Rethinking public economics: the implications of rivalry and habit

By Richard Layard

The aim of public policy should be to maximise people’s happiness, suitably aggregated. This requires us to understand what actually produces happiness. In traditional economics, we simply assume that someone’s current happiness depends on their current choice-set. The larger the choice-set the happier the person. So if my choice-set increases and everyone else’s remains the same, social welfare must increase.
But this conclusion completely ignores the impact of one person’s pay rise on the welfare of his colleagues. Such interdependencies are a basic part of human experience, and a theory which ignores them is deeply misleading. In consequence some critics would have us discard the whole approach. But this is wrong. Instead we should expand our framework to take into account the full range of human experience, rather than rejecting it.

Paper here