Tag Archives: Easterlin paradox

On Sustainability and Happiness (Part 1)

Posted on January 29, 2014 | 2 comments

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:

U.S. and Happiness jpeg

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).

Life Satisfaction and GDP jpeg

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.

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Life: What’s It All About?

Posted on April 14, 2013 | Leave a comment

Since 2007, capitalism within advanced countries has faced a growing crisis. The long-term neo-liberal prescriptions of the 1980s and 1990s appear to have stopped working: deregulation, privatization and globalization have all lost the ability to sustain an expected 2 to 3 percent rate of economic growth. Moreover, faced with a stalled growth engine, policy makers have been unable to put their economies back on an expansionary track though either the use of super loose monetary policy or large government-backed fiscal injections.

I would argue that demographics, a decline in technology-led productivity and growing resource constraints make the goal of achieving past levels of GDP growth all but unattainable. But it gets worse. Current policy is not only focusing on an outcome that cannot possibly be achieved (substantial and sustainable GDP growth), but also is worsening a whole range of other socio-economic measures that are arguably much more important than GDP.

The OECD’s 2011 publication “How’s Life? Measuring Well-Being” provides a good starting point for studying what has gone wrong. From the introduction:

Everyone aspires to the good life. But what does a “good” (or better) life mean? In recent years, concerns have emerged that standard macro-economic statistics, such as GDP, which for a long time had been used as proxies to measure well-being, failed to give a true account of people’s current and future living conditions. The ongoing economic and financial crisis has reinforced this perception and it is now widely recognized that data on GDP provide only a partial perspective on the broad range of factors that matter to people’s lives.

The report then goes on to stress that continued economic difficulties should not be an excuse to abandon any considerations other than GDP:

Even during times of economic hardship, when restoring growth matters for the achievement of many of many well-being outcomes, such as having a good job or access to affordable housing, at the core of policy action must be the needs, concerns and aspirations of people and the sustainability of our societies.

So what are the OECD’s favoured measures of well-being? They provide us with 11 metrics, divided into two categories

Material Living Conditions

  1. Income and wealth
  2. Jobs and earnings
  3. Housing

Quality of Life

  1. Health status
  2. Work and life balance
  3. Education and skills
  4. Social connections
  5. Civic engagement and governance
  6. Environmental quality
  7. Personal security
  8. Subjective well-being

The figure below shows the feedback loops between these metrics, implications for sustainability and the interaction with GDP (click for larger image).

How's Life Figure 1.2 jpeg

I find the OECD’s approach uplifting since it makes GDP a means to an end, not an end in itself. Surely, it is time that every political party from the left or right takes this fact onboard and makes well-being a central plank of their policy platform? We occasionally pay lip-service to non-growth goals, but this is not enough. Growth is not a goal in and of itself!

Moreover, policy-makers in developed countries are utterly failing to achieve their false god of GDP growth, and in the process are degrading what should be the true goals of improved living conditions and quality of life for the average citizen. Indeed, the fruits of any growth that can currently be squeezed out of the system are being funneled toward an ever-narrower section of society.

Nonetheless, I have a major problem with the OECD’s methodology. Just as GDP is a means toward improving material living conditions and quality of life, so material living conditions and quality of life are just means toward better subjective well being—in other words, ‘happiness’. In short, the category ‘subjective well-being’ has been relegated to one category among many. It’s proper place is at the apex of society’s needs and goals. Both ‘quality of life’ and ‘material living conditions’ should  be subservient to ‘happiness’.

Of course, ‘happiness’ itself is a slippery concept. The OECD report limits itself to two categories: 1) positive and negative affect, which we can think of as feelings like joy, and 2) life satisfaction, which is an evaluation of how happy we are through reflecting on our current life.

For this post, I will limit myself to a quick look at the OECD’s findings on self-reported measures of life satisfaction using the Cantril Ladder, pioneered by the psychologist Hadley Cantril. The OECD’s Cantril ladder approach is based on data taken from the Gallup World Poll (here), who in turn ask this question:

Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?

From the results of the Gallup World Poll, the OECD reports the following graph of life satisfaction by country:

Cantril Ladder jpeg

And the even more intriguing graph showing only a weak relationship between life satisfaction and GDP per capital:

Life Satisfaction versus GDP per Capita jpeg

Out of which comes the “Easterlin Paradox”. This paradox, in the words of the OECD, is that “a higher rise in personal income leads to higher subjective well-being for that person, but that a rise in average incomes for a country does not give rise to a corresponding increase in the country’s average subjective well-being.”

Against this background, I feel that the burgeoning field of ‘happiness studies’ could provide us with some theoretical tools to tackle the neoclassical economic crisis, deepening resources constraints and the looming threat of climate change. Indeed, I think such studies could provide us with a framework for a fresh political movement that goes beyond neo-liberalism and 1950s and 60s style socialism. I will return to this theme in future posts.

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