Happiness Economics: Does Wealth Provide Happiness?

Whether money can buy happiness has been a hotly debated topic among economists for decades. While a section says rich people are in general happier than the poor, the others reckon that economic growth hardly results in long-lasting happiness. Turns out, neither is completely true. Richard (Dick) Easterlin, professor of economics, University of Southern California, came up with the Easterlin paradox in the 1970s to explain the complicated relationship between money and happiness. While others have attacked the Easterlin paradox over the years, Easterlin says it is as relevant today as it was four decades back. Brain World speaks with Easterlin on why the paradox still holds forth and why money doesn’t always guarantee happiness.

BW: The Easterlin paradox forms the basis of study on happiness and economic growth. Can you explain it briefly?

RE: The paradox is this: If you look at the data for a specific point in time, and if you look at the relationship between happiness and income, you’ll find that greater income and happiness are associated. However, over time, the levels of happiness stay unchanged as income trends upward. Statistically, the paradox is the cross-section positive association of happiness and income, and the indication of a shrinking association between happiness and the size of income over time.

BW: Why does the paradox occur? Why can’t money ensure long-term happiness?

RE: Because we compare ourselves with other people. If your income goes up, and no one else’s does, that typically makes you happier. However, if everyone’s income goes up but yours, that makes you feel worse. What happens over time is that everybody’s income goes up, so the positive effect of your income increasing is canceled by the negative effect of other people also having raised incomes. This is what psychologists call “social comparison.” If there were no social comparison, then when people’s income went up, everybody would feel better.

BW: Justin Wolfers and Betsey Stevenson tried to debunk the Easterlin paradox in 2008 and came up with the following conclusions:

  • Richer countries are happier than poorer countries.
  • As countries grow, they get happier.
  • Rich people are happier than poor people.

Do you think the paradox has suffered a blow?

RE: Not at all. They failed to distinguish between short-term and long-term changes in income and happiness. Over the short-term, income and happiness go up and down together. For example, consider Ireland. While I analyzed Ireland over a 30-year period, they broke up the 30 years into three 10-year segments. They produced a positive association, because in the short-term — a 10-year period — Ireland had a decline in income and a decline in happiness and then a recovery in income and happiness. That positive short-term association is what they’ve shown.

When you look at what happened over the entire 30-year period, however, Ireland’s happiness doesn’t go up at all, even though long-term income does go up quite noticeably. It is worth noting, by the way, that their original study was published in 2008 and then they did a new one in 2012. Late in 2008, new data became available. In 2012, they still didn’t put the new data into their analysis. My study included all of the data available including the new data that they ignored. Also, they don’t look at data for Latin America and China, as I do. They are essentially ignoring data that does not confirm their conclusions.

BW: Do you think indices like the “gross national happiness” index are a true measure of countries’ happiness?

RE: There are a number of indices that are constructed. The statisticians who put them together select different types of data. For example, what’s happening to the environment, GDP [gross domestic product], and happiness? They throw all these things together arbitrarily and construct an index. There is no agreed upon standard of what items to include and how much weight each item should get. When I look at these indices, I think, well that’s what that particular statistician thought about it. In the case of happiness, it’s not the statistician who decides what’s important, it’s the self-reports of individuals who themselves are deciding what is important.

BW: Is there an underlying message behind the Easterlin paradox that countries should not chase GDP?

RE: When you look at what people talk about when you ask them what makes them happy, the answers they give have to do with basically four things: their standard of living, their family situation, health, and work situation. They do not cite things like inequality, democracy, discrimination, and giving to charity. Those issues are remote from people’s immediate happiness. The things important for happiness are what take people’s time everywhere in the world — making a living, raising a family, worrying about health, trying to have a job that is satisfying. So the lesson is this: if you think the way to make people feel better is to improve their well-being simply through economic growth, that will not do it. The countries that are the leaders in happiness are the countries where the everyday concerns of people are addressed through government policies.

BW: What can we learn from the “happy” countries?

RE: The importance of welfare policies that address the everyday concerns of people. For example, Costa Rica is one of the happiest countries in the world. It has a gross domestic product that is one quarter of the United States’. Depending on the happiness measure used, it is as happy or happier than the U.S. Costa Rica has been engaged in welfare policies that address the concerns of their citizens for well over a century. So Costa Rica is a good example of a relatively low-income country that is quite happy because of public policy. It makes people happier when public policies deal with everyday concerns and risks.

BW: The Easterlin paradox will inevitably face opposition in the future. Do you think it will survive?

RE: I started with data for one country — the U.S. — in 1970. Then, more and more long-term data gradually became available — data for other developed countries, less-developed countries, and transition countries in Europe, and also for China — and I was interested in seeing whether what was true for the U.S. was also true elsewhere. I didn’t start with the belief that these data would show no improvement in happiness with increases in income. I was curious to find out what the data did show. And these data showed the same pattern that existed in the U.S. The evidence that has continued to accumulate supports the paradox. Given the broad basis of data support that now exists, the outlook for the paradox into the future seems quite good.

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