n31 13n 13n 13n n31


Fujimori uses the symbol w

(Romer, 1981, pp. 16–17)

Sources:  Fujimori (1982), Romer (1981), Rieu (2009).

Theorem (Morishima, 1973): ‘The equilibrium rate of profit is positive if and only if the rate of exploitation is positive.’ (Morishima, 1973, p. 6) Corollary I: ‘The exploitation of laborers by capitalists is necessary and sufficient for the existence of a price-wage set yielding positive profits or, in other words, for the possibility of conserving the capitalist economy.’ (Morishima, 1973, p. 53) The theorem rests on an alienated life, which prevents people under capitalism from reaching a happy life. In a section on ‘Happiness and Communism’, Richard W. Miller wrote: Marx . . . judges societies by the kinds of human lives they create . . . he describes the best life indirectly, by presenting the main features of its opposite, a life of alienated labor, in which the worker’s labor power is put under the control of another. (Miller, 1989, p. 178)

According to a visual two-dimensional interpretation, alienation of man, nature, and industry or productive activities can be related on the vertices of a triangle. Two-way relationships can then be shown between any two vertices. This threefold reciprocal dialectical interrelationship forms the ‘geniuses of society’. If one were to cut out nature from the relationship, as Rousseau did by declaring industry as disruptive to man, then we get a kind of biological, ahistorical relationship between man and industry (Meszaros, 1972, pp. 128‒131). To demonstrate this theorem, one must use some of Leontief’s input‒output analysis (Table 3.5).

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Brief proof of the FMT by Romer (1981, pp. 16‒17) and Rieu (2009, pp. 217‒218) Write prices as proportional to cost (excluding fixed capital). Then we have:

p 5 (11 r) * (Unit cost of production without fixed costs)

In scaler form, we can write p 5 ulc 1 m 1 a (Shaikh). In vector form, we have:

Unit cost of production 5 pA 1 wL 5 pM, where M 5 pA 1 bL

The unit cost definition assumes that w 5 b. If the wage is sufficient, then b is affordable, and pb 5 1. By the Perron–Frobenius theorem, M is indecomposable means there is a eigenvector, x . 0 of output such that: x 5 (1 1 r) (A 1 bl) x, which we can multiply by Crystalized or embodied labor: λ 5 λA 1L 5 (I 2A) 21L . 0 if A is indecomposable and productive. The Perron‒Frobenius theorem in Leontief’s matrix is well documented in the literature (MacClue, 2000). Also, using the rate of exploitation, e (b) 5 (12λb) / (λb) , yields:

λx 5 (1 1 r) (λA 1 λbl) x 5 (1 1 r) aλAx 1

1 Lxb 11e


implying that (11r) 5 (λA 1 1/11e L)x, which implies that r can equal or vary in the same direction or e. Another proof of the FMT, which was illustrated by Y. Fujimori (1982), uses a net output vector. For instance, D. Foley took up the Marxian analysis that prices are proportional to labor value. In this theory, we find ‘the claim that the money value of the whole mass of net production of c­ ommodities expresses the expenditure of the total social labor in a commodity-producing economy’ (Foley, 1982, p. 37; MacClue, 2000). So, one can write: Net Product (NP): y 5 x 2Ax, implies x 5 Ax 1y, or x 5 (I 2A) 21y. This proof correlates several theorems. Theorem I states that value of labor embodied and socially necessary labor are the same. Theorem II states that the rate of surplus value and the rate of surplus labor are the same, and Theorem III requires that profitability implies and is implied by reproducibility (Fujimori, 1982, p. 28). Implications of Marx on Accumulation for Happiness The centrality of exploitation as a driver of profit rates has essential implications for happiness in the production of wealth. Marx clearly referred

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to this as workers in chains, which requires a system of socialism and afterwards communism to correct the problem. If not a revolution, what Marxists have been proposing is a research programme for equality in rights and wealth distribution. In our view, we have sidestepped several important concepts. One is the issues of falling rates of profits. As accumulation proceeds, the ratio of c to v varies, leading to a fall in profit. This will decrease the formation of new capital and cause a circulation crisis (Lowe, 1997 [1926], p. 262). Technically, if (C/V) is constant, and accumulation rises at a greater rate than labor supply, then real wages may rise and profit falls, slowing down accumulation. If (C/V) rises, labor may be displaced. To re-employ, workers may require more C, which increases its costs, and lowers the profit rate. If technology displaces workers, dead labor (accumulated in machines) replaces living labor (workers). The Marxians postulate counteracting tendencies to falling profits. To take one example, if (C/V) falls it may lead to crises, which will reproduce the capitalist’s process again. Also, real wages will not keep up with productivity or will even decline. Meanwhile, capital will be devalued and concentrated, leading to new investment opportunities (Christiansen, 1976, p. 20). Another issue we sidestepped regards the overseas markets. For Marxians, because capitalists have the propensity to overproduce, they are dependent on markets abroad. There are two sides of this matter according to Michal Kalecki: Turan-Baranovski and Rosa Luxemburg are on two opposite poles. TuranBaranovski denies altogether that the problem of markets may constitute an obstacle to the development of capitalism, which thus depends entirely on the increase in productive capacity. Rosa Luxemburg on the contrary considers expanded reproduction in a closed capitalist system impossible, attributing all its development to the possibility of selling its wares in the markets external to it, i.e. in the non-capitalist sector of the world economy. (Kalecki, 1971, p. 146)

JOHN MAYNARD KEYNES We have made many references to Keynes in the text so far. Now, we wish to discuss his predictions of the future. The Keynesian model most people are concerned with is embodied in his General Theory that was aimed at the crises of the Great Depression. It was framed as a short-run model, in which Keynes wrote: ‘I conceive, therefore, that a somewhat compressive socialization of investment will prove the only means of securing an approximation to full employment’ (Keynes, 1972‒89, Vol. VII, p. 378). Keynes’s short-run model depended on three propositions. The first

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involved three propensities: consumption, liquidity preference, and expectation. The second was the wage-unit set by collective bargaining. The third was the quantity of money determined by a nation’s central bank (pp. 246‒247). In 1930, Keynes stated his long-term view, published the Economic Possibilities for our Grandchildren (Keynes, 1972‒89, Vol. IX). Keynes’s milestone for the success of the Modern Age was the sixteenth century, which marked a critical age of capital accumulation of the Western world (p. 323). A second milestone was technological advances in the eighteenth century (p. 324). Now, we must add a third milestone to account for high technology. In the nineteenth century, the balance between population growth, invention, the opening of new lands, the state of confidence, the frequency of wars, the marginal propensity to consume (MPC) and the marginal efficiency of capital was conducive to growth. That balance permitted ‘a reasonably satisfactory average level of employment to be compatible with a rate of interest high enough to be psychologically acceptable to wealthowners’ (Keynes, 1972‒89, Vol. VII, p. 307). The problem of the Great Depression was that the ‘marginal efficiency of capital [was] . . . much lower than it was in the nineteenth century’ (p. 308). A Variety of Post-Keynesians There appears to be a lack of consensus as to what post-Keynesian economics means. The early book by Kenneth Kurihara characterized ‘Post Keynesian Economics’ as ‘the extension of Keynes’ work by the younger generation’ (Kurihara, 1954, p. viii). Keynes saw his work as a break away from the classical paradigm, and he rejected Marxism, as implied in the statement: ‘I believe that the future will learn more from the spirit of Gesell than from that of Marx’ (Keynes, 1972‒89, Vol. VII, p. 355). Samuelson contrasted monetarism with his brand of post-Keynesian economics, which consists of three propositions: (1) Changes in thriftiness and the MPC can affect output, prices and production; (2) Exogenous bursts in investment or the animal spirit have systematic effects on gross national product (GNP); and (3) Increases in public expenditure, or cuts in the tax rate have systematic effects on GNP (Samuelson, 1977, p. 765). Samuelson, Modigliani, Solow, and Klein are also representative of a group of post-Keynesians. At one time Klein declared that he was a Marxist, but not the others. Post-Keynesians, such as L. Pasinetti, question whether a break with Keynes from the classics had occurred, pointing to reconciliations that were going on ‘between the group of young economists who had been

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working with Keynes . . . and those economists who, after publication, tried to reconcile the General Theory with traditional thinking’ (Pasinetti, 1999, p. 3). He concluded that a Keynesian revolution ‘might as yet remain unaccomplished’, waiting for something analogous to the Arrow‒Debreu formulation of Leon Walras to happen to J.M. Keynes (p. 13). John Hicks wrote that the survival of ‘classical economics into the post-Keynesian epoch is not the same thing as the survivals of outmoded scientific theories . . . It survives because we have found that we have to attend, sometimes at least, to some of the things which Keynes left out’ (Hicks, 1981, p. 234). The post-Keynesian work of Paul Davidson has a partiality for authenticity, opposing Samuelson for triangulating between gross substitution, where any interest-bearing capital can substitute for money; money neutrality, where money is neutral on its effect of output; and ergodic hypothesis, where ‘in an ergodic system where the future can be reliabl[y] predicted  . . . where the gross substitution axiom underlies all demand curves, then as long as prices are flexible, money must be neutral and the system automatically adjusts to full employment equilibrium’ (Davidson, 2007, pp. 214‒215). Davidson predicted that ‘as we entered the 21st century, only the post-Keynesians remain to carry-on in Keynes’s analytical footsteps and develop Keynes’s theory and policy prescription for the 21st century real world of economic globalization’ (p. 209). The actual post-World War II (WWII) performance of Keynes’s model was noted by Samuelson. He wrote that ‘a simple prescription for the government to lower tax rate[s] and increase spending actually did make good sense in the early 1930’s . . . By war time 1942 and peacetime 1952, however, such simple Keynesianism was dead’ (Samuelson, 1986, p. 280). By 1939, Keynes shifted his focus from employment towards demand inflation occasioned by WWII spending. It turns out that the short-run Keynesian model worked during the Roosevelt‒Truman period, and in Europe and Japan through the 1960s (p. 293). In the 1970s, however, the emergence of stagflation created double-digit inflation. A problem with the Keynesian model for prediction during the 1970s lies with its adaptive expectation hypothesis. That hypothesis started in the 1950s with Phillip Cagan, who in modeling hyperinflation incorporated the rate of change of expected prices. The actual rate of change of prices was ‘approximated by the difference between the logarithms of successive values of the index of prices’ (Cagan, 1956, p. 35). A problem with it was summarized in a speech by the Federal Reserve Governor Edward M. Gramlich: ‘We knew that an adaptive expectations Phillips Curve would explode if the lag coefficient was one – we just couldn’t get its estimated value to be one . . . our nonlinear Phillips Curves became very, very steep at

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low unemployment rates, implying that inflation would become uncontrollable at low unemployment rates’ (Gramlich, 2004). In the 1970s, the stagflation problem of simultaneous high unemployment rates and high inflation rates led to wrong forecasts in macroeconomic models. The adaptive expectation hypothesis, which holds that people learn from their mistakes, did not work. Frequent supply shocks and increased money supply had thrown off predictions. Attempts by the Nixon, Ford, and Carter administrations to accommodate and neutralize shocks created more stagflation. The Reagan administration stopped the growth in the money supply and cut both business and personal income tax rates to extinguish inflation. Meanwhile, forecasters had ready at hand some new theories to retool their econometric models. Notable is the rational expectation and New Classical schools of expectation formation over the adaptive expectations to accommodate shocks. The consequences were numerous: ●●






‘Some rational expectationists overshoot . . . when they exaggerate the neutrality of money and the impotence of government to alter real variables’ (Samuelson, 2011b, p. 573). Government monetary policy could not stimulate employment. For instance, people will learn about an increase in money supply, which will be picked up by increasing prices, leaving employment unchanged (p. 282). Only surprise governmental policy could work in that environment. On the fiscal side, Robert Barro’s prediction within rational expectationism that the Reagan deficit would not crowd out investment did not materialize (Barro, 1974, 1979). The argument is complicated, being based on the Ricardian equivalence doctrine. Samuelson has summarized it as follows: ‘we people, realizing that in the future they and their heirs will face extra taxes by virtue of the enhanced public debt, we will increase our savings’ (Samuelson, 2011b, p. 1035). But the savings did not happen, and so investments were low. Tomas Sargent brought bounded rationality into rational expectation, which was intended to replace the ‘mutual consistency of perception about the environment’, with artificially intelligent agents (Sargent, 1993, p. 3). The New Classical views morphed into dynamic stochastic general equilibrium (DSGE). In that model, agents’ goals are optimized over decision trees, under conditions of perfect competition. To the surprise of Robert Solow, the New Classical model had turned neoclassical growth theory into a real business cycle theory (Solow, 2003, p. 19): ‘The theory actually imagines that the model economy is disturbed from time to time by unforeseeable shocks to

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the technology and to the household’s taste. Then more elaborate dynamic-programmeming apparatus is required’ (p. 23). New Keynesians and real business cycle theorists incorporated Keynesian wage‒price stickiness to explain realities of imperfect competition.

Keynesian Wage and Price Rigidities Early writings on Keynes have made significant arguments for wage rigidity in the labor market and the liquidity trap due to low interest rates in the money market. New Keynesians and real business cycle theorists incorporated Keynesian wage‒price stickiness into the rational expectation models. The economist Robert Rowthorn identified the following additional adjustment New Keynesians have made (Rowthorn, 2020, p. 3): ●●




Besides price and wage rigidities, they added real ones such as ‘habit formation in consumption, costs of adjustment in capital accumulation, and variable capacity utilization’. They incorporated a ‘financial sector, a zero lower bound for the interest rate, and a fraction of “hand to mouth” or creditconstrained consumers’. They added a ‘continuum of households indexed by their holdings of liquid assets, illiquid assets, and their idiosyncratic labor productivity’. Last but not least, they added search and matching (SAM) models to involuntary unemployment.

The perception one got was that additions are ad hoc adjustments compared to the addition of epicycles to the failed Ptolemaic system of astronomy. The danger involved in such theorizing is that of supporting a degenerate research programme, which in the case of astronomy has set back science for thousands of years. On the liquidity trap side, several new adjustments are notable. One approach arises on the distribution side, which some post-Keynesians were debating under the name of the Cambridge Controversy on the theory of capital. A simple starting point is to assume one technique of production, a capital‒output ratio. If wage is determined by either a wage-fund theory or collective bargaining, then the division of per capita output will simply be q 5 rk 1 w, where q, k, and w are output, capital, w is in per capita terms, and r is the rate of interest (Harcourt, 1974, p. 143). This expression implies two expressions for k, which are not equal unless the w–r frontier is a straight line for each technique (p. 148).

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Growing Inequality of Wealth and Happiness We bring up only a small part of the Cambridge Controversy in order to discuss some modern takes on the revival of Keynesian economics relating to the rate of return, r, and growth rates, g. The first problem has to do with growing inequality. The idea of the rich growing richer and the poor growing poorer has been discussed in popular textbooks since the 1980s. Regarding income, official census data for the US demonstrates that tendency. In regard to wealth, a recent book by Thomas Piketty has demonstrated the growing world inequality. According to Piketty, capital is ‘the sum total of nonhuman assets that can be owned and exchanged on some market’ (Piketty, 2014, p. 46). Growth is related to ‘the annual increase in income or output’ (p. 25). If the return of capital (r) exceeds the growth rate (g), then wealth distribution becomes more unequal because ‘wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved’ (p. 378). Piketty backs up this statement with two equations. One equation is on distribution, which states that α 5 rβ, that is, the share of national income equals the rate of return on capital times the capital/income ratio. He stated that this is an accounting identity that ‘can be applied to all societies in all periods of history, by definition’ capital (p. 52). Another equation of Piketty is β 5 income, which varies in the long run (p. 168). That ratio will vary with savings and growth. ‘A country that saves a lot and grows slowly will over the long run accumulate an enormous stock of capital (relative to its income), which can in turn have a significant effect on the social structure and distribution of wealth’ (p. 166). Piketty’s position is that r . g, which implies wealth inequality. A recent study by Barry Eichengreen confronted this inequality with the current low interest rate from the Keynesian viewpoint (Eichengreen, 2020). He argued that r on private risky capital is greater than r on safe government debt (p. 31). If one were to add a risk premium of say 5 percent to private return, then not only will Piketty’s equation be reconciled, but also another argument by Blanchard (2019) that r , g would also be reconciled. With Keynesian focus on employment, especially during crises in the short run, and Piketty’s focus on inequality, we see mechanisms are put to work to enhance well-being from the economic point of view. The postKeynesian controversy on the definition will question such distribution theories from the definition of a capital point of view. Other theories, such as functional finance by Abba Lerner, and financial instability of Hayman Minsky, were always lurking behind the performance of Keynes’ model. Today, the Modern Monetary Theory is having a heyday in the face of deficits and questionable growth. We will focus on the latter.

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Keynes and Modern Monetary Theory Traditional theory starts with a barter economy. Extended forward to monetary theory in a Walrasian or Arrow-Debreu general equilibrium system is a commodity acting as a numeraire. In Modern Monetary Theory (MMT), money is an ‘I owe you’ (IOU) of the government, a debt of the government, which includes coins, bank notes, demand deposits, and reserves (Wray, 2015, p. xiv). The Modern Monetary Theory as developed by Wynne Godley is said to be an offspring of Keynesian concerns with the nation income identity model. We read that ‘the national income identity . . . implies without need for further proof, that there is a reciprocal, offsetting relationship between public deficits and private savings’ (Galbraith, 2012, p. 68). Although there is a broad history to MMT, we will pursue the Keynesian foundation. A more precise expression of this point was given by L. Randall Wray (2019) in his Congressional Testimony. Wray stated a sectoral balance identity as follows (p. 9):  Government balance (GB) 1 Domestic private balance (PB) 1 Foreign balance (FB) 5 0. In terms of gross domestic product (GDP), the equation becomes: (T – G) 1 (S – I) 1 (M – X) 5 0 where T 5 taxes, G 5 government expenditure, S 5 private savings, I 5 private investment, M 5 imports, and X 5 exports. Some of the implications of this identity are as follows: ●●



The sectoral balance is endogenous, so that the government does not need to balance its budget as GB will be offset by PB or FB. The typical case for the US is for GB (Deficit) 5 PB (Surplus) 1 FB (Surplus in Capital and Financial accounts) – (Deficit Current Account). The deficit/GDP ratio in the US is fairly constant and has a U-shaped relationship to growth in GDP. A U-shaped curve is familiar as the average cost curve in economics. The minimum of that curve corresponds to the lowest point of the two ordered pairs, which in MMT can be percentage growth or deficit (Wray, 2019, p. 14). Governments monopolize money for tax purposes. ‘The purpose of taxation is not to raise funds, but to reduce the capacity to spend of the domestic non-government sector. The aim is to restrain aggregate demand and thereby defend the national currency’ (Rowthorn,

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2020, p. 4). An increase in, say, consumption taxes will lower the growth rate and increase the deficit rate. It is better to have tax policy that will give greater growth for a given deficit. Based on a theory going back to B. Ruml (1946), a country with its own (sovereign) currency worries about deficit spending only to the extent that it affects inflation and the exchange rate (Rowthorn, 2020, p. 6). A modern soundbite exaggerates this by saying ­something to the effect that the government cannot run out of money.

On the idea of enhancing happiness, the MMT model gained traction from the Democratic Party platforms in the 2016 election in the US. The idea that one can increase deficit spending to finance social programmes and fight global warming and other economic problems appears to have no budget constraint. But some economists are uncertain about its effect on employment by transforming resources from the private to the government sector, and on inflation by creating more money. One way suggested in the literature to incorporate those concerns is to devise a MMT rule like the Taylor rule. Such a rule would calculate short-term deficits matched by lagged cyclically adjusted deficit, plus actual less targeted inflation and minus actual unemployment less targeted unemployment. In equation form, we have: dt 5 Dt21 1 0.5 (πt21 2 πt ) 2 0.5 (ut21 2U T ) (Mattson and Pjesky, 2019, p. 4). An alternative way to attain full employment and price stability is through a job guarantee program (JGP). Combined with a fair minimum wage, a JGP will keep inflation low (Rowthorn, 2020, p. 6). But it might interfere with the efficient wage concept that depends on workers’ efforts in wage determination.

RAMSEY ON BLISS At the time Keynes was writing, Frank Ramsey advanced a theory of bliss in consumption and savings (Ramsey, 1928). We mentioned this in Chapter 1. Now, we will give the gist of that model. Models for which consumption is a bliss point are due to Frank Ramsey in 1928. A variable to optimize was utility from consumption, specified in utility form, u (C) , and the goal was to attain some bliss state. The aggregate production is dependent on K for capital, and L for labor, F (K, L) (Koopmans, 1970, p. 552). Policy decisions include whether to allocate output flow over time to consumption, or to net increase in the capital stock. An optimal path occurs either when C reaches a bliss level of consumption, or when Kreaches a saturation level (p. 553). When the marginal

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– UB


– U = f (K)



– 1. Bliss level of consumption is reached at tangent point A with coordinates (KB, UB). 2. Bliss point A is a constraint imposed by the consumer. 3. If the optimum lies beyond A, it means increased capital will bring forth more utility. 4. A is optimal if movement to its right does not augment production.

