The Coca-Cola Theory of Happiness

{} The root cause of our hopelessly defective economic theories is a fundamentally misguided model of human behavior. Modern economic theory assesses the impact of policies by replacing all human beings with homo economicus, which is a brain connected to a mouth and stomach. Because the heart and soul of human beings is removed from the picture before the economist begins his calculations, economists are routinely baffled by behavioral economics, based on actual behavior instead of hypothesis. Topping this deep ignorance is an amazing arrogance about “microeconomic foundations” — that even if macro is wrong, at least our micro theories rest on solid foundations! Such assertions leave me speechless; what can you say to someone who confidently claims to be Napoleon Bonaparte ?

Because of complete failure to understand human beings, economists subscribe to a ridiculous theory of human welfare — it is monotonic in consumption. All of us act as if our sole purpose in life is to maximize the utility obtained from consumption. Economists have never heard of the Buddha who taught that the root of suffering is attachment to material pleasures obtained from consumption. Yet the illusion that increasing consumption leads to increasing welfare has been clearly exposed by Easterlin. Economists continue to struggle to counter and explain away the Easterlin Paradox, since it contradicts their firm belief in the “Coca-Cola theory of happiness”. This is briefly described below, in an excerpt from my previous post on “The Search for Knowledge” :

The second idea that we must unlearn is the “Coca-Cola theory of happiness”, which is at the heart of modern economics. If a cool and refreshing drink makes a hot and thirsty man very happy, he should not deduce that he has stumbled upon the formula for a lifetime of happiness. It would be very foolish of him to build a hot sauna next to a refrigerator stocked with cases of cola, and market it as the ultimate pleasure machine. The economists’ idea that the purpose of our lives is maximization of the utility of lifetime consumption is equally foolish. Consumption and acquisition of material goods provide short run happiness but have zero correlation with long-term happiness. Long run happiness depends not on consumption, but rather on cultivation of character traits like gratitude, contentment, and compassion, as well as cultivation of social relationships – loving, and being loved.

Heterodox economists are attempting to find a technical fix to the problems of modern economic theory. In my view, we cannot launch a revolution by changing the equations we use. The changes required are much deeper — we need to change the way we understand human beings. We need to understand that “Revealed Preference” is a disastrous mistake — by avoiding thinking about the unobservable preferences in our hearts, and replacing them by observable behaviors, we prefer a shallow understanding to a deep understanding. The choice may be guided by feelings/emotions which are inherently unobservable, but we can learn about them by looking into our own hearts, since we are human beings. By ruling out introspection, and asking human beings why they do what they do, we rule out the possibility of understanding human behavior. Economists are religiously committed methodologically to “rational” behavior. They will not consider models of human behavior which allow humans to be whimsical or emotional. Even the alternative models, like Prospect Theory, which are being constructed, endow human beings with computational and informational capacities they do not possess. This blocks the possibility of knowledge. Unless we re-introduce the heart and soul into human beings, we will continue to fail to understand human behavior in any of the realms of economics, politics and society.

POSTSCRIPT: For a radical alternative to materialistic economics, see Islam’s Gift: An Economy of Spiritual Development. In general, long run happiness depends on character and on social relationships; see The Secrets of Happiness and Re-enchanting the World.

Post-Post-Script: Much after writing/publishing this article, I recently came across this video interview of Robert Lustig, which provides a neurological basis for the stark difference between pleasure and happiness. This provides a very modern justification for very ancient wisdoms. It is well worth watching this video, not just for economists, but for anyone seeking to improve their lives:


10 thoughts on “The Coca-Cola Theory of Happiness

  1. The discussion is from a line of argument trying to explain a macroeconomics property using microeconomics. This is a mistake because the two are not compatible and micro- generally and in particular does not determine macro- situations. There are too many “experts” who only understand a small part of the Big Picture of our social system,.

    1. Point well taken. I am interested in macroeconomics and find nothing about it that requires a model of economic behavior of individuals. I’m interested in macroeconomics because it requires a definition of what the purpose of the US monetary system is and the evolution of wealth distribution that results. The definition of the purpose of our US monetary system is that of Ayn Randian. That purpose is to maximize the freedom of individuals and corporations to pursue mindless self-indulgence and greed without concern for the concomitant impoverishment of the 99%.

      1. lobdillj– you recently sent me a post to say that you are interested in macroeconomics not of the individual. Please write for my free e-book to and get the explanation about how our social system REALLY works.

  2. Actually, humans do not maximize consumption. They do up to a point, arguably too high, but up to a point. Humans (many of them) do maximize the pursuit of money as a means to keep score. Unequal wealth beyond a point is not about consumption but it’s about ranking versus others, as a substitute of self-worth and in pursuit of diminishing returns in security. Economics needs to model all of this properly.

    1. What kind of a confused mind claims this nonsense? Man seeks to satisfy his desires with the minimum amount of effort but these desires are unending. This is the proper way of defining economics which is a mixture of these two opposites. The model for it is the intersection of the supply and demand curves for each of what I reckon are 19 different kinds of activities within our social system, see SSRN 2865571 “Einstein’s Criterion Applied to Logical Macroeconomics Modelling.”.

      1. Just from what was posted I found Pavlos more persuasive than David here.

        A true definition of economics might fall close to some’s definition of “the study of scarcities and how we deal with them”, but the massively overlooked scarcity is the scarcity in ability to consume. Ability to make things vastly outstrips ability to consume them in every right-wing country and, indeed, in every export-driven developing economy (Ever heard of an import driven economy in a developing nation? I didn’t think so.)

        You don’t need philosophy, Buddhism, or Einsteinian thought for this – this is a simple engineering problem with well known, but assiduously ignored, constraints.

  3. Firstly my personal view of Homo-economicus is that it is a total misunderstanding of human nature. Therefore I strongly support Tony Lawson’s call for a new ontology, as well as modern anthropological study of culture and people in economics. Thus I am in complete agreement with the whole paragraph where you state :

    “we need to change the way we understand human beings, we will continue to fail to understand human behaviour in any of the realms of ot economics, politics and society”.

    The point I want to make here is that generally Moslems, Catholic’s Christian and others all believe in some sort of superior being or entity. Where as the elite wealthy certainly appear to have only one belief and that is wealth and power.
    As far as happiness. for some it is winning at sport or a personnel achievement. for others it may be ministering to the sick and seeing them recover. On the other side of the coin what makes me sad is has been so little respoce to your post

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