Economists used to talk about happiness, under utilitarianism, when economics wasn't a propagandistic pseudoscience that disguised its value commitments with hyper-mathematical language and utopian models. At that latter point, "happiness" became "utility."
The task for these pseudoscientists is to talk about "subjective desirability" without presupposing the philosophical, admittedly normative concept of happiness. Luckily I'm engaging in philosophy here, so I needn't pretend I'm being neutral, out of physics envy. I don't have to disguise the propagandistic nature of neoclassical models with the technical term, "utility," like the economists who pretend only to be studying capitalism and neutrally discovering its marvelous properties.
Amusingly, your statement that "Economic theory says that given preferences and budget constraints and under certain market structures, the decentralized, free market will lead to an allocation that is pareto efficient," is trivial, as you said elsewhere, because the second theorem of welfare economics says this efficiency can be obtained with artificial redistributions of wealth. So this optimality isn't tied to the invisible hand defense of free-market capitalism.
You say there's nothing about happiness in that latter formulation about pareto optimality. But that's only if you're reading the letter of the law, as it were. Again, luckily, I'm free to philosophize and to see what's presupposed in the spirit of the law. And yeah, Adam Smith and the classical economists were talking about capitalism as a system for maximizing happiness. They thought capitalism was a good thing, and so think the neoclassical economists who want to protect capitalism from governmental interference, because they promote the myth that capitalism takes care of itself for the best (for the sake of "efficiency," "pareto optimality," or "maximizing utility").
The earlier economists could be more open in their value judgments because economics wasn't yet separated from philosophy. After the separation, economists like you must pretend to be value-neutral in your professional capacities.
That doesn't stop me from seeing the big picture in which economics has obfuscated the plutocratic tendencies of American capitalism.