Sources:  Adapted from Ramsey (1928, p. 551) and Heertje (1963, p. 10).

Figure 3.2  Ramsey bliss point of consumption productivity of capital is equal to the growth rate, a golden rule of accumulation is attained (pp. 497, 499, 553). In order to illustrate the bliss point, we constructed Figure 3.2, which is adapted from Heertje’s exposition (Heertje, 1963, p. 10) and Ramsey’s original formulation (Ramsey, 1928, p. 551). The curve increases at a decreasing rate indicating diminishing utility from consumption, U (C) . Let Maximum [ U (C) ] 5 U and in turn, make U 5 f (K) . Now, we can plot some ordered pairs of (K,U ) to construct Figure 3.2. As explained in Figure 3.2, the tangent point A represents the bliss point. It is not necessary that A be an optimal point. A consumer can attain bliss in consumption before an optimal point beyond A is reached. However, if a point beyond A does not call forth further productivity, then the bliss point is coincident with the optimum. We mentioned that there is a controversy about the definition of capital. The economist J.B. Clark gave a homogenous definition of the capital fund, which Samuelson has turned into some parables. He wrote that ‘the J. B. Clark parables [were] given rigorous form in Frank Ramsey’s 1928 production function’, and he proceeded to list a number of authors including himself that accepted it, and those who question it (Samuelson, 1966a, p. 206). Much confusion occurred. What is not consumed is saved, which is channeled to change the capital stock ex ante or ex post. Also, the dual Pasinetti theorem invited the debate as to whether it is the savings from

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capitalists or workers that are involved (Ramrattan and Szenberg, 2007b). This model is the basis of intertemporal consumption, its bliss level, while the controversy on capital is mainly about the distribution of output, equating the wage rate with the marginal productivity of labor, and the rate of interest with the marginal productivity of capital.

JOAN ROBINSON’S MODEL OF ACCUMULATION Joan Robinson gave us a complicated discussion on accumulation in The Accumulation of Capital (Robinson, 1969 [1956]), and a simplified version of growth in Essays in the Theory of Economic Growth (Robinson, 1974). Her approach is based on ‘the theory of value and distribution . . . it consists of a variety of systems, each appropriate to the model of a different kind of economy’ (Robinson, 1974, p. 1). The model for the former volume can be defined in terms of the Wicksellian production diagram (Wicksell, 1970 [1954], p. 122). A group of workers want to produce some output, s. Capital is financed from loans on a given interest rate, z. When the output is produced, capital becomes worn out and obsolete. The objective of the workers is to obtain the greatest subsistence wage, l (pp. 120‒121). In this model, the interest rate is adjusted for the time period based on the installment of capital, which has a minimum length of time 5 ½. Wicksell put all the variables together in the form s 5 tl (11zt/2) (p. 121). This formula is still being used today in finance. For instance, if one were to invest $1 million for 90 days at an annual rate of 8 percent, then the return per investor will be (1 1 i*90/360) or $1million* (1.02) 5 $1020000. Wicksell’s model of production was employed to demonstrate Joan Robinson’s The Accumulation of Capital model (Ferguson, 1979, p. 327). Robinson ‘measure[d] capital in terms of past labor-time compounded at a given interest rate’ (Lutz and Hague, 1961, p. 11). One gets a similar ­production function as listed in Figure 3.1, but with the following interpretation: 1. Each point of the production function has a different technique of production, which we may name going left to right: delta, gamma, beta, and alpha. They are given as a book of blueprints. The production function is not smooth but piecewise linear or a straight line joining the techniques from left to right. 2. The tangent line to the productivity curve will give the coordinates for optimal (capital/labor, output labor) ratio. That line will join the vertical axis at the given wage. So, the tangent line is also known as the wage line as well. Its slope is a measure of the rate of return.

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3. It is possible that a whole segment of the productivity curve coincides with the tangent line. That will indicate the same level of profit for two joined techniques, even though one has a higher output/labor ratio than the other. 4. When wages change, the wage line will affect the rate of profit, which will yield different productivity curves. 5. The capital/labor ratio reflects past labor time or working labor at full capacity utilization. Based on the above points, one could experience cases of re-switching or double-switching in technique. In his chapter titled ‘A Child’s Guide to the Double-Switching Debate’, Harcourt explains that for such a phenomenon ‘the same method of production may be the most profitable of a number of methods of production at more than one rate of profit even though the other methods are more profitable at rate in between’ (Harcourt, 1974, p. 124). Dobb wrote that Joan Robinson’s The Accumulation of Capital book is intended ‘to propose the conditions for steady growth as a constant rate (what she termed “golden age” conditions)’ (Dobb, 1973, p. 233). Joan Robinson has given us a diagram to enables that objective. She called it ‘the double-sided relationship between the rate of profit and the rate of accumulation’ (Robinson, 1974, pp, 47‒48). This is the way Robinson describes her double-sided diagram: The central mechanism of our model is the desire of firms to accumulate, and we have assumed that it is influenced by the expected rate of profit . . . Valuing the existing stock of capital on the basis of the same rate of profit, we can then express their plans in terms of a rate of accumulation. (p. 46)

These two views are shown in Figure 3.3 as the A-curve and the I-curve, respectively. It is customary to represent total profits by the Cambridge equation, which is the rate of investment over capitalist propensity savings (Pasinetti, 1977). The distinguishing feature of this equation is that only capitalists, and not workers, save. We can now describe dynamic growth based on several constraints. Backhouse has illustrated several of these constraints to growth by using broader assumptions (Backhouse, 2003). He analyzed growth with ‘animal spirits’, growth with Malthusian checks, and growth with inflation barriers. Backhouse’s objectives seem to be to make the model more inclusive to reflect developments in dynamic monetary theories in the literature. Robinson’s model appears as a special case of the Cambridge model.

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Rate of Accumulation

1. A-curve is the expected rate of profit; I-curve is the rate of accumulation. 2. Beyond “D” where rate of I > Rate of A. Basic to commodity-sector plant investment ratio is high and will tend to fall. The opposite occurs at below S. Between S and D more investment will take place, as indicated by the growth curve joining them at the horizontal axis. Sources:  Adapted from Robinson (1974, p. 49) and Backhouse (2003, p. 459).

Figure 3.3  Joan Robinson’s double-sided relationship According to C. Bliss, two features of the Cambridge model are prominent, namely a semi-stationary state that makes each production period of a week the same, and the model does not decompose because everything is interdependent (Bliss, 1975, p. 119). A three-step procedure is followed to make the model decomposable. One step is that the rates of interest are determined from the demand for and supply of funds. The second step follows for the given rate of interest. It allows determination of cost of production in wage units, and techniques of production to use. The third step is how a demand condition determines rate of output, and capital output ratios (p. 121). The first decomposable assumption makes it possible to relate profits and savings, from which we come to the popular notion that consumers spend all their income and only capitalists save. Bliss showed how we can reduce the classical position form: et product of week 1 – cost of non-produced inputs 5 returns at the interest N 1 Surplus (p. 74)

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Rate of interest (ρ) 5 Natural growth rate (γ)/Savings out of profits (π) (pp. 124‒125) In the second equation, the right-hand side variables are given, and the rate of interest is the rate of profit if production is under constant returns to scale. It is the only unknown. Robinson’s growth model adds a feedback between the rate of interest and the natural growth rate depending on ‘the willingness of producers to accumulate capital in the light of the rate of profit’ (p. 127). Such a feedback model will look like: γ (ρ) 5 πρ. Backhouse prefers to specify the desired rate of accumulation as a function of the difference between the capitalist rate of savings and the real interest rate to analyze the dynamics of the system (Backhouse, 2003, p. 459).

OTHER ECONOMIC CONTRIBUTIONS TO HAPPINESS Ian Steedman gave a summary of what some of the more modern big names in economics had to say about happiness (Steedman, 2011). One reads the disappointing conclusion that ‘economists of the caliber of Marshall, Wicksteed, Pigou, Hicks and Graaff (along, of course, with many others) . . . have taken it for granted that economic output is, at best, a support for the things of ultimate importance’ (p. 41). Those stalwarts did not say much in a direct way about happiness. First, we look at what Steedman said about them, and then add a comment. According to Steedman, what Alfred Marshall said about happiness goes more to a person’s dispassion than to his possession. Marshall mentioned that habits of the body, mind, and spirit are more conducive to happiness. Hedonism and utilitarianism are heavily discounted (p. 24). Money is a means to an end, which is true for both spiritual and material happiness. Economics is about the ordinary business of life that is characterized more by flesh and blood activities than by abstract thoughts (p. 25). Steedman did not notice Marshall’s big contribution that fuses cost with utility. Marshall places costs on the side of disutility, and brought them together with his famous berry-picking metaphor as a play between effort and desire. He wrote, ‘When a boy picks blackberries for his own eating, the action of picking is probably itself pleasurable for a while; and for some time longer, the pleasure of eating is more than enough to repay the trouble of picking’ (Marshall, 1982 [1890]), p. 276). He stressed that this activity will be carried on until a maximum, or equilibrium, is reached. This is all about pleasure and its maximization, worked out from the cost and utility

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doctrine, mirroring the demand and supply apparatus that works together like the two blades of a pair of scissors (p. 290). We read from Steedman that Phillip Wicksteed did not entertain the psychological aspect of economic man. We must study people through the relationships they enter into (Steedman, 2011, p. 29). All motives cause economic actions, so that one should not isolate only economic ones. Indeed, we read in Volume 1 of Wicksteed’s The Common Sense of Political Economy that ‘we shall therefore have to consider what constitute[s] an economic relation rather than what constitute[s] an economic motive. And this does away at a stroke with the hypothetically simplified psychology of the economic man which figured so largely in the older books of political economy’ (Wicksteed, 1957 [1933], p. 4). In Volume 2, Wicksteed seemed to have softened his stance that prohibits psychological investigation in political economy. He wrote that the political economist should ‘accept psychological principles as his data rather than [establish] them as his conclusion; unless indeed he should be compelled to make excursions into the psychological field proper, because he does not find his premises sufficiently elaborated to his hand’ (Wicksteed, 1946 [1933], p. 766). He went on to state that the laws of rent may require investigation into the psychological motives because they regulate conduct, that consumption is based on psychological law, and that value and exchange are related to consumption. Wicksteed went on to argue that money, the quantity theory doctrine, production, and distribution have underlying psychological laws. He surmised that economists may be working in regions in the world ‘in which the simple psychology of Ricardo and Senior is wholly inadequate’ (p. 770). Steedman has reviewed A.C. Pigou’s book on welfare economics from the point of view of happiness. We learn that Pigou posited welfare economics in the state of consciousness, not material things. So, satisfaction is bundled with cognition, emotion, and desires (p. 31). Economic welfare is not precisely linked to total welfare. Economic cause may promote noneconomic consequences that can cancel economic welfare. If some satisfaction is ranked better than others, their maximization might not be that of goodness (p. 32). In addition, our practice of preferring the present to the future can be misleading, as the future is unknown and may benefit others besides ourselves. We will have more to say about Pigou’s contribution to welfare economics in Chapter 5, dealing with that subject, where we will also address John Hicks’s treatment of Pigou. Also, Chapter 4 addresses modern concerns about well-being. Our comment here on Steedman’s article will rest with one more significant contribution on Pigou. It is relevant to list here that Pigou has made contributions to other areas of economics that have impli-

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cations for happiness. One such area is called the wealth, or Pigou, effect. It was offered as an objection to Keynes’s policy that a fall in prices will lead to a fall in money wages and therefore no changes in real wage. Pigou’s argument is that, given the stock of money, a fall in prices would appreciate the holdings of wealth holders, which would induce them to consume more. That would fill a gap in consumption that kept the economy at under full employment equilibrium in the classical stationary state. A feeling of being more wealthy leads to increased consumption, and more utility until the maximum is restored (Pigou, 1943). An early exposition and criticism of this view was given by Michael Kalecki (1944). The work of the Irish political economist William Thompson  (1775– 1833) that looked at happiness through the distribution of wealth was not mentioned by Steedman, nor by the other contributors of his book on happiness (Thompson, 1824). Thompson was an associate of Jeremy Bentham, who worked through the utilitarian doctrine to a labor theory of value. Thompson wrote that ‘the noble discoveries of political economy . . . the art of social happiness . . . Without a constant reference to it, the regulating principle of utility is sacrificed, and the grand object of political economy, the indefinite increase of the accumulations of wealth or of its yearly products, become worthless objects’ (p. vii). To back up his argument, Thompson thought in terms of propositions worded around the equal distribution of wealth for happiness. For him, ‘happiness denotes that continued state of well-being which is compounded of the different items of pleasurable feeling, experienced during a considerable space of time’ (p. 17). At the foundation of his argument we find the proposition of Bentham’s principle to the effect that ‘the object to be aimed at in the distribution of wealth . . . is to confer thereby the greatest possible quantity of happiness, i.e. of pleasures’. His view of equality is represented in the statement that ‘all members of society . . . being similarly constituted in their physical organization, are capable by similar treatment of enjoying equal portions of happiness’ (p. 4). Although an associate of Bentham and Mill, Thompson was influenced by Marxism, which he studied. But he depended on the ‘system of labor by mutual co-operation . . . not to class or party, but to the whole of society, that it can well afford a competition with individual or isolated exertion in its best shape’ (p. 597).

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4. Subjective studies in income and wealth: can money buy happiness? The modern literature on happiness has a large number of survey studies aimed at finding relationships between happiness and income or wealth. These surveys ask questions in order to bring out people’s feelings about happiness. It is a study of their mind, which is psychological, but from a revealed sense.

ON SURVEY DESIGN FOR HAPPINESS One objective of surveys is to measure subjective well-being. ‘A person is asked to define on the basis of his own assumptions, perceptions, goals, and values the two extremes of anchoring points of the spectrum on which some sale measurement is desired’ (Cantril, 1965, p. 22). The top and bottom may represent good and bad, best and worst, respectively. People are then asked to locate on the ladder where they and their country stand at the current, past and future time (p. 22). Respondents are asked about their: (1) wishes and hopes; (2) worries and fears; (3) position on the ladder now; (4) position on the ladder five years ago; and (5) expected position on the ladder five years in the future; and questions relating to demographics, education, economics, politics, and social characteristics are asked (pp. 23‒27). The continued relevance of this Cantril scale-type survey methodology is evidenced by its incorporation into Gallup Poll surveys. A recent paper by Gallup Poll spells out the relevance ( understanding-gallup-uses-cantril-scale.aspx). We will build on Richard Easterlin’s and Angus Deaton’s works, two economists who followed that method in their analyses in their studies of happiness. A good reference on this methodology is The Oxford Handbook of Happiness (David et al., 2013, p. 156).


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ON DATA The data of these surveys are time series, cross-sectional, and panel data. Economists sometimes estimate households’ consumption by their disposable, cyclical, or permanent income. The study can be done annually for a long period of time, making it a time series. If it is done for different nations, households, or persons for the same time period, then we have a cross-sectional data set. Panel data is ‘the pooling of observations on a cross-section of households, countries, firms, etc. over several time periods’ (Baltagi, 2005, p. 1). Happiness studies are done frequently for all kinds of data at a national or global country level. A Nobel laureate who studied such data wrote the following: Household surveys are a near universal database, available in some form in virtually all countries, developed or undeveloped, market or centrally planned . . . from the point of view of academic research, the major development over the last decade has been the increasing availability for analytical work, not only of the published survey reports with their summary statistics and crosstabulations, but of the individual household files. (Deaton, 1984, p. 228)

In cases where panel data is sparse, one can resort to the building of cohorts from a number of time series surveys. Some surveys are done on a fixed sample size regularly, but the individuals who responded may not be identified. Then it is possible to build cohorts for, say, a specific age of respondents (such as 45‒50) for the different years of the study. Generally, ‘a “cohort” is defined as a group with fixed membership, individuals of which can be identified as they show up in the survey’ (Dean, 1985, p. 109).

ON MODEL BUILDING Utility models have attracted the most attention in the economic literature. Figure 4.1 gives a timeline of their development for our purpose. It shows, from the left, concerns from the time of Bernoulli, to the right, modern concerns on consumption. Only major theories are represented. Daniel Bernoulli on Utility We start with Daniel Bernoulli, who used a utility function to explain the St Petersburg paradox. The paradox is about most people taking a fixed

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1789: J. Bentham, pleasure and pain principle: intensity, duration, certainty, propinquity (Stigler, 1950a, p. 309)

1802: J. Bentham: proposition that wealth maps to happiness (Stigler, 1950a, p. 310)

1817: D. Ricardo, TU = riches; value = ∆Riches; but no DMU (Stigler, 1950a, p. 312)

Figure 4.1  Utility of happiness timeline

Modern theory of consumption (discussed in text)

1944 : J. von Neumann and O. Morgenstern; ordinal to cardinal utilities (discussed in text)

1867: K. Marx, ‘A thing can be useful and the product of human labor, without being a commodity’ (Marx, 1975 [1893], p. 40)

1870: the marginal revolution of L. Walras; S. Jevons; and C. Menger. (discussed in text)

1854: Gossen, stated the fundamental principle of MU (Stigler, 1950a, p. 83)

1844: Dupuit, distinguished MU and TU, and CS (Stigler, 1950a, p. 313)

Note: TU 5 total utility; MU 5 marginal utility; DMU 5 diminishing marginal utility; CS 5 consumer surplus.

1776: A. Smith, utility as value in use and value in exchange (Smith, 1976 [1776], Vol. 1, p. 28)

1735: D. Bernoulli, wealth versus utility paradox (Bernoulli, 1954 [1738], p. 25)

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sum of money, say $20, over the choice of a lottery with an expected monetary value pay-off that is substantially more. Daniel Bernoulli observed that ‘any increase in wealth, no matter how insignificant, will always result in an increase in utility which is inversely proportionate to the quantity of goods already possessed’ (Bernoulli, 1954 [1738], p. 25). For a symbolic form of Bernoulli’s model, one can distinguish between a physical fortune, x, and a moral fortune or utility, y. A change in utility dy is not only proportional to changes in physical fortune dx, but inversely proportional to x as well. We can therefore write dy 5 k (dx/y) , where k is a proportional constant. Integrating that equation yields: y 5 klog (x) 1 C. The constant of integration depends on a person’s initial wealth defined as α 5 x0, which is estimated as C 5 2klog (α) by setting y 5 0. According to A. Marshall, Bernoulli thought of α as the ‘income which affords the barest necessaries of life’ (Marshall, 1982 [1890], p. 693). Utility is therefore represented by a log arithmetic function: y 5 klog (x) klog (α) 5 klog (x/α) (Keynes, 1972‒89, Vol. VIII, p. 350). This equation describes a curve that shows diminishing marginal utility of money and that people do not have linear utility (Samuelson, 1986, p. 135). As the marginal utility of money declines, ‘it follows that the mathematical expectation of utility (rather than of money) in the game was finite, so that the individual would be willing to pay only a finite stake’ (Arrow, 1984, p. 23). Bernoulli’s work has influenced development in psychology, now discussed as the Weber‒Fechner law. The basic function of that law is that sensation depends on stimulus, as pleasure depends on income for Bernoulli (Stigler, 1950b, p. 376). But the law is at variance with economic needs and purpose; that is, economists deal with behaviour in relation to need and not with external stimuli, and economists rationalize the use of limited resources to attain an end (p. 377). Adam Smith also used the concept in a water‒diamond paradox. The paradox is that the utility of water is high but the value is low, versus the value of diamond which is high, but its utility is low. Jeremy Bentham was directly concerned with our theses, for which he rendered three propositions (Stigler, 1950a, p. 310): 1. Each portion of wealth has a corresponding portion of happiness. 2. Of two individuals with unequal fortunes, he who has the most wealth has the most happiness. 3. The excess in happiness of the richer will not be as great as the excess of his wealth.

