FT Alphaville " Beyond happiness Economists love assessing preferences. In doing so they look to happiness and satisfaction, searching for the point at which the rational agent's need for more is finally satiated. The idea is described as the law of diminishing marginal utility. The more of something you own the less utility and satisfaction it provides, thus the greater your incentive to trade it for something else. All of which helps economists anticipate supply and demand, price and quantity of goods and services. But as a new paper called Beyond Happiness and Satisfaction by Benjamin, Heffetz, Kimball and Szembrot observes, more often than not economists look at all this from a purely consumption-based point of view. Could economists be considering too narrow a set of determinants of well-being? Which leaves them wondering whether there's more to economic behaviour than just the pursuit of goods and services and whether economists need to start paying attention much more closely to other variables. That's exactly what they try to do in their paper: To broaden its scope, we follow other researchers in shifting attention away from standard consumption goods (for example, rice, TVs, train rides) and toward more fundamental aspects of well-being (for example, health, emotional states, freedoms). This is intended to be more general in that these fundamental aspects include all objects of desire for individuals regardless of which specific consumption goods are in an agent's choice set at a given time and place. In this framework, consumption matters for wellbeing through its effects on these more fundamental aspects of well-being, but non-consumption determinants of well-being are also accounted for via their effects on the fundamental aspects. The problem is, it's hard to quantify people's appreciation of non-consumption based fundamental-aspects. After all, how do you determine the marginal utility of things like health and freedom from a price point of view - can these things really be valued in monetary terms? But also, how does one decide the fundamental-aspects to be monitored in the first place? As the authors note: A major obstacle to any real-world application of our theoretical framework is that no one knows which fundamental aspects comprise the vector w, nor which broader, composite aspects might capture much of the variation in u. Indeed, different authors have proposed different sets of aspects as important components of well-being Benjamin et al approach the problem from a survey point of view, aiming to construct a well-being index, which can then be used by governments to monitor the marginal utility of fundamental-aspects in society. In the end they choose 135 aspects to monitor - 113 are privately related, the other 23 are more public in nature, relating to an entire society's well-being. Within the 113 there's also another division. Purely "you" aspects - like health - and things which are more relative, like social status. Here are the aspects which were chosen: But even this process doesn't resolve some key issues, like how to aggregate findings across individuals. Nevertheless, the ultimate purpose of a properly constructed index is noteworthy. It can be used as a key input in economic framing to give you a better idea of what's really making the economy tick. The authors also suggest that, as an alternative, rather than monitoring the state of the economy through purely market-price-based indices such GDP - as derived from the value of products and services - utility could also be modeled as a function of market goods as well as non-market goods such as leisure, social relationships, and environment. Either way formalising a well-being input seems a good entry point towards understanding whether the economy is making up for a lack of conventional growth in other less obvious ways. Perhaps, also, it's social media networks that hold the data-mining key? Related links: On abundance, post-scarcity and leisure - FT Alphaville Towards a steady-state economy? - FT Alphaville This entry was posted by Izabella Kaminska on Thursday, September 20th, 2012 at 9:49 and is filed under Capital markets. Tagged with economics, utility.