Happiness Economics - Neo-classical Economics

Neo-classical Economics

Under neo-classical economic theory happiness, subjectively defined, has long been the standard of measurement used interchangeably with utility as well as the general welfare.

Modern classical economics no longer attempts to quantify happiness or satisfaction through measurements in consumption and profits. Instead, modern neoclassical framework argue that individual's preference is revealed through choice. Therefore, if an individual decided to purchase an apple over orange, the satisfaction one derived from apple is revealed to be greater than an orange. Similarly, modern economics also consider that work/leisure balance is also matter of individual choice.

The idea that modern neoclassical economics define happiness on the basis of consumption is widely disputed. The basis of utility has been defined as revealed preference.

The assumption within neoclassic economics that satisfactions are highly subjective found expression in the work of Vilfredo Pareto, whose definition of optimal allocation in the nineteenth century was a crucial contribution that allowed further development of the mathematical precision of the discipline. Pareto argued that because satisfactions are subjective, we cannot know for certain that we have increased the amount of satisfaction in the system if we take a dollar from a billionaire and give it to a starving person to buy food; for all we know, the billionaire might have derived as much satisfaction from that dollar as the starving person does in spending it on food.

This counter-intuitive result is the cornerstone of Pareto Optimality: a system is in Pareto Optimality when no one can be made better off (in their own estimation) without making someone worse off (in their own estimation). In practice, "better off" and "worse off" are defined by consumption: by definition, it is always better to consume more. Thus, Pareto Optimality led to the bias in standard economics toward perpetual growth models—models that are increasingly being called into question, as being impractical (and dangerously destructive) in a finite world (see, for instance, limits to growth).