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John von Neumann and Oskar Morgenstern’s Utility Theory John von Neumann and Oskar Morgenstern (von Neumann et al., 1953 [1944]) stated that: we must find a correspondence between utilities and numbers which carries the relation u . v and the operations αu 1 (12 α) v for utilities into the synonymous concepts for numbers . . . Denote the correspondence by u S ρ 5 v (u) being the utility and v (u) the number which the correspondence attaches to it. Our requirements are then: u . v implies v (u) . v (v) . (von Neumann and Morgenstern, 1953 [1944], p. 24)

Von Neumann and Morgenstern (NM) were concerned with the measurability of utility only in the second edition of their book in 1947. They emphasized the cardinal over the ordinal approach to measurement. Events can be combined with probability weights between 0 and 1. This is in mathematical jargon ‘a correspondence between utilities and numbers’ (von Neumann and Morgenstern, 1953 [1944], p. 24). The assumption for such an operation is complete ordering, ordering and combining, and the algebra of combining (p. 26). The hypothesis of completeness is necessary because if ‘the preferences of the individual are not all comparable, the indifference curves do not exist’ (pp. 19‒20). An individual should be able to rank their preference in a trichotomous way using the signs ,, ., and 5 , and also be consistent in their ranking by following the transitive rule. This way, we can tell if an event is preferable to another. Then, even a chance of the event is preferred to the other. Combination of this sort implies that the indifference curve would be linear and parallel (MasColell et al., 1995, p. 178). The algebra of combining appeals to continuity: ‘However desirable [an event] may be in itself, one can make its influence as weak as desired by giving it a sufficiently small chance. This is a plausible “continuity” assumption’ (von Neumann and Morgenstern, 1953 [1944], p. 27). The algebra does not require an order in which events are combined and allowed for combinations to occur in steps as well. The three types of postulates allowed NM to form the following two major axioms: NM1: x f y 4 u (x) $ u ( y) NM2: u [ (1 2 π) x 1 πy ] 5 (1 2 π) u (x) 1 πu (y) The convention followed in the interpretation of these axioms is that the right-hand side of the equations corresponds to utilities, and the left-hand side to numbers, because ‘utilities are numerically measurable quantities’

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(p. 16). NM1 says that if event x is preferred to event y then the utility which is a number for x is at least greater than the utility for y. NM2 says that one can distribute the utility over a mixture of the events. How do the NM axioms work? NM1 and NM2 determine the utility of x and y. To find the utility of another event, z, we will consider u (12π) u (x) 1πu (y) as a standard lottery. We would then have to determine the probability, through either an interview or behavioural observations, which would make us indifferent between the standard lottery and the new event, z, namely: u (z) 5 (12π) u (x) 1 πu (y) (Baumol, 1965, p. 518; Dixon et al., 1980, pp. 207‒212). In other words, given our preference for a glass of tea to a cup of coffee, if we introduce a third object, such as a glass of milk, a person must now decide whether ‘he prefers a cup of coffee to a glass, the content of which will be determined by a 50%–50% chance device as tea or milk’ (von Neumann and Morgenstern, 1953, p. 18). The two NM axioms are equivalent to a complete and transitive preference relationship that satisfies the Archimedean and the independence axioms (Karni and Schmeidler, 1991, p. 1770). Samuelson was the first to show that the NM axioms satisfy the independence axiom. The independence axiom holds that: ‘whether heads or tails come up, the A lottery ticket is better than the B lottery ticket; hence, it is reasonable to say that the compound (A) ticket is definitely better than the compound (B) . . . This is simply a version of what Dr. Savage calls the “sure-thing principle”’ (Samuelson, 1966a, p. 139). Leonard Savage uses this principle to establish probabilities and utility functions (Kani and Schmeidler, 1991, p. 1767). The Archimedean property is a standard mathematical concept which states that if x is preferred to y, then a multiple of x is preferred to y, namely nx . y. We demonstrate how the Archimedean and independence axioms strengthened the axiomatic method of expected utility following Herstein’s and Milnor’s (1953) work: Because of the lengthiness of their presentation, practitioners choose simpler systems such as the Herstein‒Milnor axioms discussed below to demonstrate NM axioms. Herstein’s and John Milnor’s (HM) axioms are necessary for the existence for the John von Neumann and Oskar Morgenstern (1944) utility on a mixture space S. Mixture refers to probability weighting; order means preference; and mixture space is a set of prospects. As an example, they gave us a,b [ S;λ,μ [ [ 0,1 ] . We can mix a,b to get μa 1 (1 2 u) b [ S. This operation is possible because of three mixture axioms (Herstein and Milnor, 1953, p. 265): I. 1a 1 (1 2 1) b 5 a, 3 (1 2 0) a 1 0b 5 a, II. μa 1 (1 2 μ) b 5 (1 2 μ) b 1 μa, and III. λ [ μa 1 (1 2 μ) b ] 1 (1 2 λ) b 5 (λu) a 1 (1 2 λu) b.

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With these mixtures, we can show that λa 1 (1 2 λ) a 5 a. This is proven by putting a 5 b; μ 5 0 in III to get: λ [ 0a 1 (1 2 0) a ] 1 (1 2 λ) a. By I, the square bracket items 5 a, and by II, we can switch terms around, yielding: λa 1 (1 2 λ) a 5 a. More complicated examples can be given, but it is more interesting to point out that the HM axioms are ‘at least necessary conditions’ for the existence of an NM utility (p. 266). Their assumptions are featured as follows: HM1: (Completeness). The space of lotteries, S, is completely ordered by the preference relation ) . For lotteries a, b, complete ordering means that: (1) either a ) b, or b ) a; (2) the reflective property is a * a; and (3) for lotteries a, b, c, the transitive property: a ) b, and b ) c implies a ) c. HM 2: (Continuity). For some elements in S, a, b, c [ S, there exists a probability α [ [ 0.1 ] , such that a mixture of a, b will be preferred to c and vice versa. This is expressed as (A) . { α 0 αa 1 (12α) b ) c} and (B) . { α 0 c ) αa 1 (12α) b } .

Using NM1 and NM2 we can apply the utility c­oncept to get (Ar) .{ α 0 αu (a) 1 (12α) u (b) $ u (c)} and (Br) .{α 0 u (c) $ αu (a) 1 (12α) u (b)} , respectively. These are closed sets as the probability α lies in the [ 0,1 ] closed interval. From (Ar) , we can find α $ [ u (c) 2 u (b) ] / [ u (a) 2 u (b) ] for u (a) . u (b) , and α # [ u (c) 2 u (b) ] / [ u (a) 2 u (b) ] for u (a) , u (b) . If we set u (a) 5 u (b) , we get zero or the whole interval. The idea of continuity implies that we can perturb the probability α without changing the ranking of the lotteries. Herstein and Milnor (p. 267) preserved continuity by the limiting concept: lim αi S ` 5α. If we are given two sequences of points such as pn, qn , then for all n we can state that pn ) qn 3 lim pn ) lim qn (MasColell et al., 1995, p. 46). Continuity helps us avoid such phenomena as infinitely favorable or unfavorable outcomes of a lottery. We want to purge such outcomes because they would create a lexicographical ordering which would make the indifference curve nonexistent (MasColell et al., 1995, p. 171): HM3:  Given  a, ar [ S, a & ar,  then  for  every  b [ S,

1 1 1 1 a 1 b & ar 1 b. 2 2 2 2

If one is indifferent between a and ar, then one is indifferent between a 50:50 chance of getting a or b, and a 50:50 chance of getting ar or b. This is the Herstein‒Milnor way of simplifying the independence axiom (Fishburn, 1983, p. 303). Originally, the NM axioms did not explicitly show the independent axiom. They used abstract operations or an abstract utility concept (Karni

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and Schmeidler, 1991). HM generalized the outcome to a mixture set using a weaker independence axiom (HM3) and a stronger mixed continuity axiom than what traditionally goes by the name of Archimedean axiom. It is a traditional student exercise to show that the HM axioms are necessary for the NM utility. HM1 follows from the well-ordering of the real line. HM2 follows from NM1 and NM2. HM3 follows from a | ar 3 u (a) 5 u (ar) . This is a mathematical venture, but the steps in the march toward an NM utility function are worth noting. The completeness axiom gives the best and worst outcomes. The continuous axiom allows us to get an indifference curve. It tells us that there exists a probability α [ [ 0.1 ] such that for the lottery, c, we can write u (c) 5 α, which is a construction of the utility function (Jehle, 1991, p. 198; Laffont, 1989, p. 11). We will describe this function to a greater extent later, but for now it is worth noting also that the utility function is better described as a ‘kind of function, with certain specific mathematical propert[ies]’, rather than a function that represents preference in the ordinal senses. It is a mapping from the gamble to the real line possessing the expected utility property (Jehle, 1991, p. 197). Samuelson’s Revealed Preference as a Way to Bypass Utility Theory Surveys such as the Gallup Poll try to find out people’s ‘preference contours by giving [them] choices of every pair of good’ (Samuelson, 1966a, p. 80). Buried in that statement is a methodology that is converse to utility theory. To clarify methodology, we note here two propositions from the consumer and observer points of view: Consumer: Preference S Choice . . . PC1 Observer: Choice S Preference . . . CP1 The consumer map explains how the consumer behaves. The consumer first has a preference and then chooses a commodity. The observer, who does not know the mind of the consumer, starts from the choice the consumer has made and tries to derive its preference. The observer wants to know whether the consumer is a utility maximizer. This means that the observer can discover its preference, or its demand and indifference curves. What kind of restriction might the observer place on the consumer choice for an observer to discover its preference? We can see them through Figure 4.2. The choices are shown to be restricted to two overlapping budget sets or triangular areas for two commodities cases (x, y) . In the case of the consumer map, the points, A, B, A’, B’ would represent indifference curves tangent to those points. One can use a ‘thumb-tack’ to

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R M A’


B’ A

B x

Description of this figure: • A, B, A’, B’ are revealed preferences. • WARP. Can choose B over A, when A was also available. Also can choose A’ over B’ when B’ was also available. • Consistency. Cannot choose B over A and also A over B. (A’ and B’ are the reverse situation.) • No-ranking. Can choose B over A’ and A’ over B, but cannot rank one over the other. • Completeness. Can choose A over B’ or B’ over A, or be indifference to A and B’. This is also called connectedness. Unconnectedness implies one cannot choose any of the pairs. • Given one budget line, the other is found by changes in prices. So a demand curve can be constructed. • One can construct an indifference curve through a limiting process in the space between RA’S and line A’A. M will be preferred to A’. Note:  For a diagrammatic construction of an indifference through the areas RA’S and A’A, see Baumol (1965, p. 100). Source:  The selected points on the budget lines are motivated by the work of Koo (1963, p. 648).

Figure 4.2  Revealed preference: points on budget lines picture the three-dimensional case, where its head will lie perpendicular to each point and the tip will point in the direction of an increased preference (p. 84). The consistency criterion given in Figure 4.2 is for the two goods case. On this condition, we can enunciate Samuelson’s first axiom on revealed preference: Samuelson (weak axiom of revealed preference, WARP): ‘If at the price and income of situation A you could have bought the goods actually bought

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at a different point B and if you actually chose not to, then A is defined to be “revealed to be better than” B. The basic postulate is that B is never to reveal itself to be also “better than” A’ (p. 90). (Note that the labels in this quotation are reverse to the ones in the diagram.) Samuelson thought that this condition of consistency should be proven for three or more goods. In the consumer map case, this is called transitivity or transitive reasoning, namely: if A is preferred to B, and B is preferred to C, then A is preferred to C. The consumer map also requires completeness, meaning that one can always make a preference. In the case of A, B, and C, what would a complete comparison look like? One can choose over the pairs: A is preferred to B, A is preferred to C, and B is preferred to C. If one is indifferent between a pair, then one can choose any one of the pairs. But if one cannot choose between any of the pairs, the preference is unconnected or incomplete. Note the consequence for Buridan’s ass of not choosing between two bales of hay: it ended up dying. So, one should choose. Then, transitive and completeness yields maximum utility. A Proof of WARP What are we trying to prove? We stated the problem as CP1, that is, to go from the observed choices to the consumer preference. Because we will be trying to establish the old utility concept, which Samuelson tried to bypass, some researchers play down revealed preference theory as a scientific contribution. According to a recent book on the matter, one idea is that WARP assumed that the consumer used preference to reveal the data point such as in Figure 4.1 (Wong, 2006). A major textbook stated that ‘all the properties illustrated by revealed preference have of course been inferred from utility theory’ (Stigler, 1966, p. 70). The revealed preference research programme continues to be active in the literature. A general approach is to take price quantity data and look for consistency of preference for the consumer. To demonstrate how this works, take a triangular budget set in Figure 4.1, choose a point on the budget line, say B on the budget line B’B. Since all combinations of (x,y) pairs are on or within the budget line could have been bought over B, but only B was chosen, then B is revealed preferred over all the other points. We know B, which is also the slope of B’B or the relative price ratio, 2 ( px / py) . We seek a function that represents the preference of the consumer choosing B. That function is one of a family of curves defined dy by f (x,y) . Each curve of the family has slope dx . Our problem then is to dy solve the differential equation: dx 5 f (x,y) . The solution to this function require integration. Therefore, it is termed the problem of ‘integrability’

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(Samuelson, 1966a, p. 72). This is not a problem for two commodities, but for three or more commodities. A solution came with the strong axiom of the revealed preference (SARP) model below. Samuelson (SARP): ‘If A reveals itself to be “better than” B, and if B reveals itself to be “better than” C, and if C reveals itself to be “better than” D, etc. . ..then I extend the definition of “revealed preference” and say that A can be defined to be “revealed to be better than” Z, the last in the chain. In such cases it is postulated that Z must never also be revealed to be better than A’ (p. 91). A Proof of SARP In a word, we need to prove what is called transitivity. One can have a feeling for this proof in the process of constructing an indifference curve through a revealed preference point. The procedure amounts to slipping an indifference curve between the space RA’S and the A’A line in Figure 4.2. The easy steps for a geometric proof are given in standard texts (Baumol, 1965, p. 200). But more advanced steps take convergent limits in a procedure to chip away in the area of ignorance to reveal the curve is necessary. The values in Table 4.1 are explained at the bottom of the table. The indirect preference we found between B1 and B3 is called the transitive closure. In our interpretation of 210 in Table 4.1, we have that P1B1 5 20 is greater than or equal to P1B2 5 10. Then, we cannot also have that Table 4.1  Varian, Fostel et al., and Dobell’s procedure for SARP

P1 P2 P3

A 5 [ aij ] 5 [ pi . qj ]

B 5 [ bij ] 5 [ aij 2 aii ]




Each element – main diagonal element

20 21 12

10 20 15

22 15 10

0 1 2

210 0 5

2 25 0

C 5 [ cij ] 51 if bij # 0, i 2 j;5o otherwise. [A Boolean matrix] 1 0 0

1 1 0

0 1 1

Notes: P 5 prices, i 5 row of matrix, j 5 column of matrix, B1, B2, B3 are bundles of commodities. Matrix A is computed from price‒quantity data. Matrices B and C are derived for Matrix A. For B, subtract each element from the main diagonal elements in B. The negative values helps us to find transitivity: 210 means B1 is directly preferred to B2; 25 means B2 is directly preferred to B3. Therefore, B1 is indirectly preferred to B3 (Varian, 1996, p. 128; Fostel et al., 2004, p. 213). We can reach the same conclusion by drawing a directed graph for the Boolean matrix (Dobell, 1965, p. 452).

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P2B2520 is greater than P2B1521. If this is so, then we can have arbitrage profit equal to: P1 (B1 2 B2) 1 P2 (B2 2 B1)

or (P1B1 2 P1B2) 1 (P2B2 2 P2B1) 5 (20 2 10) 1 (20 2 21) 5 9.

We want to underscore that the available proofs for PC1 and CP1 are not going to reveal a person’s motive and reason for taking an action. Such knowledge requires that one knows the human mind. This argument bears similarity with F. Hayek’s argument that a scientist (or social planner) cannot access the information in people’s brain cells to find their or a social preference. Samuelson was aware of this problem when he walked back his initial strong position that ‘the individual guinea pig, by his market behavior, reveals his preference pattern’, to a more feasible position of finding more ‘operationally meaningful foundations’ of consumers’ behaviour (Samuelson, 1966a, p. 72). One reason why one cannot guarantee the finding of a person’s preference from revealed price‒quantity pairs is that we need all the person’s choices at the start. We therefore must settle for smaller samples of price‒ quantity pairs, which are very operational. For instance, given a small quantity of such pairs, we can use readily available methods to test for the strong and weak axioms. Consider the method in Varian’s intermediate text for doing this (Varian, 1996, pp. 124‒128). Now we work with the combination TRPT 5 WARP 1 SARP: the two axioms require a complete set of data to construct the observer map. What one observes in reality is only a finite number of price‒quantity points of a consumer’s choices. In 1967, S. Afriat detailed a theory that corrected some problems with total revealed preference theory (TRPT). The theorem dealt with cyclical consistency (CC) which is now under the name of GARP. One problem arises because a single-value demand function such as is used in SARP has a unique optimal bundle. But in some cases, a bundle can cycle, which will yield multiple solutions. So, cyclicality should be accounted for. Another problem is that we observe only a sample and not all the consumer preferences. This requires that some ordering must be placed on the sample we observe. We turn to GARP for some answers to those problems. Varian and Afriat (generalized axiom of revealed preference, GARP): If pjxj11 # pjxj, the xj11 could have been purchased at prices pj, but was not. So, xj ) xj11 (Fostel et al., 2004, p. 212).

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GARP addresses cases where all the observed choices of a consumer lie on a flat segment surface of a preference curve. It examines the case where multiple consumption bundles maximize utility, for some price level. The obvious concern is how to rank such preferences. To satisfy GARP, one must first order the subsets of bundles { i, j, k, . . .r } of the number of sets N. This means that each of the diagonal elements in the price‒bundle combination must be ‘less than or equal to’ its corresponding diagonal element (p. 212). The important thing is that each ‘inequality’ must be an ‘equality’. GARP is achieved by computing each of the elements of a square matrix aij using the formula pi . (xj 2 xi). If the result of the formula is negative, then xi is preferred to xj (p. 213). We have seen how that description worked for the SARP case. In the SARP example in Table 4.1, we saw that transitivity holds up going from B1 to B2 to B3. If we were to add the B3 cycles back to B1, then GARP would be violated. We illustrate this in Table 4.2 with data from David M. Kreps’s book (Kreps, 1990, p. 44). This example is similar to that of John R. Hicks (1956). The explanations for the numbers are at the bottom of the table. Table 4.2  GARP with Kreps’s data Price X quantity output data P1 P2 P3

Price‒quantity input data










300 130 120

415 130 109

290 173 110

10 10 10

10  1  2

 1  1 10

10 10 10

 9 25 7.5

15  5  9

Notes: The main diagonal elements show the income of the consumer. All of it will be spent. The off main diagonal elements were calculated from the price‒quantity data to allow comparison. At P1 and Y 5 300, the consumer chose B1, but B3 was affordable, with some savings. 1. So, B1 is preferred to B3 or [B1(RP)B3]. At P2 and Y 5 130, B2 is chosen, But B1 was affordable at the same Y. 2.  So, B2 is at least as good as B1. At P3 and Y 5 110, B3 is chosen, but B2 was affordable, with some savings. 3.  So, B3 is preferred to B2, or [B3(RP)B2]. So, by 1 and 3, we have transitivity: from B1 to B3 to B2. But by 2, we go from B2 to B1. This circularity violates consistent behavior in GARP. Source:  Data from Kreps (1990, p. 44).

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Differences between WARP, SARP, and GARP In WARP, indifference is not allowed, and we do not test for transitivity. In SARP, indifference is not allowed, and we test for transitivity. GARP allows for indifference, and tests for transitivity (Nobibon et al., 2015, p. 1064). Demand in Revealed Preference So far, we have looked at price and quantity as given. We have said little about demand. We know price and quantity data, and something about the consumer income, Y. This allows us to form the triangular area such as in Figure 4.1. Such a triangular area is a budget set, Bp, y . Early attempts, such as by Hicks (1956), to analyze revealed preference emphasized the logic of order on bundles of the budget set. For Hicks, ‘demand theory, which is based upon the preference hypothesis, turns out to be nothing else but an economic application of the logical theory of ordering’ (p. 19). Strong ordering means a bundle has a place of its own in the ranking. We can give it a name and a number which acts like a one-to-one correspondence with the bundle. Weak ordering, like points on an indifference curve, are clusters of bundles. In such groups of bundles, no one can be ranked ahead of others. Besides ordering, Hicks also points to whether the bundle is discrete, or infinitely divisible. If discrete, the bundles may be represented by points on, say, the corner of a small box that contains it. Money is more divisible than a commodity. Instead of a box, money will rank bundles on a vertical line with money instead of a commodity on the vertical axis. So, one may find one line distinct from another that allows strict ordering, but for points on the lines, such strict ordering will fail. So, Hicks chooses two further restrictions on the budget set, namely, that one with more money is preferred to the other, and that transitivity in ordering is possible. The demand curve can then be derived by disaggregating total changes into income and substitution effects. Usually, at least three further assumptions are placed on the budget set: 1. Homogeneity of degree zero in price and income. This means that if we were to multiply both price and income by the same constant, then the results do not change. Denote the general budget set by Bp, y 5x ( p.Y ) . Homogeneity of zero means x ( p,Y ) 5 x (αp, αY ) , where α is any positive constant. 2. The budget set must be non-empty. If prices are so high that the income of the consumer would not allow it to buy the commodity, then the set will be empty. To avoid this, we say that Bp, y 2 0.

