The Economics of Happiness, Part 1: Reassessing the Easterlin Paradox

Justin Wolfers and Betsey Stevenson discussed their happiness research on CNBC today.

Arguably the most important finding from the emerging economics of happiness has been the Easterlin Paradox.

What is this paradox? It is the juxtaposition of three observations:

1) Within a society, rich people tend to be much happier than poor people.
2) But, rich societies tend not to be happier than poor societies (or not by much).
3) As countries get richer, they do not get happier.

Easterlin offered an appealing resolution to his paradox, arguing that only relative income matters to happiness. Other explanations suggest a “hedonic treadmill,” in which we must keep consuming more just to stay at the same level of happiness.

Either way, the policy implications of the Paradox are huge, as they suggest that economic growth may not raise well-being by much.

Given the stakes in this debate, Betsey Stevenson and I thought it worth reassessing the evidence.

We have re-analyzed all of the relevant post-war data, and also analyzed the particularly interesting new data from the Gallup World Poll.

Last Thursday we presented our research at the latest Brookings Panel on Economic Activity, and we have arrived at a rather surprising conclusion:

There is no Easterlin Paradox.

The facts about income and happiness turn out to be much simpler than first realized:

1) Rich people are happier than poor people.
2) Richer countries are happier than poorer countries.
3) As countries get richer, they tend to get happier.

Moreover, each of these facts seems to suggest a roughly similar relationship between income and happiness.

What explains these new findings? The key turns out to be an accumulation of data over recent decades. Thirty years ago it was difficult to make convincing international comparisons because there were few datasets comparing rich and poor countries. Instead, researchers were forced to make comparisons based on a handful of moderately-rich and very-rich countries. These data just didn’t lend themselves to strong conclusions.

Moreover, repeated happiness surveys around the world have allowed us to observe the evolution of G.D.P. and happiness through time — both over a longer period, and for more countries. On balance, G.D.P. and happiness have tended to move together.

There is a second issue here that has led to mistaken inferences: a tendency to confuse absence of evidence for a proposition as evidence of its absence. Thus, when early researchers could not isolate a statistically reliable association between G.D.P. and happiness, they inferred that this meant the two were unrelated, and a paradox was born.

Our complete analysis is available here. An excellent summary is available in today’s New York Times, here, with a very cool graphic, and readers’ comments. Other commentary is available in the F.T. (here and here), and Time Magazine.

Given the broad interest in this topic, I thought that I would spend the next couple of days blogging about our new findings on the links between income and happiness. Tomorrow, I’ll describe comparisons of rich countries and poor countries. I’ll follow that up with separate posts describing comparisons of rich and poor people, and then assessing how happiness changes as countries get richer or poorer.

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  1. oddTodd says:

    How does happiness relate to inequality within a given society?

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  2. Luis B. says:

    This is a very interesting topic. I always believed that money can buy happiness. It reminds me when I would have to work weekends, and some of my wealthier friends would go out and have fun. So I guess if my friends had to work weekends like me, I wouldn’t be so sad. I see what you mean about trying to keep up with our neighbors.

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  3. Adam Herbst says:

    Not too concerned with happiness (I basically think this research a little silly), but more concerned with unhappiness. Let’s say there’s a group of people in society and rather than moving upward in the scale they move down. Is a 10% drop economically equal and opposite to a 10% rise econoimcally in terms of happiness. I bet its not. I think this is what fuels revolutions. Unhappiness.

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  4. Mirek says:

    Hi,
    one interesting question should be – are countries happier because they are richier or maybe happier countries become richier bacasue of – e.g.:
    - more optimism in making decisions about investments
    - more consumer spending
    - more enterpreneurship…
    - etc.
    Maybe a boost in country happiness may become an impulse to move the economy forward?…

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  5. Bruce Umpstead says:

    Triple Aptonym Alert:
    Yesterday I bought a 2006 Ford Fusion from Martin Sell, salesperson, who negotiated a lower price with Michael Carr, the sales manager at Grand Ledge Ford, Grand Ledge, Michigan (http://www.grandledgeford.com/). Both Carr and Sell work for Bill Ford Jr., chairperson Ford Motor Company.

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  6. synapticmisfires says:

    Wow. I haven’t read the full paper yet, hopefully I will get a chance later, but WOW. That is very exciting indeed. While some of the hypotheses offered were reasonable, I was never too comfortable with the idea that people in the United States weren’t a lot more happy than people in sub-Saharan Africa. After all, rich people in rich countries have the means to choose to be a poor person in a poor country if they wanted, and not many do it.

    I myself did some research on optimism and I complete agree that one of the biggest problems is not having data on extremely poor countries. Kudos to everyone who’s been working hard to improve data collection and to your team for this intriguing finding.

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  7. flighty says:

    It’s not money. It’s status. Status combined with Maslow’s hierarchy. Status is an evolutionary concept that literally transforms the way we feel about ourselves (think about how you feel after getting a new job versus being fired from your job). It helps set us down certain evolutionary path of continuing to gain or lose status (from cells to humans – those with status proser while those without the feeling shrivel and die)

    There are many ways to achieve status because it is completely relative. In a region with no food, you’re going to feel pretty good about yourself if you eat 3 meals a day. In an overfed nation – skinny women will be en vougue and will give you status. (generally speaking).

    But once you combine that idea with Maslow’s hierarchy you get a fuller picture. That’s the “treadmill” part. You need to have certain needs met before you start worrying about the next level.

    the reality is poverty sucks and we should never confuse the relative status/happiness of the poor with the idea that they are happy to remain in poverty.

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  8. John says:

    I still cling to the hope that those like Dan Gilbert are correct in their findings that happiness is about the same for everyone:
    http://www.ted.com/index.php/talks/view/id/97

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