The last few years has seen a big bust-up within the academic economist community over whether higher income makes you happy. Since the experimental and survey data are still immature—albeit expanding and deepening year by year—even the seminal papers on happiness remain open to attack. And battle has certainly commenced over the so called Easterlin Paradox, named after the economist Richard Easterlin. For the sustainability community, the debate is important because it deals with the link between happiness and economic growth.
Somewhat simplistically, the Easterlin Paradox refers to the phenomenon whereby the level of happiness in a society doesn’t grow with absolute income but rather with relative income. The landmark paper which first promoted this idea is Easterlin’s “Does Economic Growth Improve the Human Lot? Some Emperical Evidence” published in 1974.
Easterlin’s paradox rested on the fact that in-country income disparities (the rich and poor within a particular country) corresponded closely with life satisfaction, yet between-country comparisons (rich country, poor country) showed a much smaller-than-expected happiness gap. Moreover, if you tracked a specific country through time, life satisfaction did not improve even as the country grew richer. Easterlin asked the question: “Will raising the income of all, increase the happiness of all?” And his answer was “no”, or rather “not so much”. This is one of the tables printed in the paper as evidence for his thesis:
As to why this should be the case? This came to rest on the theory that our lot in life is to live on a hedonic tread mill, ever resetting our happiness to the income and wealth of a particular time and place. So the thrill of a brand new car, house or holiday will always dull and pale.
In the following decades, Easterlin and his disciples amassed further evidence to support the income paradox, and, critically, it become one of the lynchpins of the new heterodox strands of economic thought that questioned the wisdom of neo-liberal growth without end. As such, it showed up in such canonical texts as Herman Daly and Joshua Farley’s “Ecological Economics” and Tim Jackson’s “Prosperity Without Growth.” Daly, Farley and Jackson believe (as do I) that there exist both resource and pollution limits to growth. Critically, if the Easterlin Paradox is correct, you can have your cake and eat it, since a steady-state, or no-growth, society can be just as happy as one emphasising rampant consumerism and exponential expansion.
Almost inevitably, a counter-attack was launched in the form of a 2008 paper by the husband and wife team of Betsey Stevenson and Justin Wolfers titled “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox” and a subsequent follow-up in 2013 called “Subjective Well-Being and Income: Is There Any Evidence of Satiation“.
In this post, however, I will pull out the abstract and a chart from a third paper which Stevenson and Wolfers wrote together with Daniel Sachs titled “The New Stylized Facts About Income and Subjective Well-Being” since it gives more prominence to the question of whether happiness increases with an individual country’s income through time.
The abstract to the paper blasts a broadside into the Easterlin Paradox.
Economists in recent decades have turned their attention to data that asks people how happy or satisfied they are with their lives. Much of the early research concluded that the role of income in determining well-being was limited, and that only income relative to others was related to well-being. In this paper, we review the evidence to assess the importance of absolute and relative income in determining well-being. Our research suggests that absolute income plays a major role in determining well-being and that national comparisons offer little evidence to support theories of relative income. We find that well-being rises with income, whether we compare people in a single country and year, whether we look across countries, or whether we look at economic growth for a given country. Through these comparisons we show that richer people report higher well-being than poorer people; that people in richer countries, on average, experience greater well-being than people in poorer countries; and that economic growth and growth in well-being are clearly related. Moreover, the data show no evidence for a satiation point above which income and well-being are no longer related.
And here are a set of charts purporting to show that growth in life satisfaction and growth in per capital GDP are linked through time (click for larger image).
It’s worth hearing the argument directly from the horses’ mouths, so here is a podcast over at EconTalk ,with Stevenson and Wolfers taking about happiness and growth to Russ Roberts. And below we hear Wolfers debating happiness with Robert Frank at the Aspen Institute’s Ideas Festival:
Right-wing politicians love to characterise anti-growth advocates as out-of-touch ‘hippies’, so the attack on the Easterlin Paradox has met with a warm reception in such quarters. So is this the revisionist counter-revolution that will put the anti-growth ‘hippies’ back in their box? Well, not really. But I will leave that to my next post.
I checked out the position taken by Wolfers as a result of his survey data. He is fairly convincing, but it certainly clashes with my anecdotal experience, which includes extended living with people who where very poor but generally healthy, adequately fed and not under any particular stress. They seemed about as happy as any group I have encountered in much wealthier countries.
I suspect that one reason why the correlation of well-being to differences in GDP between countries may be for the same reason it correlates to relative differences in wealth within countries. That is, anyone in the world who is answers a questionnaire related to well-being will be aware of the general standard of living in every region of the world. If so, everyone will be in the relative difference pool, not just those within a particular country. One would have to have little exposure to mass media of any kind to have little understanding of life in other countries.
Going back to the folks I alluded to in my first paragraph; they were in a remote village in the tropical Pacific and had virtually no access to media of any kind except one local-language radio station. Perhaps that is what allowed them to be happy.
Joe. Your observations about relative income are absolutely correct. The happiness literature pulls out a number of different kinds of relatively as well: relativity to others, relativity to one’s past situation and relatively to what one perceives as one’s future expected situation. Of course, if you have no knowledge of these other worlds or states, then it won’t impact on your happiness as per your Pacific islanders.
There is also the truly massive issue of what kind of happiness we are talking about. The papers above all refer to life satisfaction or reflective happiness and ignore experiential happiness. However, I am getting ahead of myself: this is all for my next post.