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3. Walras’s law: if the budget set has no satiation points. If it does, we will have excess supply. The law says that excess demand must be 0. So, the excess supply must be free goods. A general way to look at such demand is to say that its region is a compact set, meaning that it is closed and bounded. From compactness, we can find the maximal element in the set. If that corresponds to a bundle the consumer is indifferent to, then we get maximum satisfaction. What the analysis does not bring out is who the maximizer is. One analysis noted three types of consumer types: representable consumers, rational consumers, and the revelation and congruous consumers (Richter, 1966, pp. 636‒637). In his 1956 Revision of Demand study, Hicks thought that since only variation of current prices and income was involved empirically in the changes of consumption, and not non-price variables such as population, age distribution, social habits, and so on, that he was dealing with an ‘ideal consumer’ (Hicks, 1956, pp. 16‒17). In his 1981 revision, Hicks maintained that purpose, stating that he would make an exception for Scitovsky’s paradox, and complement it with welfare economics (Hicks, 1981, p. xiii). Except for writing about welfare economics, the other consideration leads to more in-depth studies that are beyond this inquiry. For example, rational consumers lead to a theory of rational expectations situated in general equilibrium analysis. Revealed Preference Implies Maximum Happiness The preference map (PC1) associates utility with pleasure, happiness, or well-being. Preference and budget information determine demand. The revealed preference map (CP1) observes bundles of goods that consumers choose. If the consumer chooses consistently, then one can infer the person’s preference. In general, preference means such things as taste, habits, emotions, fears, promises, social norms, psychological propensities, and affective relationships (Bowles, 2004, p. 99). Samuelson’s original research program for revealed preference had degenerated. One aim of revealed preference is to contradict the movement from preference to choice. Economists hankered after existential proof in the old map, and sought empirical or operational justification for the latter. The empirical and operational findings in reality marked an alternative way of justifying the old method. PC1 and CP1 turned out to have a common, albeit useful aim. If one can affirm happiness as the goal for one, then one can also affirm happiness as the goal to the other. One cannot transcend the view that maximum happiness and maximum utility are the same results.

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PROSPECT THEORY One of the modern theories that challenges the utility foundation of happiness is prospect theory by Daniel Kahneman and Amos Tversky (Kahneman and Tversky, 1979). Prospect theory attacked the utilitarian perspective, mainly from ideas running from Bernoulli through the NM utility axioms. The problem with the Bernoulli‒Weber‒Fechner approach is that it fixates on absolute income. The utility or well-being of a person depends on our gains and losses relative to a reference level, which is often the status quo (Kahneman et al., 2003, p. 17). Tversky and Kahneman posited prospect theory in the domain of Hedonic psychology, studying the factors that may explain why we are pleasant or unpleasant (Kahneman et al., 2003, p. ix). Kahneman and Tversky have shown that the framing of choices can bias the outcome. To quote them: people underweigh outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. (Kahneman and Tversky, 1979, p. 263)

Prospect theory was related to Bernoulli’s attempt at solving the St Petersburg paradox. In their early approach, Kahneman and Tversky’s revolutionary approach was to ‘define outcomes as gains and losses, not as states of wealth’ (Kahneman, 2011, p. 270). This way, they were able to discern that if you own say $1 million, then ‘the disutility of losing $500 could be greater than the utility of winning the same amount’ (p. 271). Now people who were risk-averse between having $900 for sure and a lottery with a 90 percent chance of winning $1000, will become gamblers if they had to choose between losing $900 for sure or a lottery with a 90 percent chance of $1000. In general, people take on more risk when all their options are bad. They depicted this result on a diagram measuring values on the vertical axis, and gain‒loss on the horizontal axis, where the graph is an elongated S-shape image with the top half being asymmetric to the bottom half of the image. Kahneman continued the work of prospect theory by steering it in another direction (Kahneman, 2011). Besides the asymmetry between gains and losses, Kahneman added thoughts about machines versus humans. The motivation of this discussion is that a part of human thinking does not change over time and their judgment frequently goes bad in

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complex situations. That brings lots of noise in human decision-making, but with machines, which use artificial intelligence (AI) algorithms, decisions are noise-free and based on large databases. One cannot come to a conclusion using human judgment without supplemental use of machines that have less biases and make less mistakes. This led him to adopt a twosystem mind of thinking in psychology, namely System 1 and System 2 in his Thinking, Fast and Slow book in 2011. We give some characterizations of these two types of thinking as follows. System 1 Thinking This is a fast way of thinking. We do most activities automatically, like driving, activities that pivot on our intuitive skill. ‘The capabilities of System 1 include innate skills that we share with other animals. We are born prepared to perceive the world around us, recognize objects, orient attention, avoid losses, and fear spiders’ (Kahneman 2011, p. 23). As a major example in economics, Adam Smith wrote about specialization in the pin factory, underscoring how a worker becomes skilled and dexterous from the repetition of one task. In System 1, we develop confidence from our feelings, and not from judgment. We are so confident that we generate most of our thoughts without doubts. We tend to invoke mottos like ‘seeing is believing’. In this system, our mind works with associative and emotional coherence. Things fit, and do not follow from one another. For instance, to say of the cruel dictator, Hitler, that he liked dogs does not fit. Also, if someone were to put a sticker on a glass of orange juice that says ‘cyanide’, people would not drink the juice even if they knew it was orange juice. We tend to exercise System 1 thinking unconsciously. System 2 Thinking This is a slow way of thinking. This way of thinking requires one to make some effort in reasoning. In arithmetic, the product of two large numbers is not obvious to most people. So, they will slow down and go through a multiplication algorithm to be sure of their answers. In syllogistic arguments, a System 2 person would reason from premises to the conclusion, but a System 1 thinker would believe in the conclusion because of some authority and argue for a premise to make the conclusion look right. System 2 is usually called up when System 1 runs into an incongruous problem. ‘A crucial capability of System 2 is the adoption of “task sets:” it can program memory to obey an instruction that overrides habitual responses’ (Kahneman, 2011, p. 38). Then one tends to slow down and

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take a more careful look at the problem. One can say that in simple moral problems it takes much thinking to be polite to someone you do not like. We do not express such character without some or much effort. Heuristics and Biases Kahneman and Tversky discussed several heuristics and biases that play out in our minds. These are short-cut methods or rule-of-thumb measures we use in decision-making. We discuss some of them as follows. Anchoring heuristic Planting a number in one’s head urges one to think in a fast mode, as in System 1. Such planting comes from a bias mechanism. If one were to rig a roulette wheel to stop at a certain number, then that number would be planted in one’s head. One would use it as an anchor if asked a question about the percentage of an outcome of anything in the world (Shleifer, 2012, p. 1084). In a more scientific parlance, we estimate outcomes starting from an initial value. Different starting values may lead to different estimates, which are biased towards the initial value (Kahneman, 2011, p. 421). For instance, in estimating the Dow Jones average, one can start from an initial guess and adjust to an estimate, or one can start from an anchor on evens or odds and make an estimate. The two starting points yield different answers (p. 425). Representativeness heuristic We tend to fit individuals and events into preconceived ideas that we have. When asked questions about whether Steve is a librarian or farmer, people’s minds do not get to the base statistics, such as there are more farmers than librarians. Instead, their minds tend to make up a story from the information they are given, to come up with a fast answer. What we do is tend to represent in an automatic way by focusing our attention on it (Shleifer, 2012, p. 1085). This heuristic has a place in economic forecasts based on trends. In the short-term, investments elicit a bandwagon effect based on the assumption that the trend will continue. They tell stories such as ‘the trend is your friend’. They know in the long-run that ‘what goes up must come down’. Such ability to extrapolate is related to the representativeness heuristic (p. 1086). Availability heuristic This occurs when we rely on the ease of memory search (Kahneman, 2011, p. 11). For instance, ‘one may evaluate the probability that a given b ­ usiness

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venture will fail by imagining various difficulties it could encounter’ (p. 418). Again, we have ‘a procedure (the availability heuristic) for estimating the numerosity of a class, the likelihood of an event, or the frequency of co-occurrences, by the ease with which the relevant mental operations of retrieval, construction, or association can be performed’ (p. 421). Endowment effect Here the meaning of endowment is as it is presented in utility and budget constraint analysis. The budget line marks your status quo or reference point, which is on an indifference curve between two commodities (Kahneman, 2011, p. 282). Such a solution takes into account only of the present, ignoring past behaviour or where the agent wants to be on a future consumption path. Happiness versus Well-being Well-being is a spectrum of feelings between the coordinate axes of arousal vertically, and pleasure horizontally (Kahneman et al., 2003, p. 394). This two-dimensional framework allows one to identify ‘content’ and ‘intensity’ of a feeling (p. 393). In a three-dimensional framework, well-being is posited in a three-axis system, labelled anxiety, displeasure, and depression on the negative side, and comfort, pleasure, and enthusiasm on the positive side (p. 395). Kahneman worked on the well-being of the experiencing self (Kahneman, 2011, p. 383). He used a day reconstruction method (DRM). In two-hour sessions, participants were asked to relive the previous day’s experience, dividing it up into scenes in a movie. Then, they were asked questions about each scene regarding the ones they paid most attention to, and the intensity of their attention on a scale of 0‒6, representing least to most intensity. One finding was that ‘American women spent about 19% of the time in an unpleasant state, somewhat higher than French women (16%) or Danish women (14%) . . . About half our participants reported going through an entire day without experiencing an unpleasant episode. On the other hand, a significant minority of the population experienced considerable emotional distress for much of the day’ (p. 384). Our famous Gallup Poll asks two questions on well-being in the United States (US) and in about 150 other countries. It asked about ‘the well-being that people experience as they live their lives’ and about ‘the judgment they make when they evaluate their life’. As we explain elsewhere in this text, this method is based on the Cantril scale (or Cantril Self-Anchoring Striving Scale). Findings include that more educated people reported higher stress during the day; stress and anger are common among parents; and religion

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has favorable effects on positive affect and stress but not as favorable on life evaluation (p. 387). Regarding money buying happiness, the results show that the poor are miserable, the rich can increase their satisfaction, but on average the rich do not witness experienced well-being (p. 387). Implications of System 1 and System 2 for Happiness One obvious observation is one is thinking all the time; fast or slow. This thinking process governs our happiness. Thinking arises from our memories, perception, emotions, intellect, and so on. Kahneman makes a distinction between the experiencing and the remembering self. ‘The experiencing self is the one that answers the question: “Does it hurt now?” The remembering self is the one that answers the question: “How was it, on the whole?”’ (Kaheman, 2011 p. 371). ‘This is how the remembering self works: it composes stories and keeps them for future reference’ (p. 377). Our happiness depends therefore on thinking, which is different from the utility model that satisfies a want from a product or service. In the colonoscopy test, it is thinking about pain and pleasure. One way to achieve happiness is if things happen the way we want them to. If the world operates on heuristics and biases, then we should not expect harmony with it and our thoughts. Therefore, our happiness is inversely related to short-cuts and biases. This suggests that we may study this problem by relating an index of happiness inversely to the major heuristics and biases in an equation form: Index of Happiness 5 1/f(Heuristics and Biases). Such a study can help us to identify those biases we need to work on to increase happiness. Ultimately, we can surmise that all heuristics and biases will have to be eliminated for the full attainment of happiness. Since, they are related to System 1 and System 2 thinking, then there is a serious implication for thinking about the road to happiness. As many philosophers have said, the human will, as Schopenhauer and Nietzsche had it, has to be invoked for that task. If willpower is exercised by only a few, then happiness will go to those few and the rest of mankind will not be privileged. Perhaps System 2 will have to analyze thinking itself, and not just problems, predictions, and explanations. It therefore seems that William Shakespeare was right when he wrote, ‘There is nothing either good or bad, but thinking makes it so. To me it is a prison’ (Hamlet, Act 2, Scene 2). There are precedents that allege that happiness is inverse to thinking. There is no objective method to find happiness. People in deep reveries do not seem to think, and when they are out of them, their thoughts seem spontaneous or effortless. They ‘are’ rather than they ‘think’.

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RICHARD LAYARD: HAPPINESS, LESSONS FROM A NEW SCIENCE Layard has dedicated his book to Daniel Kahneman, so it is surprising that it opens with the statement: ‘There is a paradox at the heart of our lives. Most people want more income and strive for it. Yet as Western societies have got richer, their people have become no happier’ (Layard, 2006). The foundation of his book is the new psychology of happiness, including neuroscience, sociology, economics, and philosophy. The philosophy is mainly Jeremy Bentham’s ideas. The psychology of happiness is about feeling good. From neuroscience, we learn that good feelings come from activities of the brain on the left-hand side of our forehead. This view gives us a scientific basis to confront the subject view of happiness. In Chapter 2, we learn that this happiness is measured by taking surveys on questions about whether people are very happy, quite happy, or not very happy. In Chapter 3, Layard displayed a paradoxical situation with a divergent chart for the US for the post-World War II era. Since the mid-1960s, real income per head went up constantly, while the percentage of ‘very happy’ responses went down constantly. He then proceeded to give a table of distribution for the US and the United Kingdom for the top and bottom quarters of respondent income. The results showed that as people become wealthier relative to other people, they are happier, but when the whole society becomes richer, people are not happier. We ought to try and explain this so-called paradox. Before we discuss the paradox, relative income and people’s adaptation to work is needed as background material. Take two situations: first, your income is twice that of the average income people make; second, your income is less than the average. People would most likely be happier in the first situation, since their relative income is better. Now, adaptation works thus: given a pay raise, you feel happier, but when you adapt to your new situation you will not feel any better. The pay raise increases your income, but it lowers relative income, which does not make everyone happier. Steedman thinks that Layard gave reasons for and against that paradox (Steedman, 2011, p. 37). One has to consider that ‘happiness could be both positively related to income and negatively related to “other things,” which have been increasing (and/or positively related to “other things,” which have been decreasing)’ (p. 37). On the good side, increased income tends to increase happiness; while on the bad side, inharmonious social relationships can counter that increase. So, one should temper statements to the effect that rising income has not increased happiness. The situation would support weak statements such as that rising gross domestic product (GDP) is a weak measure of happiness or social welfare.

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Another consideration of Layard is whether or not people in the West are happier than people in other societies. This point is looked at from a policy point of view, which can have varied consequences, good and bad. Also, the race for status can be a zero-sum gain, showing no increase in happiness. Economic policy should pay attention to intense preferences, diminishing marginal utility, endogenous preferences, income distribution, social relationships, and what economics is all about: incentives (Steedman, 2011, p. 39).

RICHARD A. EASTERLIN’S PARADOXES IN HAPPINESS STUDIES Many studies started with the Richard Easterlin paradox stated as follows: The Easterlin Paradox (2010): ‘At a point in time both among and within nations, happiness varies directly with income, but over time, happiness does not increase when a country’s income increases.’ (Easterlin et al., 2010, p. 11463) Easterlin first laid out his hypothesis in a 1973 paper under the title ‘Does Money Buy Happiness?’ (Easterlin, Does money buy Happiness?, 1973). In that early paper, he announced the results of a more empirical paper on the subject, ‘Does Economic Growth Improve the Human Lot? Some Empirical Evidence’ (Easterlin, 1974). His early findings were that ‘in all societies, more money for the individual typically means more individual happiness. However, raising the inome of all does not increase the happiness of all’ (Easterlin, 1973, p. 4). Easterlin specifies a utility function to frame his hypothesis. The function was based on a relative income hypothesis proposed by James Duesenberry (1949). Basically, this income hypothesis predicts that people tend to maintain a consumption pattern that is based on the previous peak income they received. That is different from a basing consumption on absolute inome or permanent income (Ramrattan and Szenberg, 2009).

SPECIFICATION OF HAPPINESS MODEL Easterlin proposed a utility function that captures the happiness hypothesis (Easterlin, 1974, p. 112):

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Ui 5 f a


a aij Ci

b ...... (East1)

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where U is utility, C is consumption, subscripts are individuals, aij is the weight individual i gives to the consumption of individual j. A 2008 study by Betsey Stevenson and Justin Wolfers occasioned a new view on the specification of a utility functions for happiness (Stevenson and Wolfers, 2008). Reviewing that study on the Easterlin paradox, a more general utility function was proposed (Becker et al., 2008). They proposed a general utility function of the general form: U 5U (Z,H ) ...... (East2) ,

where the input H is happiness, and Z is another commodity. The inputs are in turn produced in another function with other inputs. This view is piggy-backing on an older research program set by Gary Becker to integrate social matters into the utility function. It is notable because Don Patinkin included money in such functions he was met with much resistance. We note that Becker won the Nobel Prize in 1992 ‘for having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior’. He socialized the standard ordinal utility function where utility is a function of two goods, say x and y, by inserting a variable called social capital into it to get: U 5 U (x,y;S) . Without the insertion of S, the standard utility function would shift about as S changes. With the insertion, the standard function will not shift, but rather utility will rise or fall when S changes (Becker and Murphy, 2000, p. 9). With equation (East2) fully specified, Becker et al. (2008) extracted the following major implications for happiness study: If happiness is just one (important) commodity in the utility function, then the absence of a positive connection between happiness and income over time or across nations is consistent with an increase in utility when income is higher. (p. 95) Happiness as a commodity may not increase when utility does, perhaps because happiness is very habitual, even addictive, or because a person’s happiness may be affected by the achievements and happiness of others. (p. 95) perhaps happiness is time intensive, so that a rise in wage rates over time raises both income and the relative cost of producing happiness. (p. 95) [One must] speak to the question of whether happiness is identical with ­utility  . . . [and] integrate . . . findings into a more comprehensive theory of utility maximization that can discern the precise role played by happiness in people’s decisions. (p. 95)

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ESTIMATION OF HAPPINESS MODELS The problem in estimating such a specified utility function is the lack of data on happiness. Researchers on the one hand fall back on survey data, and on the other hand use surrogate measures for happiness. Easterlin’s early methods used 30 surveys from 19 developed and less developed countries. Easterlin’s relative paradigm is that ‘individuals assess their material well-being, not in terms of the absolute amount of goods they have, but relative to a social norm of what goods they ought to have’ (Easterlin, 1973, p. 4). In his assessment, the terms ‘money’, ‘income’, and ‘goods’ are surrogate measures for happiness (p.1). The study by Stevenson and Wolfers opted to use a regression analysis (Stevenson and Wolfers, 2008). What they add to the method of estimating the Easterlin paradox is a ‘focus on the magnitude of the subjective well-being‒income gradient estimated within and across countries at a point in time as well as over time, rather than its statistical significance or insignificance’ (p. 3). We read in a recent study that: people live typically happier in rich countries than in poor ones. This difference is at least partly due to an effect of material affluence as such, as much of the correlation remains when other nation characteristics, such as climate, are controlled. Analysis of change over time reveals that economic growth goes together with rising happiness . . . This contradicts the well-known ‘Easterlin Paradox’. (Veenhoven, 2015, p. 283)

This argument is ‘contradicting Easterlin’s and Duesenbury’s hypothesis that happiness is completely relative’ (Haverty and Veenhoven, 2003, p. 20). It appears that the argument was based on a small sample: Easterlin’s earlier claim was based on reports from 11 nations up to 1987. Five of these 11 nations now show significant increases in life satisfaction (US, Netherlands, Germany, Italy, and Denmark), while only one shows a significant decline (Belgium). Hence, the new data require substantial revision of Easterlin’s conclusion that no country showed significant trends in happiness. (p. 14)

In one of his papers, Veenhoven claimed that ‘empirical tests falsify all the theoretical objections against the greatest happiness principle’ (Veenhoven, 2010, p. 627). In his ‘Building a Better Theory of Well-Being’, Easterlin replied to psychological and economic critics of his model of happiness (Easterlin, 2006). He proposed that such model-building ‘proposes new enquiries on the interplay of personality and life-events in shaping well-being as a solution to the problem’ (p. 1).

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Easterlin first addressed the psychologist’s ‘setpoint theory’, which is analogous to equilibrium theory in economics. A person’s happiness has an equilibrium set by genetic and personality traits. Economic and life events can cause only a temporary displacement, followed by a return to the initial setpoint. This view is nihilistic for economic and social efforts to better one’s condition. It also is not clear that such a displacement and return to a setpoint is complete. Easterlin noted that declining heath has a negative effect, and marital status has a positive effect on happiness on average. The new framework Easterlin offers opposes prevailing psychological and economic theories based on survey evidence. A lifecycle approach is now taken, looking at survey data over age cohorts for the years 1972–2000. The findings are discussed under pecuniary and nonpecuniary terms. Over the lifecycle, improvements in material circumstances yield little change in well-being, while attainment in family life goals leads to increased wellbeing. More time spent on pecuniary goals, and less on family and health areas, leads to declines in well-being. Policies to improve health and attain full employment will increase well-being. It is not that setpoint theory does not matter, but research is needed to link it to the new framework.

