Bryan Caplan  

Goods, Bads, Marginal Utility, and Happiness Research

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When psychologists introduce economists to happiness research, they usually emphasize the finding that, once people enjoy a modest First World standard of living, additional income doesn't make them much happier. What surprises me is that more economists haven't responded "As we suspected. Ever heard of the Law of Diminishing Marginal Utility?" For goods, psychology and economics are already on the same page.

This is not true, however, for bads - stuff that people value negatively.

What does basic economics say about bads? Well, the corollary of the Law of Diminishing Marginal Utility for goods is the Law of Increasing Marginal Disutility for bads. The first unit of a bad is mildly annoying; the second unit is worse; and so on. Think about pollution: The worse the air, the more you'd pay to make it a little cleaner, right?

In contrast, a common (though not universal) finding in psychology is that people adapt to bads. If you get a high dose, you get used to it. Maybe it quits bothering you altogether. Obvious? Yes. Consistent with standard economics? Not really.

This might seem like a purely abstract issue, but it's not. Lots of policies try to reduce the level of negative externalities. But if you take happiness research seriously, you at least have to wonder: Have people gotten used to this "negative externality"? If so, what's the point of doing something about it?

Leading happiness researcher George Loewenstein famously wondered "how anybody could study happiness and not find himself leaning left politically." I'd call this yet another counter-example for him. (And here's another).

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The author at South(west)paw in a related article titled the good, the bad and the utility writes:
    Bryan Caplan has an interesting post about a fundamental difference between economic and psychological theories of preference. Economists assume that we have a "utility function" that exhibits "diminishing marginal utility. " According to this theory: ... [Tracked on March 12, 2006 4:02 PM]
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John Thacker writes:

Well, standard economics doesn't really say a lot about "what happens as the utility function changes over time." It's a shame, really, as important things happens, but presumably it's partially because the math is different. Instaneously, the "Law of Increasing Marginal Disutility for bads" almost certainly holds. Preferences change over time, and much of economics does not necessarily adapt to changing time.

This is similar to why "standard economics" as learned in an intro Micro course often acts as though idealized "Perfect Competition" is the best thing for an economy, when precisely markets where people are competing to try to capture monopoly rents-- and sometimes succeed-- have the greatest technological advancement and long-term contribution to utility. The chance of success causes more investment; the lack of obstacles to market entry means that no monopoly is permanent unless supported by law. An analysis of a snapshot in time does not necessarily tell you how things will change over time.

Tom Anger writes:

Doesn't the law of diminishing marginal utility apply to a particular good? Higher income enables the earner not only to enjoy more of the goods he is used to consuming, but new goods as well. The marginal utility of owning a second Toyota Camry, for example, might be positive but small compared with the marginal utility of owning a Lamborghini as a "second" car.

Besides that "my" happiness is not "your" happiness. Taking away "my" Lamborghini so that several of "you" can own Camrys doen't add up to anything, except in the mind of a socialist who is bent on punishing success. ("Your" happiness doesn't cancel "my" unhappiness, and vice versa.) Punishing success, of course, has a disincentivizing effect on those persons who make possible the kind of economic growth that enables the "masses" to buy Camrys instead of stealing them.

Zac writes:

The law of increasing marginal disutility never made sense to me intuitively. If I think introspectively I come to a much different conclusion.

In most cases I would think the first few units would be very annoying, the next few not quite so much, and so on (perhaps, because I am getting used to it) until we reach the proverbial "last straw" and we're in a whole new world of disutility.

Specifically, in the case of pollution, I'd say in the case of pollution there is a big difference between NO pollution - pristine air and pastoral pastures - to some pollution, and not much difference between some pollution and a lot, until some critical point where it effects your ability to breathe or see.

