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The paper contrasts early theories of the utility function (starting with Bentham and elaborated by Jevons) with the modern theory (laid down by Fisher and Samuelson). The former include in the utility function not only the sensation of current events but also the memory of past events and the anticipation of future events, whereas the latter treat current utility as a function only of current consumption and not of consumption at other times. The alternative hypotheses are tested by introducing both past and expected future income into the estimated subjective well‐being function, using an appropriate data set for China. The conditions under which the happiness score is a proxy for utility are analysed. Efforts are made to examine whether the associations between the introduced variables and the happiness score are causal effects. The tests, involving detailed analysis of reference points, both reference times and reference groups, favour the early theories. Implications for the analysis of some aspects of economic behaviour are drawn.

AbstractThe paper uses an appropriate survey from rural China to answer the question: is happiness infectious, i.e. does the happiness of an individual depend positively on the happiness of his or her reference group? The evidence is consistent with this hypothesis, but the challenge is to solve the 'reflection problem', i.e. is the apparent effect of neighbours' happiness on own happiness a causal one or merely a reflection? A 'quasi‐panel' approach is adopted, treating villages as groups and individuals as multiple observations within each group, and using an error components 2SLSestimator. The results suggest that the relationship might be largely causal. The normative and policy implications are briefly considered.

AbstractSocial capital is considered to play an economic role in labour markets. It may be particularly pertinent in one that is in transition from an administered to a market‐oriented system. One factor that may determine success in the underdeveloped Chinese labour market is thus guanxi, the Chinese variant of social capital. With individual‐level measures of social capital, we test for the role of guanxi using a dataset designed for this purpose, covering 7,500 urban workers and conducted in early 2000. The evidence is consistent with the basic hypothesis. Both measures of social capital – size of social network and Communist Party membership – have significant and substantial coefficients in the income functions. Social capital can have influence either in an administered system or in one subject to market forces. It appears to do so in both parts of the labour market.