ANGUS DEATON’S PUZZLES AND PARADOXES IN HAPPINESS STUDIES The gradient concept surfaced in a study by the 2015 Nobel laureate Angus Deaton for surmising that ‘to design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices’. We can enhance our perspective by noting what are now called Deaton’s puzzles and paradoxes. First, we note that Deaton was well aware of a new set of data to study consumption behavior. In summarizing his life and work, he noted that his office was next to Daniel Kahneman who was working in this area, and whose work we discussed above. But important for Deaton was that Kahneman was developing a new data set for Gallup that he would use in his work on happiness. Deaton noted that ‘there are wide-open and important questions of what the various measures of happiness really mean and to what extent they can and should be used for policy and welfare economics . . . The old question of whether money buys happiness turns out to have a complicated answer’ (Deaton A., 2014, p. 99). To take these issues beyond Milton Friedman’s permanent income hypothesis, and Franco Modigliani’s lifecycle hypothesis, Deaton embraced a new consumption hypothesis in a joint Brookings Paper with Alan Blinder (Blinder and Deaton, 1984, p. 465). They changed the way transi-

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tory income was explained in the received models by either short-horizon or liquidity constraints. Their new model was designed to accommodate the following novelties: ●● ●● ●● ●●


Lucas’s critique called for the joint estimation of consumption and income and not a structural one (p. 466). Robert Hall’s random walk specification allowed for only surprise in income to affect consumption (p. 466). Robert Barro’s equivalence hypothesis allowed free transfers of income across generations (p. 458). The interest rate omitted in received models on the ground that consumption was insensitive to it played down intertemporal substitutions (p. 468). Recent problems about temporary tax changes, interest rate and inflation, and budget deficits.

The specification that would accommodate those concerns can be written as follows:

Δct 5 f ( yt, yt21, qt, zt) ...... (Deaton1)

where c and y are natural log values for consumption and income, q represents contemporaneous variables inflation, prices, and wealth, and z are either lagged q variables or other variables such as time trends. The model can also use decomposed values for y and q to capture anticipated and unanticipated effects (p. 475). Such effects involve a vector autoregression (VAR) specification using two lags for the consumption and income variables to generate series to treat the anticipated and unanticipated variables as known data. Then, ordinary least squares (OLS) techniques are used for the final results, after some trial and error, based on diagnostic tests. They recommend that procedures over say a system approach in order to avoid specification errors (p. 477). The main conclusion validated rational expectation concerns that unanticipated changes in income and wealth do affect consumption. Anticipated inflation leads to lower consumption. Nominal rate of interest has an insignificantly negative effect on consumption. Changes in relative prices ‒ the price of one commodity relative to the price of another ‒ matter in spending in the short run. They also change the effect of interest rates, inflation, and unanticipated income on consumption. Temporary tax changes turned out to be insignificant, as the permanent income hypothesis predicted. In a 2010 research study with Kahneman, Deaton extended his idea of

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correlation of income to include emotional quality and life evaluation of happiness (Kahneman and Deaton, 2010). Emotional quality involves joy, stress, sadness, anger, and affection, and life evaluation is the thoughts people have about their lives. The main finding is that ‘when plotted against log income, life evaluation rises steadily. Emotional well-being also rises with log income, but there is no further progress beyond an annual income of ~$75,000’ (p. 16489). In the 2013 American Economic Review, Deaton did a joint study with Arthur Stone on subjective well-being (SWB) (Deaton and Stone, 2013). Their purpose in this paper was to appraise how subjective well-being and ‘happy fork’ symptoms are correlated. They noted: (Left fork) – that income, education, and health are positively linked to SWB – are taken as support for SWB measures, while results that do not so conform (right fork) – that unemployment is much worse than the loss of income would imply, or that people hate to commute – are also taken as supportive and indeed demonstrative of the superiority of the SWB measures. Such interpretations are unlikely to persuade skeptics. (p. 591)

Again, the log income on SWB variables was used. Regressions have either SWB or happiness as the dependent variable, and reported the coefficient on log income. Regressions include controls for sex, age groups, and white and nonwhite persons. One finding is that income has little effect on economic growth. Another finding is that people have a focusing illusion. This seems to mean that when their attention is drawn to a thing, they seem happier, but without that focus they would report lower life evaluation (p. 596). The authors concluded that these findings do not help us with welfare assessment.

DANIEL HAUSMAN ON PREFERENCE Daniel Hausman made a comprehensive study of preference in economics covering a wide range of subjects (Hausman, 2012). His work is included here for its philosophical insight as well as because it serves as an arc or bridge over the variety of concepts in this book. One clear distinction we should note upfront is between choice and preference. In economic parlance, if we choose x over y, we tend to mean that we prefer x over y. We can see problems with such a distinction in the case of Romeo and Juliet. ‘If choice defines preference, then Romeo prefers death to eloping with Juliet . . . it is perfectly possible to prefer x to y yet to choose y from the set {x, y} because, like Romeo, one mistakenly believes that one is choosing between y and something other than x’ (p. 28).

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Hausman also makes a distinction between preferences and desires. ‘The most important difference is that preferences, unlike desires, are comparative . . . more cognitive, more like judgments, than desires’ (p. x). A distinction to keep in mind is that one can desire both apples and bananas, but one can prefer one over the other. Also, ‘desires provide prima facie evidence that there is reason to seek their objects’ (p. 6). Hausman’s book opened with several concepts of preferences, namely, enjoyment comparison, where one’s preference is based on joy; comparative evaluation, where someone evaluates x over y such as is done with economic policies; favoring, as in a racial context; and choice ranking, where one makes decisions over binary choices (pp. 1‒2). Comparative evaluations can be partial or total. The distinction seems to parallel what economists think of making rational decisions with partial or full information, where total evaluations will include ‘everything that matters’ to the chooser (p. 3). We read that preference ‘places enormous cognitive demand on agents’ (p. 17). That is a reference to the axioms one normally places on preferences, such as that they are transitive, complete, context-independent concerning ‘whether an agent prefers x to y remains stable across contexts’ (p. 16); and choice determination, where ‘among the alternatives they believe to be available, agents will choose one that is at the top of their preference ranking’ (p. 15). A preference is subjective, that is to say it is indexed to people, who integrate preference with their beliefs in making economic decisions (p. 32). One of Hausman’s findings confronts the revealed preference theory (RPT), which seeks to put preference on a scientific basis as we have illustrated above. One point seems to be that RPT seems to reconstruct preference but it cannot reconstruct the agent’s beliefs for making those choices. For Hausman, beliefs are likened to reasons (p. 6). As one reviewer puts it, since the time of David Hume, ‘both reason and passion are required to cause action. Hausman claims that we cannot make any inferences concerning hypothetical choices unless we also know an agent’s beliefs. So, preferences cannot be defined by hypothetical choices either’ (Bruckner, 2013, p. 371). Hausman stresses some ambiguities in the use of preferences in welfare analysis. Preference is a good indicator of well-being because it is a good measure of people’s self-interest. But not all preferences are based on self-interest: caring for a clean environment cannot be so judged because it spans more than one self-interest lifetime. From another angle, it takes special interests to generate the results of Coase’s theorem, which requires one to postulate private parties and zero transaction costs for it to function in a self-interested way. Hausman touched on some major flaws in welfare considerations. These

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views are covered under what he calls ‘mental states’ theory and ‘objectivelist’ theory (p. 79). Mental states covered the hedonism of Jeremy Bentham through John Stuart Mill and Henry Sidwick and are still practiced today. The objective-list or preference satisfaction theory requires one to make a list of all things that contribute to well-being. Mainstream economists tend to look for preference satisfaction based on their assumption that people are driven by self-interest and are well informed. We discuss welfare theory in the next chapter.

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5.  Social welfare and happiness In this chapter, we specialize our study of happiness to that of society and the welfare of mankind. This will require focusing on social relationships and the social skills, ties, and support that may contribute to happiness. Welfare economics is classified as normative against positive economics which is falsifiable. In positive economics, we test the conclusion; in welfare economics, we must verify its assumptions.

BACKGROUND OF WELFARE AND HAPPINESS The objective in this section is not to be comprehensive, but to set up a few milestones to help us touch on modern concerns in a reasonable way. Humans are gregarious animals who find happiness individually and through their participation in groups. The concept of group rationality reveals that each individual gets benefits from such membership. For instance, you may not be able to adequately protect yourself and your properties, so you turn to society. The will of individuals guides selfinterest, but there is a general will that operates for the common interest according to Jean-Jacques Rousseau (1978, p. 72). The general will is a compelling force, and may not work in a way to provide the individual happiness. Utilitarian View Our central theme is concerned with the utilitarian perspectives starting with Jeremy Bentham, where maximizing welfare means maximizing the total utility of the individual. Implied in this view is that a transfer from me to you will hurt me less than it helps to you (Myerson, 1981). The utilitarian view was taken up by Francis T. Edgeworth (1881), Alfred Marshall (1982 [1890]), and Arthur C. Pigou (1920), who used utility to measure the happiness of individuals and the welfare of society. There is a capacity problem associated with the view of maximizing total utility. Let the capacity of a person be likened to a jar. Since there are large and small jars, some people will say there is unequal capacity. Some would ­153

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argue that equality would mean to fill all the jars with the same substance, say milk, and to fill some with milk and others with, say, water would be discriminatory. With this analogy, people with lower capabilities would receive a lesser share of total utility. The concept of rewarding a person according to their effort is also problematic. With the marginal productivity theory, equality appears out of the rule in awarding each participant in production a reward equal to their marginal products. For instance, workers get a wage that equals their marginal products of labor. The problem is that capital cannot be defined so as to reward it with its marginal products in terms of interest rate or profit. This has been the constant theme in the debate under the name of the Cambridge controversy. Suppose three people in a car going to a picnic destination were to come to a three-way fork without directions. The fork shows three directions: left, centre, and right. According to Maurice Dobb, a leading exponent of welfare economics, a majority vote of preference could lead to an unambiguous outcome in cases of the following two choices (Dobb, 1969, p. 114): the choices below shows that the majority is 2:1, (Tom and Dick) versus (Harry). But, as Dobb goes on to show, one can have contradictory choices as well. Voters

Go left






Go straight on

Go right ,5

5. ,5


The Early French Views J.C. Borda (1781) and Marquis de Condorcet (1785) looked at social choice problems from a mathematical point of view (Sen, 1999, p. 350). Their analysis was related to voting. Its relation to economics is that when one buys a commodity, one is voting for it, like a citizen voting for a politician. It uses a rational method for group decisions under preference analysis. If a group prefers A over B, and B over C, then it will be inconsistent for it to prefer C over A. Borda found that the simple concept of plurality voting can select the wrong candidate. If each voter selects one candidate, then plurality voting chooses the candidate receiving the largest number of votes. Borda advocated that one should use a weighted average method on the expressed preferences of voters to select the winner. The weighting scheme gives 0 points to the last-ranked candidate, 1 point to the second-last candidate,

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and so on. The candidate receiving the largest number of points, and not just votes, is the winner. Condorcet’s contribution is to use a pairwise comparison of votes. The pair that stands ahead of all other pairs is the winner (Saari and Valognes, 1998, pp. 244‒245). The Egalitarian View We read that the term ‘egality’, from which ‘egalitarian’ is derived, was introduced into English with its present meaning in a poem by Tennyson in 1864 to suggest politically assertive equality of the French variety. Even today, ‘egalitarian carries with it echoes of revolution, of fervour for equality in opposition to elaborate structures of inequality’ (Woodburn, 1982, p. 431). Woodburn claimed that ‘greater equality of wealth, of power and of prestige has been achieved in certain hunting and gathering societies than in any other human societies’ (p. 431). He suggests that the reason for the difference is that that the latter societies have delays in their returns, whereas the former societies have immediate returns. Immediate returns mean that people get immediate returns for their labor, such as when one eats what one gathers or hunts. Immediate return societies are mobile: males have access to means of coercion such as weapons; people have easy access to food and resources; they are inclined to share their tools and catch; they have sanctions on accumulation; they transmit possessions; and they have egalitarian leadership. Delay refers to such things as holding assets, planting crops, herding animals, and getting a yield or return. Writing in the late nineteenth century, Lesley Stephen, a moral philosopher, stated that the ‘power of producing wealth, meaning roughly whatever contributes to the physical support and comfort of the nation, is undoubtedly a necessary condition of all other happiness’ (Stephen, 1891, p. 275). He defended Adam Smith’s prognostication that those who peruse their self-interest unintendedly benefit the welfare of mankind (p. 274). This defines the role of competition and equality: Competition means that thousands of people all over the world are trying to find out how they can supply me more economically and efficiently the wants of other people, and that is a state of things to which I do not altogether object. Equality in my sense implies that everyone should be allowed to compete for every place that he can fill. (p. 284)

With regard to the role of government, he pronounced that ‘no interference would do good unless it helped people to help themselves’ (p. 287). L.T. Hobhouse, another moral philosopher, interpreted social philosophy of the Benthamite school. The ‘Benthamite school had the merit of clearly and avowedly subordinating politics to ethics, and attempting to

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Common Good


Be at peace

Look beyond oneself


Figure 5.1  L.T. Hobhouse’s idea of harmony apply a simple and comprehensive theory of the good as the touchstone of all personal and social relations alike’ (Hobhouse, 1965 [1922], p. 14). The principle aimed at providing the greatest possible happiness for the greatest number. Happiness is pleasure and the absence of pain. We measure them through feelings. Feelings in turn are not the addition or subtraction of pleasure and pain, but depend on stable relations. One stable condition is that ‘we should be at peace with ourselves’, and the other is that ‘our lives should be anchored in some objects that take us beyond ourselves . . . another person, or our work, or the life of the community, or the God of our belief. To know what objects will permanently satisify is to possess the secret of happiness’ (p 18). According to him, J.S. Mill proposed that if a fundamental social feeling is developed, then the happiness of others will be our own (p. 20). Figure 5.1 is constructed to bring out some of Hobhouse’s social ideas. Self-regard and the common good are opposed to each other in the diagram. Hobhouse wrote that ‘on the principle of the common good, it is clear that there can be no purely self-regarding actions’ (Hobhouse, 1965 [1922], p. 60). Just as Rousseau’s general will is formed from the real will of the citizens, so Hobhouse’s common good is harmonized from the individual good. As Kant’s general will is idealized, so is Hobhouse’s common good. The state does not influence them, but the state tries to attain them. The individual personality develops by harmony of inner development. The common good develops by the rational interaction of minds and mind

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(p. 70). In his The Rational Good, Hobhouse argued that when one satisfies an impulse, one may have pleasure and happiness, but that is done with the pain of suppressing another impulse. To clarify, ‘the impulses are not based upon the reasons but the reasons on the impulses. A man may think that he loves a woman because she is beautiful, but in reality she is beautiful to him because he loves her’ (Hobhouse, 1921, p. 20). Impulses come from the ‘effective will of God’, which is modified by social traditions (pp. 20‒21). People are moved by ‘impulse-feeling’ (p. 22). The figure also shows that feelings are the basis of social action. For ‘reason as distinguished from feeling is not the basis of our social action, but the system of feeling at the basis of our social action is reasonable’ (Hobhouse, 1965 [1922], pp. 23‒24). Practical reason as the basis for social action is ‘the harmonized body of impulse-feeling’ (p. 24). The individual is not making sacrifices here, therefore this harmony is not dependent on negotiation, compromise, or collective bargaining. On the one hand, one must be at peace, as opposed to being at war; and on the other hand, one must look beyond oneself, such as towards ‘another person, our work, or the life of the community, or the God of our belief’ (p. 18). To link impulse with reason, Hobhouse wrote, ‘Impulse, informed by a definite idea of an end, becomes purpose, and purpose is at least the beginning of rationality in action’ (p. 31). Some researchers distinguished between types of egalitarianism. One type tends to measure the inequality between different lives and tries to minimize it. Another type prioritizes the need of the badly off, giving priority to improving the bad life over improving the better lives, a maximin egalitarian view. A third gives a minimum share of advantage or benefits to everyone, a minimum entitlement egalitarian view (McKerlie, 1989, p. 475). Questions arise as to what is distributed in these views: possessions, services, resources, happiness, and values. Another question concerns how the distribution should take place over time. Here, some would compare average or total ‘shares of resources or happiness over complete lives’ (p. 477). Egalitarianism has a deontological and a teleological perspective, which oppose each other. As a definition, ‘a deontological equality view might say that I have a duty not to cause inequality myself and in addition a duty to eliminate inequality however that inequality may have been caused’ (McKerlie, 1996, p. 276). It holds that universal goodness exists. An egalitarian theory might be based on an appeal to equality itself as a moral ideal’ (McKerlie, 1996, p. 274). ‘Teleological’ means that there is a consequence to an action. For example, if one does good deeds, then one will be happy. The time variation view of egalitarian analysis is particularly useful to

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study intergenerational benefits, which are particularly relevant to policymaking. We are studying people rather than institutions or government over time. As Mckerlie wrote: For almost all egalitarians people are the units of distribution. The things to be distributed, whatever they are, should be divided equally among the lives of different people. But our lives are lived through time. Because of this fact, there are different ways in which the egalitarian requirement could be applied to us. (p. 476)

One can compare differences of people at a specific time, say T1, or different age-cohorts for two people, say the elderly and middle-aged people, as T2. In the former, interpersonal comparison is not a problem as in utility analysis, because the same person is studied at different times. In terms of the Arrow model, to be developed later, an egalitarian state is one in which all persons receive the same allocation (Samuelson, 2011a, p. 720). It implies that all members of society share equal benefits. For instance, if one person were to gain more from a group, then it should help others not so fortunate. According to a welfare view, ‘One of the primary activities of the government is indeed redistribution. Ideally, this would be achieved through measures that did not destroy the efficiency properties, and much of welfare economics is based on the assumption that non distortionary (“lump-sum”) taxes and transfers can be carried out’ (Atkinson and Stiglitz, 2015, p. 5). The problem with this approach is that the government uses surrogate ways such as income, wealth taxes, and social security benefits, that invite trade-offs between equity and efficiency. Criteria View of Happiness Samuelson has argued for the diminution of the Pareto criterion in welfare economics. He wrote that ‘Before Bergson, Lerner‒Hicks‒Hotelling‒ Kaldor‒Scitovsky insufficiently understood that the full set of Pareto optimality conditions constituted an incomplete set of conditions for ethical maximization’ (Samuelson, 2011a, p. 849). It appears that what paraded as ethical optimality for Pareto was that ‘there was no deadweight loss’, and that was ‘the gem of truth in the invisible hand argument’ (pp. 849‒850). He made this clear pronouncement: ‘You cannot obtain an ethical result without already putting an ethical premise in the proposition from outside’ (p. 852). In two cases, he showed the route toward ethical optimality: namely, a weak separable social welfare function, and a ‘just’ society (p. 853). Little’s Criterion: ‘An economic change is desirable if it does not cause a bad redistribution of income, and if the potential losers could not profit-

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ably bribe the potential gainers to oppose it’ (Little, 1950, p. 105). Little advocated two tests for his criterion. One test checks that an unfavorable redistribution of income is not an outcome, and the other test checks to see if a loser cannot bribe the gainer, consequent to a redistribution of income. Little has the honour of being the first to coin the term ‘Pareto optimality’ in the literature. Kaldor–Hicks Criterion: (K–H test). According to this test, a change can be recom­mended if the gainers can compensate (bribe) the losers and still be better off. The general spirit of this criterion is to compensate losers for losses. Compensation is an advancement over the Pareto condition in that it is open to considering interpersonal conflicts. Libertarian Concerns We take notes from the confrontation of Abram Bergson, a pioneer of modern social welfare functions, with the Austrian school. Bergson picked up the controversy with von Mises on the potential for socialism outperforming capitalism. Bergson proceeds on two levels with his argument. First, ‘Mises’ contention is that without private ownership of . . . the means of production, the rational evaluation of these goods for the purposes of calculating costs is ruled out conceptually’ (Bergson, 1982, p. 233). To this view, Bergson replies that Lange and Schumpeter, who favor this interpretation of von Mises, accurately observe that the works of Pareto and Barone refute this position. Hence, if taste and techniques are given, we can calculate the values by imputation, without the help of the market. Second, another point of von Mises underscored by Hayek states that ‘imputation is theoretically possible; but once private ownership of the means of production has been liquidated, it cannot be accomplished in practice’. Bergson situates Hayek and Robbins on one side of the balance, and Lange and von Mises on the other. He quotes Lange’s observation that a ‘trial and error’ method can be employed to value the means and ends. He takes followers of von Mises off the balance and lets the scale tip in favor of Hayek and Robbins against Lange. Hayek’s weight rests on his anticipation that ‘output, where the use of the available resources was determined by some central authority, would be lower if the price mechanism of a market operated freely’ (Bergson, 1982, p. 189). This puts the balance squarely in favor of ‘competitive efficiency’. Bergson requires a ‘test on efficiency, that is, on the ends according to which the optimum allocation of resources is to be defined’ (p. 236). He points to Schumpeter’s consumer sovereignty as a measure. This turned out to be not an idle suggestion, considering that consumer and producer surpluses are the staple

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measure of benefits in the computational general equilibrium modeling environment. Bergson also calls for a comparison of ‘ideals with ideals or facts with facts’, implying ‘competitive solutions in an established socialist state where there is a unanimity on ends with monopolistic and unstable capitalism in the United States’ (p. 236). Such a comparison is complicated by its requirement of comparable data, such as data from the World Bank, the United States  International Trade Commission (USITC), and private sources such as Penn World Table (PWT) and the Global Trade Analysis Project (GTAP), and also constant elasticity of substitution (CES) and Cobb‒Douglas a priori specifications on data, with their undermining assumptions of constant returns of scale. The economics profession will always be grateful to Bergson for asking the hard questions, and leading welfare economists in scientific directions. As the fields he initiated continue to be vigorously researched, we cannot of yet determine which side of the debate has the analytic edge. But those that judge progress based on both structure and performance will appreciate Bergson’s work for years to come.