If you are sent to prison for 10 years, that's sure to be a real blow to the happiness-o-meter. The first year, I might imagine, is hell. But is the 7th year as bad? Considering you and an equal person to you (perhaps a parallel universe you, take that "you can't compare interpersonal utility" happiness naysayers), wouldn't increasing marginal disutility imply the total disutility would be greater if you received a 10-year sentence and your copy received nothing, than if you each received a 5-year sentence? That's asinine. Chew on that.

Point being, I can think of a few different utility functions describing particular bads. None of them, though, seem to follow the pattern of increasing marginal disutility.

In other news, I had the weirdest dream that comments were banned here. Odd.

Dan Hill writes:

Isn't it just a shift in the disutility curve rather than a change in its shape. Exposure moves the threshold at which you find a bad annoying but the principle still applies that beyond that threshold more of the bad is more annoying.

I'd argue that exposure also moves positive utility curves. In layman's language it's called taking stuff for granted.

Constant writes:

"how anybody could study happiness and not find himself leaning left politically."

How about a hundred million or so dead from communism?

Constant writes:

Happiness is not economic utility. The measurement of happiness depends on people's reports of how they feel. The measurement of utility depends on the choices people make.

Even if people would ultimately be equally happy with or without pollution, that does not mean that they would not choose to be pollution-free, given the choice. If there is indeed no choice to be made, then it makes sense to adjust one's own happiness to a neutral level; there is no point in feeling agitated, unsatisfied, unhappy, if there is no choice. This does not mean that, were a choice to become available, they would not jump at it with great enthusiasm. Preference is a counterfactual concerning what people *would* choose if they *were* given a choice. Thus it may be that people strongly prefer clean air to dirty air (meaning, if they *had* the choice, they *would* choose the clean air), and yet at the same time are equally happy in dirty air as they would be in clean air, given that they have no actual choice, since it is useless, does not serve any purpose, to be unhappy.

Happiness is not the ends, it is the means. We get unhappy in order to be motivated to improve our circumstances. When there are no options open to us, it is pointless for us to be unhappy. Unhappiness exists in order to push us to take advantage of opportunities. Therefore one might even expect unhappiness to increase as the number of opportunities increase. Thus, the better things get, in the sense of the better the opportunities we have, the unhappier we might get. And that would be a symptom of something very, very good. In contrast, placid happiness may be a symptom of options firmly closed off. It may be a symptom of a kind of morbid state of society.

When we see someone with great wealth, we may get envious, which may increase our unhappiness. But since our neighbor got rich, we might get rich too, and given that we might get rich, perhaps we want to get rich. But we won't be motivated to get rich unless we're sharply dissatisfied with our current situation. Hence, envy. Hence, unhappiness. The envy we feel is a spur to action, and without it, without dissatisfaction with our current condition, we would not be moved to improve our condition. Unhappiness is the prick that motivates us. It's not a bad thing, it is a tool that we use to better our situation.

Jason Briggeman writes:

Good thing that dream isn't reality...if comments were banned here, we wouldn't get clarity of the sort offered in Constant's comment.

Two fast, if slightly off-topic, questions?

1) Are happiness studies of no interest unless they're immediately turned into political/economic policies? I'm a little surprised by how few people at this blog find happiness studies and results interesting in and of themselves. Is this a peculiarity of people who visit this blog? Of people who follow econ generally?

2) Even if/when we do get around to debating policies, why the assumption that findings can flow directly into policies? For example: If health makes people happy, then universal one-payer govt health care must be pursued. This kind of reasoning just seems naive. Maybe it's true that health and happiness are related. Maybe it's also true (in the US, for instance) that we tend to make a mess of huge, nation-wide social schemes. Maybe there are plenty of other reasons too to avoid another large-scale nationwide social program -- maybe the federal government is already overextended. So: maybe health and happiness are related, and maybe we *shouldn't* pursue govt-financed single-payer health care. But, in any case, arguing about political policies in a "Because A then B" way is often ludicrous. There are almost always a huge number of complicating factors that need to be taken into account. And there's also the too-often-forgotten general rule that 90% of the time we're better off if we do nothing...

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