MODERN NOTIONS OF WELFARE AND HAPPINESS A well-known text in welfare economics defined propositions of welfare economics as follows: They are logical deductions from a set of definitions and assumptions which may or may not themselves be realistic, and which may or may not be ethical in nature. Having defined welfare . . . we can deduce the conditions under which it will increase. (Graaff, 1957, p. 2)

Another distinction we make in welfare economics is between the old and the new theories. According to Samuelson, ‘The old welfare economics flourished in the nineteenth century, Bentham, Sidwick, and the general run of neoclassical economists ‒ Edgeworth, Marshall, Wicksell, BohmBawerk, Walras, Carver, and Pigou’ (Samuelson, 1986, p. 5). The old doctrine fell under harsh criticism that one cannot test or prove empirical observation based on different people’s utility. As Lord Lionel Robbins put it, the old theory assumes that ‘we can compare the order in which one individual may be supposed to prefer certain alternative[s] with the order in which they are preferred by another individual . . . It is essentially normative. It has no place in pure science’ (Robbins, 1962, pp. 138‒139). A new theory was then put in place by Bergson that posits a social welfare function that has testable propositions (Samuelson, 1986, p. 7). At

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the core of the new theory is the concept of Pareto’s optimal condition. Pareto calls this condition maximum ophelimity, which has a two-part distinction as follows: Maximum Ophelimity [Pareto I]: ‘Given certain rules of distribution, we can seek the position which gives, always in conformance with these rules, the greatest possible welfare to the individuals of the collectivity.’ (Pareto, 1971 [1906], p. 451) Maximum Ophelimity [Pareto II]: ‘Consider any position, and assume that we move away from it by a very small amount . . . if this small movement increases the welfare of certain individuals and decrease that of others, we can no longer state positively that it is advantageous to the entire collectivity to carry out that movement.’ (p. 451) First, Pareto defined ophelimity as follows: ‘For an individual, the ophelimity of a certain quantity of a thing, added to another known quantity (it can be equal to zero) which he already possesses, is the pleasure which this quantity affords him’ (p. 112). Pareto I is now carried as the first welfare theorem. When it is not obtainable, as in Pareto II, then we investigate the kind of compensation that would be welfare-improving. Such discussions are carried under the second welfare theorem. We will discuss them further below. Now we look as some compensation principles that claim to advance the theory. Compensation Principles This principle seems to be first characterized by the famed economist Nicholas Kaldor, although J.S. Mill in effect said that ‘free trade may help some people, and hurt some other people, but the gainers would be able to compensate the losers’ (Samuelson, 2011a, p. 850). Kaldor wrote the following statement: it is always possible for the Government to ensure that the previous incomedistribution should be maintained intact: by compensating . . . for any loss of income and by providing the funds for such compensation by an extra tax on those whose incomes have been augmented. (Kaldor, 1939, p. 550)

The statement implies that when people with losses are compensated, other people will show gain, so that welfare is improved. This is now a standard approach in microeconomics, demonstrated with indifference curve and budget lines. The idea is that after a change, one is taken back to one’s original indifference curve.

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M. Dobb has suggested what looks like a production possibility curve, which can be interpreted as a ‘compensating line’ or a ‘community indifference curve’ between two persons, A and B, and two goods, x and y, to illustrate ‘what the Kaldorian principle is suggesting’ (Dobb, 1969, pp. 89‒90). A point P on that line represents an equilibrium distribution of the two goods for the two persons. But a movement in the southeast or northwest direction of P would mean less of one good and more of the others for the parties. The question of compensation then comes up, as to how much more of one good would compensate the persons for the goods they have given up in the movement. One can discern several instances from the descriptive picture as follows: ●●





A point northeast of P and above the curve shows an increase in both x and y to both parties, which can be taken as greater real income to the persons, measuring increased happiness to both. Drawing a fan-shaped set of curves through a point in that plane would reveal some ambiguous statements about real income for different points outside the range of the fan, and between some zones. This reason for the ambiguity is that each line in the fan would represent a different distribution of income. This points to a difficulty of generalizing index numbers of individuals to a social level (pp. 90‒91). One can use utility-possibility curves to hold quantity of goods constant and let the distribution of income vary. This new plane measures utility that A and B gets on the axes. These curves measure maximum satisfaction one person gets for a given utility that the other person enjoys. Each point such as P we discussed before will now be associated with a curve can be shifted parallel to itself or intersect with another curve (p. 93). When utility-possibility curves intersect, we have a situation where one person is being compensated with more of a commodity that will not compensate for the one that was being given up. If this curve is applied to inputs, then the intersection can be avoided if the increase in one of the inputs represents more of all resources (p. 94). When a utility-possibility curve is shifted parallel to itself then a point A on the outer curve is ‘uniformly outside and beyond the utility-possibility function of B’ on the inner curve. In the language of a song, ‘A can do everything B can do ‒ (and) better’. This is because of an ‘increase in society’s potential real income in going from point B to point A’ (Samuelson, 1966b, p. 1049).

John Hicks, who considered his ‘task [as] mainly one of synthesis’, focused on the concept of efficiency at the expense of equity (Hicks, 1939,

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p. 698). He used the Edgeworth‒Bowley box diagram for that purpose. It assumes two regions produce two of the same commodities under conditions of diminishing returns. The latter is captured by bow-shaped production possibility frontiers. The same apparatus is also used for exchange between two individuals and two commodities, and for inputs used by two producers to produce a commodity. The Pareto conditions for efficiency for those three cases are given then by Hicks (p. 704), and are carried in standard microeconomic texts as follows: 1. For exchange: the marginal rate of substitution between any two goods must be the same for the individuals that consume both goods. 2. For inputs: the marginal rate of technical substitution between any two inputs must be the same for the producers that use the two inputs. 3. For products: the marginal rate of transformation of two commodities must equal the marginal rate of substitution between two commodities for the commodities and for the individuals (Ferguson, 1969, pp. 442‒443). Hicks has expanded his original position to include some dynamic considerations for temporary and permanent gains and losses (Hicks, 1981, pp. 76‒77). It is more feasible to reach an agreement for temporary losses than for permanent losses, such as that of a limb or divorce (p. 77). T. Scitovsky argued that Kaldor and Hicks have given ‘undue importance to the particular distribution of welfare obtaining before the contemplated change’. That procedure will be fine if the government preferred the old distribution as a status quo and was to impose a tax after the change to get back to the original position. Otherwise, there could be some asymmetry between the changed and the old positions (Scitovsky, 1941, p. 88). Scitovsky proposed a two-test procedure to correct the problem. The tests amount to using index number criteria this way: We compare the first welfare situation with what general welfare would be if the satisfaction . . . yielded by the physical income of the second situation were distributed as it was in the first; and contrast the second situation with the welfare that the first situation’s physical income would yield to each person if it were so distributed as to make the distribution of welfare similar to that of the second situation. (pp. 87‒88)

Index Numbers as Welfare Indicators Index numbers are calculated for different levels of aggregation such as the consumer, a firm, an industry, or for the whole economy. A popular book stated that ‘price index, or index number, is a scalar representation

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of a list of prices relative to some base value’ (Fisher and Shell, 1998, p. xi). One can take an axiomatic or economic approach to index numbers. The former sets out properties such as homogeneity to a degree that the index should satisfy, while the latter looks at what economic theory suggests that we should measure (pp. 2‒3). The Consumer Price Index (CPI) is an example of the latter, measuring the cost of base-year sets of goods at current prices. Such an index uses the current prices as weights. In economics, price times quantity subscripted by year measures expenditure. When expenditure equals income, as in the case with the indifference curve and budget line framework in economics, we can use the index number to measure changes in income. Income or expenditure changes are captured by the expression: price, p, and quantity, q, subscripted by the year, 0 or 1 for example. In Figure 5.2, we correlated the various indices and listed their measurements of individual happiness. One can enter the diagram by the expression E which measures the change in income from time zero to time 1. The next important expression to note is B in the NW box. John Hicks was careful to explain what it signifies (Hicks, 1981, p. 84). It measures a total quantity and not the distribution of wealth among group members, since a distribution can change but the quantity will remain unchanged. It does, however, tell us that for some distribution of q0 the group will be better off in time one. The expression C in the NE box is achieved by contradicting the year used in expression B in the NW box. The label q is used for any quantity, such as commodities or income. For the other expressions, the two subscripts on P and L tell the base and the current year, respectively. For individual comparisons, the results of Figure 5.2 indicate that sometimes index numbers show an unambiguous result, sometimes inconclusive results, and sometimes contradictory results. In order to represent increases in group happiness, a utility-possibility curve must meet the criteria of Samuelson’s song established above; namely, it must be uniformly above a lower curve. But as Dobb puts it, that criterion is ‘one that is difficult if not impossible to express in a verifiable form. It is not something that is capable of being demonstrated by index-number data’ (Dobb, 1969, p. 101). However, one can understand Kaldor‒Hicks’s and Scitovsky’s criterion by an example with numbers given by the legal scholar Coleman (1979–80, p. 519). The numbers are at the bottom of Figure 5.2. We assume that both persons prefer 1X 1 1Y to the State E and State E’. We can therefore write their preferences as follows: Person A’s preference ranking is: 1X 1 1Y . 12X 1 10Y . 1X 1 0Y. Person B’s preference ranking is: 1X 1 1Y . 0X 1 12Y . 10X 1 1Y.

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Individual better-off criterion in period 1, (B):

Expenditure Paasche and Laspeyres indexes

• P is for Paasche, L is for Laspeyres, and E is for change in income index. P uses the current-year income, while L uses the base-year income as weights. • Dividing expression B by



• Dividing expression C by


or 1

. or


• If then happiness increases from 0 to 1. If decreases from 0 to 1. These conditions hold only for an individual.

, then happiness

• For for

, nor better off in period 0

The individual is not better off in period one for . The result is inconclusive.

. The first inequality says the individual is better off in period 0, while the second • For inequality says the individual is better off in period 1. The result is contradictory. • The numbers below are used to illustrate Kaldor–Hicks–Scitovsky criteria:

Person A Person B

Goods X 2 0

State E

Goods Y 0 1

Goods X 1 0

State E’

Goods Y 0 2

Sources:  Information adapted from Ferguson (1969, pp. 70‒72), Fisher and Shell (1998, p. 2), Coleman (1979‒80, p. 519).

Figure 5.2  Indexes for individual welfare comparisons 1. State E is Kaldor‒Hicks efficient to E’ because Person A can give 1 unit of X to Person B indicated by the result of the single strikethrough numbers. Person A now has 1 unit of each after the compensation, indicated by replacing the original striking through numbers with the compensated number. 2. State E’ is Kaldor‒Hicks efficient to E because Person B can give 1 unit of Y to Person A indicated by the results of the double strikethrough numbers. B now has 1 unit of each, which is preferred. 3. The compensation in both 1 and 2 is called the Scitovsky’s reversal. This analysis was recently questioned in the literature (Just et al., 2004).

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The criticisms relate to the assumption that transactions are costless, that the situations are second-best, that compensation need not be realized, and that X and Y are inferior goods to at least one party (p. 2). As index numbers have failed to capture welfare improvements, more and more economists have been reverting to the Edgeworth‒Bowley box method. They focus their attention on the contract curve where allocation is Pareto-optimal. All those optimal points in turn can be projected onto the utility-possibility curve. From that point of view, welfare economics continues to be propagated around the Kaldor‒Hicks versus Scitovsky criteria (Just et al., 2004). Figure 5.3 uses two sets of utility-possibility curves to demonstrate the arguments of Kaldor‒Hicks’s and Scitovsky’s criteria. The first pane where the curves intersect demonstrates the criticism Scitovsky levelled on the Good Y B’s Util E C

Good Y B’s Util.

I. Intersecting Utility Curves




II. Parallel Utility Curves



P.U. Line



2 F


Good X A’s Util.

Good X A’s Util.

• The figure shows two sets of utility curves for persons A and B, consuming goods X and Y: I. Intersecting; II. Parallel. • On diagram I, a movement from 1 to 2 meets the Kaldor–Hicks compensation criterion (KHCC) because one can get to 4 from 2 by a redistribution of income. But a Scitovsky’s reversal of movement from 2 to 1 also meets the KHCC because one can get to 3 from 1 by a redistribution of income. Therefore, 1 is considered better than 2 and 2 is considered better than 1. A Scitovsky’s contradiction is reached. • On diagram II, a movement from 1 to 3 via a new economic policy meets the KHCC, because the higher curve is uniformly above the lower curve. By a redistribution of income, one can get from 3 to 2, which is Pareto-optimal. However the reversion from 3 to 1 does not meet the KHCC because it puts A and B on a lower income curve. • The broken line tangent at points on the intersecting curves represent an envelope curve, or Pareto-utility (PU) frontier. • A social welfare function (SWF) is shown tangential to PU at point 3.

Sources:  The authors and adaptation of curves from Samuelson (1966b, pp. 1049, 1053, 1066), and Just, L. Darrell L, A. Hueth (2004, Chapters 2 and 3).

Figure 5.3 Kaldor–Hicks–Scitovsky’s contradiction and double welfare criteria versus Samuelson’s criterion

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Kaldor‒Hicks compensation criterion (KHCC). As explained in the figure, the intersecting curves lead to a contradiction when, say, a government policy is used to compensate a person. After the compensation, a redistribution on a frontier takes place which is Pareto-optimal. However, when the curves intersect, reversing the compensation leads to a contradiction. The second pane where the curves do not cross avoids the contradiction when the double criteria is performed. In term of Figure 5.3, we can now state these hypotheses: Kaldor–Hicks–Scitovsky criterion: It ranks 1 over 2 in the crossed diagram, if potentially, there exists an alternative such as 3, than it is potentially achievable from 1 that Pareto dominates 2. Because it includes the Pareto condition, it avoids an ethical basis. Samuelson’s criterion: It ranks 1 at least as good as 2 in the crossed diagram, if any alternative potentially feasible from 2 is Pareto dominated by some alternative potentially feasible from 1. This was also named the Chipman– Moore–Samuelson criterion. (Gravel, 2001, p. 165) The Samuelson criterion is the weak axiom of revealed preference (WARP) we discussed in Chapter 4. In terms of the index numbers of Figure 5.3, it px can be written as p1x1 $ p1x0, or p11x10 $ 1, which is a Paasche index using current prices as weights. Samuelson’s idea is now interpreted as a tangency of a Pareto-utility (PU) frontier with a social welfare function (SWF). The PU curve is an envelope of many crossing utility frontiers, each sharing a point of tangency with it, represented by the PU line in Figure 5.3 (Samuelson, 1966b, p. 1056). The PU line has certain properties, such as the following: 1. It has no particular convexity. But by a monotonic transformation we can stretch it into the convexity we need (p. 1078). 2. Samuelson gives a graph that shows how points of the frontier are dual to the allocation of commodities to the individuals. One point in the commodity space can be represented as many points on the PU frontier, a one-to-many mapping (p. 1079). The reverse operation will not be a ‘functor’, mapping a curve to one point, but a point on the frontier to a Skitovsky curve in the commodity plane. The latter is attained by pairing points in the commodity plane with the same slopes (pp. 1979‒1980). But there are many such curves with the same slopes in the commodity plane. Samuelson speaks of ‘the impossibility of a singlefold infinity of consistent community indifference curves capable of giving rise to group demand function observed in the market’ (p. 1080).

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The social welfare function (SWF) can help to locate points on the PU frontier. It uses the idea that the preferences of different family members are related by ‘consensus’ or ‘social welfare functions’. This is a summary of the ‘deservingness or ethical worth of the consumption level of each of the members. The family acts as if it were maximizing their joint welfare function’ (p. 1082). There are many SWF curves in the plane. One SWF curve is shown tangential to point 3 on the PU frontier in Figure 5.3. Society will maximize social welfare at that point. The SWF function is one important leg of the story. We therefore will investigate its nature next.

ON THE SOCIAL WELFARE FUNCTION The SWF belongs to the new tradition of welfare economics where one looks for possibilities of improving the social equilibrium by giving more to some people without hurting others. In the neoclassical paradigm, this is achieved by maximizing a utility function of one person, subject to holding the utility function of others constant. For a two-person case, 1 and 2, and two commodities, x [ X and y [ Y, we may formulate the optimizing situation for fixed amounts of X and Y as:

Max U 1 5 f 1 (x1, y1) s.t. f 5 U 2 (a constant) y1 1 y2 5 Y ( fixed ) x1 1x2 5 X ( fixed) 2 (x , y ) 2 2

Utilities of two people cannot be compared directly, so the way of getting around impersonal comparison is to maximize the utility of one while holding the utility of the other unchanged. The result is an equation for the contract curve, that is, a curve passing through the tangent points of back-to-back indifference curves as in an Edgeworth box (Baumol, 1965, p. 358). This is one way to increase the utility of society. For the whole economy or globe, this can translate to a gross national product (GNP) measure of well-being or happiness that is measurable in terms of money. This does not generalize to the argument that economic growth expands economic welfare. The much-argued problem today is that economic growth is contributing to a fall in economic well-being because it damages the environment. Global warming and pollution without counteracting policies may cause harm to people. That concern is covered by the media all around and does not need any particular citation. The United Nations Human Development Index (HDI) is an approach to measure such well-being.

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THE NEED FOR A SOCIAL WELFARE FUNCTION Bentham developed happiness from the individualist point of view. Samuelson stated that since the time of Bentham, people were asking if a public expenditure programme linked with a tax system would ‘lead to a greater sum total of human happiness’ (Samuelson, 1972, p. 494). This would imply the use of a social welfare function in place of hedonic calculus. It would imply two notions of justice: one dealing with the allocation of output to obtain the greatest satisfaction, and the other of not infringing on individual rights even if such infringement would increase the social welfare (pp. 494‒495). The source of the idea of an SWF is doubtful. John Chipman claimed that it started with V. Pareto in 1913 (Chipman, 1976, p. 67). Reacting to that comment, Samuelson said that, ‘I don’t think that subtracts anything from Bergson’s originality. But I detected in it also a positivistic real political function of certain elites in any society. Each one of these elites has different power . . . you don’t get an integrable function’ (Samuelson, 2011a, p. 853). Abram Bergson was an early pioneer of the modern version of an SWF. His first published milestone article on welfare economics (Quarterly Journal of Economics, 1928, reprinted in Bergson, Selected Essays) laid out a research programme that he advanced for nearly three-quarters of a century (Bergson, 1982, pp. 2‒27). In a sympathetic evaluation of Bergson’s early contribution, Samuelson noted that the concept ‘social welfare function’ originated with Bergson. This idea has gained so much importance that it can be used to explain the community’s social preferences (Dobb, 1969, pp. 110‒111). The welfare function allowed equilibrium to be attained at the tangency of a community indifference curve with the production possibility curve. Samuelson, a friend of Bergson, also remarked, ‘Bergson was the first to understand the contributions of all previous contributors, and form a synthesis. He is the first to develop explicitly the notion of an ordinal social welfare function in terms of which the various schools of thought can be interpreted with significance’ (Samuelson P. A., 1974, p. 219). The mathematical welfare function that Bergson formulated is as follows:

W 5 F (U1,U2,U3, . . . ,Un) (5.1)

where W is welfare, U is utility, and the superscripts refer to individuals.

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Some Practical Specifications of an SWF Practitioners use a variety of aggregate utility functions as specifications for equation (5.1). Some examples are as follows: F (U 1,U 2, ... ,U n) 5 a U i ...... (Benthamite) n


F (U 1,U 2, ... ,U n) 5 a aiUi ...... (weighted utilities) n


F (U 1,U 2, ... ,U n ) 5 min (U1,U 2, ... ,U n) ...... (Rawlsian or minimax)

F (U1 (x1) ,U 2 (x2 ) , ... ,Un (xn)) ...... (Bergson2Samuelson)

The Bergson‒Samuelson function differs from the rest in that each individual is interested in maximizing only their own respective bundles, which are x1, x2, ... , xn. Rawls has explained his concept in two dimensions as one person’s gain versus the least advantaged person in society. The optimal will be an L-shaped indifference curve whose kinked point is tangent to a 45 degree line in the plane (Rawls, 1971, p. 76). Rawls also explained how his view differs from the classical Benthamite view, and the weight utility view: the former would be normal-looking at social indifference curves, while the latter would be straight line curves (p. 77). Bergson demonstrated that equation (5.1) represents a ‘generalization of the Marshall‒Pigou formulation; according to the latter, W being the sum of the utilities U 1,U 2,U 3 ... U n. Also, to maximize W would satisfy the criterion of Pareto and Barone’ (Bergson, 1982, p. 154). The solutions would be optimal as in standard theory since externalities are absent. Given a weighted average Bergson‒Samuelson SWF, of the form g ni51 λi U i, it is a standard exercise to show concavity of each Ui will lead to the concavity of the SWF. Concavity means concave, strictly concave, or quasi-concave (Aliprantis et al., 1990, p. 12).

HAPPINESS AND THE SWF The SWF relates to happiness or well-being to the extent that it uses utility curves, and satisfaction which can be maximized reveals a state of bliss. Pigou, to whom the term ‘welfare economics’ is credited, laid down two propositions on the subject: ‘First, that the elements of welfare are states of consciousness and, perhaps their relations; secondly, that welfare can be brought under the category of greater or lesser’ (Pigou, 1920, p.10). He

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went on to say that ‘economic causes act upon the economic welfare of any country, not directly, but through . . . national dividend or national income’ (p. 31). As Hicks pointed out, Pigou’s approach has three major drawbacks, namely: (1) that economic and social welfare are directly correlated; (2) we can compare satisfaction that people derive from their wealth; and (3) what is to be maximized is consumers’ surplus and not real dividends (Hicks, 1981, p. 61). The First and Second Welfare Theorems and Happiness Modern textbooks treat the SWF under the first and the second welfare theorems (p. 178). The objective of the first welfare theorem is concerned with the optimal solution with automatic forces that regulates the economy. Most economists think that it is a proof of Adam Smith’s invisible hand system. Recently, the eminent economic historian Marx Blaug stated that ‘the first theorem cannot be found in The Wealth of Nations, what can be found is the notion conveyed by the first theorem that competition has desirable properties . . . which results in the material improvement of the standard of living of even the poorest members of society’ (Blaug, 2007, p. 189). Basically, the first welfare theorem states that every competitive equilibrium is Pareto-optimal if we assume no externalities, public goods, economies of scale, or imperfect information. The second welfare theorem states that if certain transfers are allowed, then every Pareto-optimal allocation can be made into a competitive equilibrium. It is the achievements of these theorems that they allow us to find the best welfare outcome. We state these theorems here a bit more formally, and refer readers to our more detailed discussion of them in our other work (Ramrattan and Szenberg, 2007a, pp. 34‒35). First Welfare Theorem: An allocation which is supported by a non-zero price, for instance a Walrasian equilibrium, is Pareto-optimal. Perfect competition assumes for economic agents. A full set of market and complete information are also assumed. Take two individuals, 1 and 2; two bundles of commodities, A and B; and traders’ endowments. Equilibrium requires that the individual holdings of the two commodities must equal their endowment (Varian, 1996, p. 510; Atkinson and Stiglitz, 2015, p. 285). Second Welfare Theorem: A Pareto-optimal allocation can be supported by a non-zero price.

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The proof requires convex indifference curves and production sets for the agents. There must exist a full set of markets, perfect information, and a costless lump-sum transfer or taxes to maintain Pareto efficiency. Some of the limitations of these two theorems in providing the highest level of happiness are as follows: ●●





The information needed for the outcome may be imperfect. We may know the individual endowment, but the information of ownership for public decision-making may be lacking. (Sen, 2004 [1987], p. 36). With regard to the second theorem, transfer of ownership or redistribution is not easy to do (p. 38). It may require a revolutionary act, or some mixed mechanism. The concept of Pareto-optimality is wrapped up in three concepts: (1) welfarism ‒ unanimous ranking of utilities of only things of ethical affairs and state of affairs (p. 34); (2) sum-ranking ‒ the ranking is based on the sum of individual utilities; we note here that there is a problem with peak preferences; and (3) consequentialism ‒ based on choice of action and institutions (p. 34). In answering those who claim that Samuelson’s criterion lacks the Pareto-optimality that Kaldor‒Hicks‒Scitovsky has, Samuelson replied that the most general statement his model can make is that ‘five biscuits to Tom, other things being equal, is better than four biscuits to Jane’ (Samuelson, 2011b, p. 859). He meant that this is true without having to compare utilities, without ordering, and even with wrong ethics (p. 859). He stated also that it is the most general welfare statement a welfare function can make, without the Pareto criterion. Anthony Atkinson considered the strangeness of modem welfare statements, namely that ‘despite the prevalence of welfare statements in modern economics, we are no longer subjecting them to critical analysis’ (Atkinson, 2001, p. 193). There is an implication here that the fundamental theorems are not put into practice. We need to make ‘explicit the welfare basis for evaluative statements’ in modern economics (p. 203). Economists need to understand the ‘basics of evaluative calculus’, as they are required to understand the ‘basics of econometrics’ (p. 204).

ARROW’S IMPOSSIBILITY THEOREM AND THE SWF For Kenneth Arrow, ‘the problem of achieving a social maximum derived from individual desires is precisely the problem which has been central to the field of welfare economics’ (Arrow, 1951, p. 3). In his framework, indi-

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viduals order social states, which are a complex number of things such as types of commodities they have, their labor supply, resources they invested, and various collectivized activities: municipal services, diplomacy, and so on. Individuals rank social states according to their values. Some may believe in relative income, while others believe in equal income, and the criteria are not limited to individual characters (p. 17). Arrow’s social welfare function to be maximized is composed of social states (p. 22). This is different from Bergson’s SWF, which is based on taste as it relates to consumption of a bundle of commodities (p. 23). Arrow defined a numerical social utility for each social state in his SWF (p. 22). Measurement of the SWF is not required. But it must meet two assumptions, namely that any two alternatives are comparable, and transitivity must hold (p. 13). Prior to Arrow’s work, Duncan Black had proposed a way to aggregate voting from individuals to society (Black, 1948). Each member of a committee is voting on motions. Member A is asked to rank a set of four motions, {a1, a2, a3, a4 } . Let us say that member A put these four motions on a sticker. The member can make their vote known by arranging these stickers on the trunk of a tree. One arrangement is that A puts a1 sticker at the root of the tree, a2 at the highest point on the tree trunk, and a2 and a3 on one point in the middle of the trunk of the tree, because it is indifferent between them. Alternatively, one can plot preferences of one and two people ranking those motions, as shown in Figure 5.4. The top part of Figure 5.4 illustrates a single-peak curve for a person’s preference over four alternative motions to be voted on. These are ‘curves which slope continuously upward to a peak and slope continuously downward from that peak’ (Black, 1948, p. 24). Black considered curves with one point, peak, or plateau, such as an inverted U-shape curve, and truncated peak curves as allowing the same decision, namely, that the individual will less favor points further from the peak. Given m motions to be voted on, a person will be voting for one motion against all others, m (m 21) /2. Given single-peak preference curves for each members of the committee, members will vote on a motion and one amendment at a time. In the end, all the peak curves can be arranged horizontally as they occur. If there are an odd number of members, then the middle peak curve will be the optimal or median outcome, which will be the motion adopted by the committee as the ‘simple majority over every other’ (p. 26). This result in voting is analogous to the price, output, wage, or preference that will bring the most happiness. Black goes on to argue that the same result for single peak preference will hold if m 2 1 votes were taken, and if the number of members are even (p. 30). What will happen if we remove the restriction of single peak

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Preference Order for A a1





Preference Order for A

a4, a4 a3, a3 a2, a2 a1, a1 Preference Order for B

The top part of the diagram shows how Person A might rank four motions. The bottom part of the diagram shows how two Persons A and B might rank the four motions.

Figure 5.4  Preference order of motions for one and two persons preference? Black stated that ‘when the shapes of the preference curves are subject to no restriction, the transitive property does not necessarily hold [well]’ (p. 340). In his 1963 revision, Kenneth Arrow recast his model from the transitivity side. The bottom part of Figure 5.4 shows an example where transitivity holds in the diagonal for two-person ranking, four options. But this is just one profile. All the other unfilled boxes could be chosen, which will yield some intransitive profiles. Using the Condorcet view we stated above, the order of voting can change the outcome. For example, for three people voting for the three alternatives, x, y, z, one-third can vote for x over y, one-third for y over z, and one-third for z over x, which is cyclical or intransitive. The Arrow problem is to translate all individual preferences into a social order, and therefore a way to assess social happiness. Generally, it is thought of as a mapping between individual rankings to a social ranking, an abstract concept. But we can think of it ‘as the choice problem confronting a group of people choosing a picnic spot on the beach. As the beach surrounds the lake, it can be represented by a circle S1’ (Saari, 1997, p. 221). If only two people are looking for the spots on the beach, then the result, the social ranking R, is a function of the two individual rankings Ri., or R 5 f (Ri) , i 51, 2.

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Arrow’s impossibility theorem states that we cannot fit that function, so that some simple conditions about voting in a democracy will be satisfied. The conditions are variously stated, but Arrow listed them as follows: ●●




Unanimity (U): the vote is unanimous, or not unambiguous, if everyone votes for the same outcome. When people are unanimous, the choice is unique. This Pareto principle is involved to the extent that when everyone prefers x over y, then this is true for the social ordering as well. But when people disagree in their preferences, we must aggregate their choice. One way to aggregate is through majority voting, but it is hard to satisfy transitivity, which makes it impossible to generate an SWF. Transitivity (T) (Arrow, 1951, p. 13): if A is preferred to B, and B is preferred to C, then A is preferred to C. We have stated that intransitive or cyclical results are possible. This avoids any manipulation in a voting process to reach the final outcome. Its final outcome is a logical process. It is independent of the path to reach it. Independence of irrelevant alternatives (IIA) (p. 26): if one candidate drops out of an election, then the original ranking is not violated. It ensures that the social choice depends on each individual ranking only. No dictatorship (ND) (p. 30): social choices are not based on the decision of one person.

‘Impossibility’ means that one cannot design a voting system that meets all those simple condition for a democracy, simultaneously, or that an SWF cannot satisfy that small set of assumptions. Many varied proofs are in the literature. Some proofs show that the above list are not the only conditions that are impossible. Some of them are summarized by Miller (2009). We list some popular ones, starting with Arrow’s: Arrow’s Theorem: The only IIA SWFs satisfying Pareto are dictatorships (Arrow, 1951, 1963). Wilson’s Theorem: Every IIA SWF is either null, autocratic, or fails nonimposition (Wilson, 1972). Muller–Satterthwaite Theorem: For any IIA SWF, if at least three distinct alternatives are the most socially preferred in some profile, then there is a local autocrat over the possible winning alternatives (Muller and Satterthwaite, 1977). Gibbard–Satterthwaite Theorem: Every strategy-proof SCF with a range of three or more is a dictatorship (Gibbard, 1973; Satterthwaite, 1975).

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Amartya Sen: It is impossible to have a Paretian liberal; that is, ‘society cannot then let more than one individual be free to read what they like, sleep the way they prefer, dress as they care to, etc., irrespective of the preferences of others in in the community’ (Sen, 1970, p. 157). Many proofs of Arrow’s theorem follow the idea of ‘pivotal voters’ (Barberá, 1980). ‘Pivotal’ means that an ‘individual is pivotal for a pair of alternatives at a preference profile if he can change the social ordering of these alternatives by just changing his preferences’ (p. 13). Taking the Paretian and IIA assumptions, the pivotal voter is a dictator. The proof is distilled as one of Geanakoplos’s three proofs of Arrow’s theorem, with N voters and three alternatives {A, B, C} (Geanakoplos, 2005). A simple explanation is as follows. Step 1: an extremely pivotal voter can put one candidate on top or at the bottom of a ranking. Given several profiles, let us say B is ranked at the top, or B is ranked at the bottom, or half at the top and half at the bottom, then the aggregate social ranking will put B at the top or at the bottom. (Note: This changes Arrow’s concept of a decisive voter to an extremely pivotal voter.) Step 2: show that if the aggregate social ranking puts C $ B and B $ C, then a contradiction in the pivotal voter ranking in step 1 will occur. After the pivotal voter has modified its ranking by placing C above A, then the aggregate social ranking will continue to hold by IIA. By transitivity, we will have A $ C, but by unanimity we will have C . A, which is a contradiction. Therefore, the aggregate social ranking in Step 1 must hold (Geanakoplos, 2005, p. 2). Step 3: the pivotal voter is the last voter, the nth one, that cause society to rank C . A. The Wikipedia (n.d.) article on ‘Arrow’s Impossibility Theorem’ has a nice diagram to show that the pivotal voter is the dictator. We summarize it as follows: At one voting station, with 1. . . k voters, everyone ranks: {B, C, A} At another station, with k  1. . . N voters, everyone ranks: {A, B, C} The pivotal station, with kth voter, ranks: {A, B, C} Then the social ranking will be {A, B, C}, by Pareto or unanimity. Now, at the pivotal station, let the pivotal voter switch the ranking of A, and B, to get: {B, A, C} Then, that switch alone will change the social ranking to: {B, A, C} QED: The pivotal voter is the Dictator.

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Sen’s Contribution to the Impossibility Theorem By trying to avoid interpersonal comparison, Arrow’s impossibility theorem reached a pessimistic dead-end for social choice theory, to which we append social happiness. Sen worked on broadening the informational base of that theory, and the relaxation of some of its precise assumptions in favor of partial ones to make it a more progressive theorem. Kenneth Arrow has made an appraisal of Sen’s contribution in five directions: ‘(1) formal theories of social choice; (2) the formal theory of individual preference and choice; (3) the conceptual meanings of choice, welfare, and utility; (4) the measurement of social welfare as reflected in inequality, poverty, and real social income; and (5) empirical analyses of famine and nutrition related to Sen’s work on poverty and its moral implications’ (Arrow, 1999, p. 164). According to Arrow, the approaches of all such attempts seek to change some of the original conditions he imposed. For instance, one can change the wording from the individual ordinal to some interpersonal cardinal values, and one can restrict comparison to some other kind of ordering such as single peak. Sen is said to have a foot in both areas (p. 165). He broadened the scope to include freedom, inequality, poverty, and liberty (Sen, 1999, p. 95). He called that approach ‘informational broadening . . . an effective way to overcome social choice pessimism and of avoiding impossibilities’ (p. 96). In his The Idea of Justice, Sen advocates practical reasoning, an approach that has to do with human development, a capability approach that contrasts with economic theories of growth (Sen, 2009). He wrote that the ‘capability approach focuses on human lives, and not just on the resources people have’ (p. 253). It moves the focus away from means, such as income and wealth, and the attempt to find a single maximum level of happiness, to actual opportunities a person may have that yield varied solutions. Rather than searching for a single perfect justice in the world, Sen looked at plurality of justices to battle with injustice. Sen built on Adam Smith’s impartial spectator, which asks people to put themselves in the shoes of others, and John Rawls’s veil of ignorance, which puts people in an original state of nature that deprives them of information about themselves. He saw them as broader based on the contractarian views that are sources to Thomas Hobbes and John Locke. But he developed them further in line with the thoughts of Kenneth Arrow’s social choice theory. Sen developed his view under four categories of thought that consider lives and freedom; that link responsibility and effective power; that make comparative and not transcendental assessments; and justice that applies globally. He stated

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that ‘each of these respects . . . is in some conflict, in varying degrees, with mainstream theories of justice in contemporary philosophy’ (Sen, 2008, p. 333) His Rationality and Freedom book is a compendium of works intended to merge formal and informal reasoning into social choice theory. He used Kenneth Arrow’s mapping of individuals to social preferences as a reference point (Sen, 2002, p. 72). His model also found it impossible to meet some mild conditions of a democracy. One such model is the Paretian liberal, which we examine next. Sen on the Paretian liberal Stated as a theorem this model explains the following: THEOREM (Amartya Sen): There is no social decision function that can simultaneously satisfy conditions U, P, and L. (Sen, 1970, p. 153) U stands for unrestricted domains where each voter can rank the candidate using any criteria, provided that the ranking is complete and transitive. P stands for the Pareto conditions. L is for liberalism. Whatever alternative a liberal voter may choose, society will also choose that alternative. Sen gives the example that if an individual wishes to paint their wall pink, then the social ranking should allow that. This is a basic element of freedom for an individual and it should be represented by an aggregate social choice. Sometimes the term ‘minimal liberty’ (ML) is used instead of L. This assumption considers the case of at least two people as decisive on a binary pair (Lingfang and Saari, 2008). For instance, if person a and person b, rank C preferred to B, then the social ranking will admit that choice. An example of two persons ranking three candidates can be represented as shown in Table 5.1. Sen indicated that the proof that an SWF cannot satisfy the Paretian liberal condition is based ‘on showing the cyclical nature of P for various case[s] . . . when the two pairs of social states (personal domains) respectively have and do not have an element in common’ (Sen, 2002, p. 135). He went on to consider other kinds of reformulations. Sen on happiness Before we summarize Sen’s inputs, we need to read some implications for happiness. Sen takes a strong position on a broad definition of happiness. He wrote: we often use the term ‘happiness’ in broader senses than in utilitarian philosophy. We talk about a ‘happy country’ reflecting a strong sense of overall

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Table 5.1  Data for Sen’s impossible Paretian liberal Voter





Person a Person b

CsAsB BsCsA Social choice:




1. Persons a and b are ranking three alternatives {A, B, C}. 2. IIA in a cell means that the decision is made by another voter and is not relevant to Person a’s, and Person b’s decisions. 3. Transitivity is violated as shown in the ranking column, which Sen sourced to conflict between the P and ML conditions. 4. The social choice row indicates that intransitivity resulted from binary comparison and not necessary by conflict between P and ML. Source:  Adapted from Lingfang and Saari (2008, p. 396) and Sen (1970).

approval. Happiness has been invoked throughout human history as the most important thing in the lives of people . . . Is there a conflict . . . of relying on happiness to judge how a society is doing? (Sen, 2016, p. 22)

Sen’s answer is found in a more inclusive definition of happiness than one that is just pleasure, less pain. He found such a definition in Antonio Gramsci’s term ‘spontaneous philosophy’ (p. 23). This definition would cover such simple definitions of happiness as when one says, ‘I would be happy to go to lunch with you’, which would sound absurd under the utility definition. This broad definition seems to cover our activities of wanting to help the needy, even though it will not bring the self-interest kind of utility to us. Also, the expression ‘I am unhappy about Europe’ conveys a broader concept of unhappiness that the utility concept entails (p. 24). With the broader perspective on happiness, we can now bring under consideration economic concepts that stand in the way of happiness: inequality, failed policies, economic crises, and many more famous problems with economics. A.C. Pigou’s The Economics of Welfare ‘initiated the measurement of economic inequality, spent time on analyzing the nature and causes of poverty, wrote extensively on externalities and on environment degradation, and the need for public economics to aim at remedying these problems’ (p. 29). In the end, Sen came around to the good advice Adam Smith had given in his definition of political economy, which includes the plentiful provisions of revenue for individuals and states to function (p. 30).

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The Complex Nature of Sen’s Concerns Sen started by following Kenneth Arrow’s view of social philosophy. In the extended edition of his classical text, Collective Choice and Social Welfare, he quoted Horace as saying that there are ‘as many preferences as there are people’ (Sen A., 2017 [1970], p. x). He stated that the purpose in that book is concerned with ‘the foundation of social choice theory and welfare economics and their connections with ethics and political philosophy’ (p. xiii). The broadness of social choice theory allows Sen to accommodate maximal as opposed to optimal principles in welfare economics. Buridan’s ass could not choose which of two bundles of hay is optimal, which led to its death. The choice of any bundle would be a maximal choice and would have prevented its death. The concept of partial rather than complete ordering, therefore, found its home in Sen’s social choice analysis (p. xxx). If one cannot decide the optimal or best alternative between, say, two things, then choosing any one of them is maximal, meaning the choice is at least as good as the other, or that one does not have reason that it is worst. Sen bifurcates economics into the ‘ethics-related view of motivation’. This view goes beyond efficiency considerations, and its scope is the philosophical nature of what is good, or the linking of happiness with the good in ethics. This is contrary to an ‘engineering approach’ which is associated with the works of Leon Walras’s Elements of Pure Economics or the Sanskrit text Kautilya’s Arthasastra, that underscore the logistic approach to ends and statecraft, respectively (Sen, 2004 [1987], pp. 4‒5). A balance of those two approaches should be struck, but rather Sen complains that the distance between them and economics has been widening. He opposes the traditional view that there is only one best, transcendental, or ideal solution. The failure of the one best solution is found in the example he provides, which considers what the best way of allocating a flute is: to Carla who has made it, or to Bob who does not have any toys, or to Anne who is the only one that can play it (Sen, 2009, pp. 13‒14). The suggestion is that a single, transcendental solution cannot solve these divergent values. Sen’s methodology is not always synchronic with Indian philosophy. Sen draws a distinction between his and the contractarian approach as between Niti and Nyaya in Indian Sanskrit literature. The former deals with ‘organizational propriety and behavioural correctness’, while the latter ‘realized justice’. Niti is Krishna telling his disciple Arjuna in the Bhagavad Gita that he should fight the great battle because that is his duty. Nyaya is Arjuna giving reasons for why he should not fight, reasons that deal with the consequences of action (Sen, 2009, pp. 20, 213). In a similar vein, Sen explained how the Buddha was moved by conditions of life, mortality, morbidity, disability, and other insecurities of human live. This illustrates

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how the ‘obligation of effective power contrasts with mutual obligation for cooperation’ (p. 205). Although Sen starts from Arrow’s impossibility theorem, such as his specification of social ranking, R 5 f (Ri) ,i 5 1..n, he maintains that the interpretation should be taken broadly. We see him interpreting the alternatives {x,y} in various ways: judgmentally, such as that x can be at least as good as y; using choice theory, such as that one can choose x from an opportunity set that includes y, or if given a set of alternatives I will tell you what to choose from it, and given another set, the same will be done; welfare economics, such that one is at least as well off with x as with y; and hedonistically, such that one is at least as happy with x as with y. These views are in addition to what economists normally hold in the neoclassical domain. In Sen’s broad view, rankings cannot be complete, but are instead partial, pre-ordered, or quasi-ordered. Similarly, his idea of justice is anchored by clear cases such as the abolition of slavery, the liberation of women’s rights, and the alleviation of famine and poverty. Although he started with John Rawls’s view that ‘justice is fairness’, his view of justice transcends the need for a sovereign state, as developed by contractarian philosophers starting with Thomas Hobbes through to John Locke, and Jean-Jacques Rousseau to Norzick and Dworkin. He eventually reverted to a more global view of justice, supported by the economics of Adam Smith and the social contract theories of J.C. Borda (1781) and Marquis de Condorcet (1785) through Kenneth Arrow. A point about voting versus economics Much has been made about the nature of Arrow’s SWF. Paul Samuelson, Bergson, and Little prefer to call it a ‘constitutional function’ to distinguish it from a ‘social welfare function’ (Samuelson, 1986, p. 8). In a later interview, Samuelson said that ‘it had nothing to do with ethics and welfare . . . Arrow had said that any theory of ethics boils down to how individuals involved feel about ethics’ (Samuelson, 2011a, pp. 855, 857). But Samuelson disagrees on the ground that individuals know that their orderings are imperfect (pp. 855, 857). To spotlight the above view, we look at how the idea came to Arrow. He said, ‘Once, at lunch, we were talking about politics, left parties and right parties, and I remember drawing on a piece of paper the idea that a voter might have preferences over the parties’ (Arrow, 2011, p. 12). Then he said he learned about the Bergson’s welfare function from Oscar Lange, but he had dropped the U’s for utility in preference for the more abstract terms, R’s, for preference relations (p. 14). He could then put together a number of R’s based on the concept of majority voting. He then assumed no dictator from the start, which required two or more individuals to be decisive. Then

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he assumed different dictators for different pairs, and then the idea came that ‘the whole ordering can’t be determined by one dictator’ (p. 16). The Leyden Approach to Welfare Measurement The Leyden approach extended the utility concept to the well-being concept in psychology. It is named after the research works conducted at Leyden University in the Netherlands in the 1970s. The research was spearheaded by van Praag and others (van Praag and Frijters, 1999). Basically, it is an income survey approach where respondents report on what they think is a good, bad, very good, very bad, and so on, level of income. Norms for individuals are extracted and generalized for the welfare of people. The studies are aimed at the welfare of people and their well-being (p. 413). The approach predicts individuals’ behaviours from the choices they make, based on the utility they get from those choices. The utility concept can be viewed in layers. First, people choose between alternatives that are useful to them. Give a set of alternative utilities: { U1,U2 . . . ,Un } versus a choice set { 1, 2, 3, . . . n } , they map those two sets, and come up with their maximum choice. Having found their highest choice, they take it out of the first set and repeat the mapping to find the next highest choice. This way they can rank their utilities. The ranking is ordinal because they do not know by how much the first choice exceeds the second, and so on, but only the first is greater than the second, and so on. Some situations may require a cardinal measure. For instance, cardinality is required in progressive taxation that makes certain that a redistribution hurts the rich as much as it hurts the poor, or in situations of equity redistribution, cost‒benefit analysis, and uncertainties. The Leyden approach is one among five approaches to measure happiness. First is the utility function approach. Second is an axiomatic approach. Third is one that looked at work and living conditions of people. Fourth is the probability choice experiment under decision-making environments. Then comes a fifth, the Leyden approach, that allows individuals to verbally qualify their utility level (pp. 415‒417). We deal with the first approach in situations where economists maximize a utility function subject to constraints. The most laudable axiomatic approach we have is by von Neumann and Morgenstern’s game theory approach. The third approach is exemplified in the widespread use of income limits in the United States to qualify people for social welfare benefits. In the fourth approach, we note that uncertainty makes deterministic calculations impossible, so we use probability choices to manage risk. The Leyden approach starts out with deriving welfare benefits from income, and appends psychological well-being considerations. The core

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of the method asks individuals to verbally qualify their utility as good, bad, sufficient, and so on, and then translates that into a bounded [ 01 ] scale. The assumption is made that the information provided is describing the shape of the respondent welfare function. It uses a criterion called the equal quantile assumption (EQA) to collect the data. For instance, income may be collected for six levels of income, each with a 1/6 jump, such as: U(very bad) 5 U(first interval) 5 1/12; U(bad) 5 U(second interval) 5 3/12, and so on. For k number of verbal labels, level and welfare for the ith verbal level is given by the expression (2i 21) / (2k) (p. 418). This marks the way verbal description is transferred to numbers. The next stage in the Leyden approach is to fit the data to a statistical distribution. The lognormal function yielded the best fit. It is defined by the parameters: N (ln of income, mean, and Standard deviation) 5N (lny, μ, σ)22(EqLndist) The best fit for equation (EqLndist) is an S-shape curve of utility on the ln of income, which indicates that loss to a person has a greater effect than gain. The value eu 5 0.5 marks the middle of the S-curve, dividing it into the risk-averse and risk-loving sides. It is convex on the low-income side and concave on the high-income side. One finding is that as the mean increases, a person will need more income to reach the same welfare level; that is, the S-curve will shift downward. Another finding is that as the standard deviation changes, the slope of the curve will change, in this case becoming flatter, illustrating that a person will be unsatisfied up to an income eu and completely satisfied with income beyond that level (p. 420). Within the Leyden approach, other welfare and well-being considerations can be measured. One can try to fit a welfare function with the mean dependent on family size, current income, and other variables such as age, education, employment, and sex. This is done with holding variance constant for the income evaluation questions (IEQ). Dynamics can be added by considering permanent income as well as data from age evaluation questions (AEQ). The IEQ question measures welfare, while questions from the Cantril scale measure well-being, such as with questions about health, partner, job, sleep, alcohol and drugs, family, sexuality, parents, neighborhood, religion, and the optimal number of children. To summarize, the generalization of individual happiness to welfare happiness is a complex task that is unsettled in welfare economics. Economists do not, however, think of the problem in terms of the logical fallacy of composition that what is true of an individual is not true for all of them put together in a straightforward way. The same problem parallels the effort to generalize microeconomics to macroeconomics. The result in

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the comparison is that some people think it cannot be done, while others keep trying to solve the problem. From the point of view of utility theory, the major obstacle is being unable to do interpersonal comparisons of utilities, and therefore to compare happiness. Arrow’s attempt to get around interpersonal comparison has set the research programme for over a half a century now on a pessimistic journey. Some practitioners worked to broaden his conditions, while others looked for way to compensate people for bad consequences. Mathematical economists look behind the proof to unmask the cause of the impossibility. It has become a multi-discipline problem to solve. The overall feeling seems to be that individual happiness has a way to project itself to general happiness in market situations, and to trickle down otherwise.

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Index accumulation 30, 82–4, 89–90, 93, 100–103, 105–6, 108–10, 113, 117–21, 123, 155 Afriat, S. 135 anger 20, 23–4, 82, 113, 142, 150 Aquinas, St Thomas 17, 64, 69–70 Archimedean 129, 131 Aristippus (of Cyrene) 19 Aristotle 12, 16–18, 20, 25, 27–32, 60, 64, 70, 88 Arrow, Kenneth Arrow–Debreu model 17, 45, 111, 115 Arrow–Pratt measure of riskaversion 6 impossibility theorem 38, 158, 172–8, 180–81, 184 welfare function 173–5, 181 The Art of Happiness (Dalai Lama and Cutler) 10–11 Augustine, St 17, 68–70 Aumann, Robert 9 Aurelius, Marcus 22 Backhouse, Roger E. 119–21 Barro, Robert 112, 149 beings 10, 12, 14, 61–6 benevolence 14, 25, 88 Bentham, Jeremy 4, 8, 17, 31–5, 37, 42, 52, 73, 75, 123, 126–7, 144, 152–3, 155, 160, 169–70 Bergson welfare function 2, 158–60, 169–70, 173, 181 Bernoulli, Daniel 6, 125–7, 139 bias 139–41, 143 Blinder, Alan 148 Bliss, C. 120 Bohm-Bawerk, Eugene von 19, 77, 160 Borda, J.C. 154, 181 Buddha 180

Buddhism 61 Buddhist 10–11 Cagan, Phillip 111 Cambridge Controversy 113–14, 154 equation 119 model 119–20 Cantril, Hadley 16, 124, 142 capitalism 36, 38–9, 44–6, 73, 81, 90, 102–3, 107, 109, 159–60 capitalist investment function 104–5 Christian 1, 10, 56, 58–62, 88 command economies 45 commend system 82 communism 44–5, 81, 83, 107, 109 Cynics 16, 18–20, 25 Cyrenaics 12, 18–19 Dasein 65–6 Davidson, Paul 111 de Condorcet, Marquis 154–5, 174, 181 Deaton, Angus 16, 124–5, 148–50 delight 14, 20, 40, 54, 71 demand theory 137 Democritus 20–21, 24, 26, 101 deRosset, L. 47–8 Descartes, René 64, 67 Diogenes 19–21, 25 distributive justice 36 Dobb, Maurice 7, 75, 119, 154, 162, 164, 169 Duesenberry, James 3–4, 145 dynamic standard commodity (SC) 96 Easterlin, Richard 16, 124, 145–8 Economic and Monetary Union (EMU) 7 Edgeworth, Francis 7, 75, 153, 160, 163, 166, 168 effective demand 83, 100–101 ­207

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Eichengreen, Barry 114 endowment effect 142 Engels, Frederic 21, 79–81, 84, 87, 102 Epictetus 22, 25, 53, 88 Epicurean 12, 16, 18, 20–21 Epicurus 18, 20–21, 25, 33, 60, 102 equilibrium 5, 7, 17, 20, 45, 78–9, 84, 88–9, 93–4, 96, 102, 107, 111–12, 115, 121, 138, 148, 160, 162, 168–9, 171 Erasmus of Rotterdam 1 expected money value (EMV) 6 extended reproduction 106 faith 55, 57–61, 65, 70–71 feudalism 45, 102 Fine, Kit 46, 48–9 Fisher, Irving 19, 75, 106, 164–5 Fitch, Frederick 50 Fitch, Gregory W. 40 Frank, Robert 3 free trade 7, 46, 87, 161 Frege, Gottlob 67 Freud, Sigmund 9, 60, 73 Friedman, Milton 3, 30, 37–8, 78, 148 Friedman, Rose 38 Fundamental Marxian Theorem (FMT) 106–9 Galbraith, Kenneth 1–2, 115 Gallup poll 16, 124, 131, 142, 148 generalized axiom of revealed preference (GARP) 135–7 Gettier, Edmund 33–4 Gibbard–Satterthwaite theorem 175 good society 1–2 Goodman, Nelson 42 Gramlich, Edward M. 111–12 Great Depression 47, 109–10 Great Recession 47 Greek 1, 15–18, 22, 26, 29, 31, 51, 60, 62, 67 gross domestic product (GDP) 2–3, 115, 144 gross national product (GNP) 110, 168 grounding 46–9 Hall, Robert 4, 149 Hausman, Daniel 150–52 Hayek, Frederick 14, 135, 159

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Hedonist school 19 hedonism 18–19, 34, 121, 152 Heidegger, Martin 17, 61, 63–7 Heraclitus 13, 26–7 Herstein, I.N. 129–30 heuristic 141–3 anchoring 141–2 availability 141–2 representativeness 141 Hicks, Sir John 2, 5, 91, 94, 111, 121–2, 136–8, 158–9, 162–7, 171–2 Hintika, Jaakko 50 Hobbes, Thomas 177, 181 Hobhouse, L.T. 4, 155–7 humanism 1, 20 humanist 1 Hume, David 13, 17, 31, 151 index number 162–4, 166–7 Jeffrey, Richard 42–3 Jevons, W. Stanley 17, 75–6, 78–9, 126 Johnson, Samuel 10 Kahneman, Daniel 16, 139–44, 148–50 Kaldor, Nicholas 2, 158–9, 161–7, 172 Kant, Immanuel 12, 37, 46, 52–3, 55, 64, 79, 156 Keynes, John Maynard consumption function 3–4 short-run model 3, 109 Keynesian 3, 10, 38, 44–5, 47–9, 96, 101, 109, 111, 113–15 Kierkegaard, Soren 55–9, 64–5 Kripke, Saul 43 Latin America 7 Layard, Richard 144–5 Leibniz, Gottfried Wilhelm 14, 39–40, 42 Leontief, Wassily 107–8 Lewis, David 50–53 Leyden approach 182–4 libertarian 1, 159 libertarian school of economics 1 lifecycle hypothesis (LCH) 3 literature 10, 15, 35, 39, 42–3, 51, 67, 81, 91, 108, 116, 119, 124–5, 133, 159, 165, 175, 180 Little, Daniel 102, 158–9, 181

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love 4, 11, 13–14, 24, 39–40, 55–6, 58–9, 62, 68–9, 71, 88, 157 Lucas, Robert 4, 149 Luther, Martin 1 Maine, Sir Henry 81 Malthus, Thomas 2, 93, 95, 100–101, 119 marginal propensity to consume (MPC) 3, 101, 105, 110 marginal revolution 17, 75, 126 Marshall, Alfred 44, 89, 106, 121, 127, 153, 160, 170 Marx, Karl 2, 21, 60, 73–4, 79–85, 87, 90, 101–8, 110, 126 Marxian 38, 45, 106, 108–9 maximum ophelimity 161 McNaughton, Robert 8–9, 32 Meek, Ronald 82, 90–91, 102 Menger, Carl 17, 75–7, 126 mental conception 103 mercantilism 83–4 Mill, J.S. 32–7, 52, 123, 152, 156, 161 Milnor, John 129, 130 modal realism 49 modern monetary theory (MMT) 114–16 modes of production 80, 102 Modigliani, Franco 3, 30, 110, 148 Moore, G.E. 9, 35, 167 Morgan, L.H. 80–81 Morgenstern, Oskar 5–7, 16, 126, 128–9, 182 Muller–Satterthwaite theorem 175 music 26, 53–4 Muth, John 4 naturalism 102 neoclassical 2, 38, 45–6, 77, 79, 102, 112, 160, 168, 181 New Classical 112 new paradox of happiness (NPH) 50 Nietzsche, Friedrich 18, 60–64, 79, 143 Nikolsky, Boris 20, 27 Old Testament 17, 53 Pareto, Vilfredo 2, 5, 7, 15, 158–9, 161, 163, 166–7, 169, 172, 175–6, 178 Parmenides 13

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Pasinetti, Luigi 93, 96, 100, 110–11, 117, 119 permanent income hypothesis (PIH) 3, 148–9 philosophical 13, 15, 28, 51, 68, 150, 180 physiocrats 84–7, 90–91 Pigou, Arthur Cecil 3, 121–3, 153, 160, 170–71, 179 Piketty, Thomas 114 Plantinga, Alvin 40–41 Plato 12–13, 16–20, 25–8, 32–3, 51, 60, 64, 69, 88 political 15, 28, 61, 81, 87, 122–3, 155, 169, 179–80 Polk, Richard 66 post-Keynesian 46, 110–14 preferences 5, 8, 16, 30, 32, 78, 128, 132, 135–6, 139, 145, 151, 154, 164, 168–9, 172–6, 178 primitive accumulation 82–3 communism 81, 83 happiness 79 society 45, 80–81 principal principle (PP) 50–53 production function 48, 84, 117–18 prospect theory 139–43 Protagoras 17–18, 26, 33 psychological 3, 16, 31, 34, 63, 73, 89, 100, 105, 122, 124, 138, 147–8, 182 Pythagoras 26 quality of life 3, 13–14 Quesnay, Francis 84–7 Ramsey, Frank 9–10, 42, 116–18 rational expectation 4, 112–13, 138, 149 Rawls, John 30, 35–6, 170, 177 relative income hypothesis (RIH) 3–4, 145 Renaissance 1 revealed preference 15, 131–5, 137–8, 151, 167 Ricardo, David 2, 74–5, 79, 87, 90–96, 98, 100–101, 105, 122, 126 Rieu, Dong-Min 107–8 rigidities (price and wage) 113 risk 6, 114, 139, 182–3

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Fundamentals of happiness

Robinson, Joan 45, 118–21 Robinsonian economy 74 Romer, John E. 107–8 Rousseau, Jean-Jacques 16, 79, 107, 153, 156, 181 Rowthorn, Robert 113, 115–16 Ruml, B. 116 Russell, Bertrand 13, 21, 25, 32, 67, 80 Salerno, Joe 49–50 Samuelson, Paul 2, 4, 16, 86, 89, 91, 93–4, 105–6, 110–12, 117, 127, 129, 131–5, 138, 158–62, 164, 166–7, 169–70, 172, 181 Sargent, Tomas 112 Savage, Leonard 42–3, 74, 79–80, 129 scarcity 77, 82 Schopenhauer, Arthur 19, 53–4, 64, 79, 143 Schor, Juliet 4 Scitovsky, T. 138, 158, 163–7, 172 self-interest system 2 Sen, Amartya 2, 13–15, 154, 172, 176–81 Seneca, Lucius Annaeus 22–4 set theory 22 Sidwick, Henry 35, 152, 160 simple reproduction 102–5 simple surplus 97, 99 Singer, M.G. 33 slave society/societies 45 Smith, Adam 17, 19–21, 25, 31, 34, 36, 38, 45, 55–6, 73–4, 79, 82–3, 87–91, 98–9, 102, 105, 126–7, 140, 155, 171, 177, 179, 181 spectator principle 88–90 water–diamond paradox 74, 127 The Wealth of Nations 31, 89, 90, 171 Socrates 8, 12, 16–20, 26–7, 33 social equity 2 happiness 2, 74, 82, 123, 174, 177 justice 14 relation 16, 83, 102–3, 144–5, 153–6 reproduction 102 welfare function (SWF) 166–73, 175, 178, 181 socialism 39, 45, 81, 109, 159 Solow, Robert 110, 112

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Sophist 12, 16–19, 26 Sraffa, Piero 85, 96–9 St Petersburg paradox 6, 125, 139 stagflation 47, 111–12 Stalnaker, Robert 41–2 standard commodity (SC) 96 Steedman, Ian 121–3, 144–5 Stephen, Lesley 155 Stoic 16, 18, 21–5, 27, 39, 88, 90 strong axiom of revealed preference (SARP) 134–7 subsistence 80–82, 87, 93, 95, 97, 99–100, 102, 107, 118 survey 16, 124–5, 131, 144, 147–8, 182 System 1 140–41, 143 System 2 140, 143 technology 10, 64, 85, 89, 100, 103, 106, 109–10, 113 Thompson, William 123 total revealed preference theory (TRPT) 135 Trever, A.A. 25–6 utilitarian 14, 17, 21, 31–3, 35, 52, 63–4, 121, 123, 139, 153, 178 utility 2, 4–8, 13–17, 31, 33–4, 36, 42, 45–6, 48, 74–9, 116–17, 121, 123, 125–31, 133, 136, 138–9, 142–3, 145–7, 153–4, 158, 160, 162, 164, 166–70, 173, 177, 179, 181–4 cardinal 4–5, 31, 74–5, 126, 128 diminishing marginal (DMU) 48, 126 maximization 6, 76, 78, 121–2, 146 ordinal 5, 31, 74–5, 126, 128, 131, 146 Varian, H.R. 134–5, 171 Veenhoven, R. 147 von Mises, Ludwig 1 von Neumann, John 5–7, 16, 126, 128–9, 182 Wagner, Richard 54 Walras, Leon 78–9, 97, 111, 180 weak axiom of revealed preference (WARP) 132–3, 135, 137, 167 Weber–Fechner law 127, 139

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welfare 1–3, 7, 14, 16, 47, 122, 138, 144, 148, 150–55, 157–61, 163, 165–73, 175, 177, 179, 180–83 Werlang, Sérgio Ribeiro da Costa 9 Wicksell, Knut 48, 77, 79, 118, 160

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Index ­211 Wicksteed, Phillip 121–2 Wilson’s theorem 175 Wittgenstein, Ludwig 13, 36, 67–8 Zeno 18, 21–2

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