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.


infopractical

Tony,

I respectfully disagree. And furthermore, I have an address to which you can send your wealth.

t

I read what you wrote about using life-satisfaction and happiness interchangeably, but that can't always work. I'm fairly life-satisfied, but I am intensely unhappy.

Why do people who write about this insist on using the word happiness, when that's not even in the question they're asking? A link between money and life-satisfaction is good enough, isn't it?

Emily

Typical economists, oversimplifying. Like the generalization that men are stronger than women, but in reality you cannot assume that any particular man is stronger than any particular woman. Likewise, not ALL rich countries are happier than ALL poor countries. The U.S. is less happy that Iceland, for example. In the end, Eric Weiner (The Geography of Bliss) found that it's not about economics or geography at all. For me, the happiest people I ever met were in Venezuela.

George

Absolutely hilarious video parody of the principles of economics, http://www.youtube.com/watch?v=IchvAAswTlE

misterb

The graphic really does explain the data well. I would also like to see the same happiness data plotted against the the Gini coefficient as suggested by oddTodd (1). I notice that Venezuela is perhaps the most "happiness-efficient" outlier. Perhaps there are cultural clusters - a brief glance shows Latin America in toto seems to be above the average in happiness efficiency.
All things considered, happiness data have to be taken with a grain of salt - if someone asked me how i felt (even if they specifically said In General) a lot would depend on how I felt at that particular time. If you did the polling at Christmas in Europe, you might get different answers than in March.

Conor

As Mark Twain said: "Work consists of whatever a body is obliged to do . . . Play consists of whatever a body is not obliged to do."

If you have to work, then that work is probably less likely to make you happy. If you do work that you enjoy or keep working even though you have enough money not to work, you are transferring yourself into the "not obliged" category.

For those of us that are "obliged" to work to survive, I think this is a fair question to gauge happiness in relation to money:

"If you kept the same job, but were paid X dollars more, would you be happier?"

AaronS

Maybe it's the old "We were poor, but we didn't know it" thing.

Maybe that's why children, not seeing class distinctions so easily, are more content.

Or why you are not nearly so happy when you find that your best friend on the job, who does what you do and started the same day, makes a few thousand more than you do.

It's only when you realize what you don't have, or what you can't have, or what others have that you don't, that this whole problem kicks in. As long as you aren't aware that there is color TV, black and white does just fine.

And it's true, money does buy happiness...to some degree. Certainly being able to hire a maid to clean the house would make my wife much happier. And not having to tussle over bills and expenditures. Of course, all the money on earth won't buy happiness in the case of, say, a child that is incurably sick, or the lose of a beloved parent (even though wealth may have some light effect by enabling one to bring certain resources and therapies to bear that a poor person much forego).

But my goal is to be as the Apostle Paul, who said, "I have learned that in whatsoever state I am, to be therewith content."

Read more...

flighty

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.

Read more...

John

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

synapticmisfires

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.

Bruce Umpstead

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.

Mirek

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?...

Tony

There is no correlation between being rich and being happy. There are just as many happy rich people as happy poor people. People confuse happiness with fun. Fun from monetary success is temporary and is like a drug which will require more fun the next time. True happiness is found outside of wealth.

adina

Yes, we are richer and happier than people in Zimbabwe, but is that because richer places tend to have better human rights records, more democracy, better health care, more ketchup and ice cream flavor options or simply more money?
Geographical correlational studies have limited value, because it is very difficult to determine cause and effect.

Adam Herbst

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.

Josh

Maybe happier people create more wealth because they spend time being more productive and less time reflecting on why things aren't good.

Maybe the idea that happiness is a function of economic prosperity is a hypothesis that can only be accepted in a society that values wealth. In a society that values a good harvest or a healthy child, happiness may be easier (or more difficult) to come by, given that the pursuit is an internal measurement made by the individual.

Those interested in this topic should seek out Dennis Prager. He has been writing and speaking weekly about the origins and effects of happiness for decades.

BingoLong

Why is Ireland on the graph twice? (at $34k, 7.1 and $7500, 5.3)

Luis B.

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.

Mike

I also think these happiness test miss something important. People in richer societies live longer. So even if they have the same mean happiness level, the integrated amount of happiness over their life is greater.

oddTodd

How does happiness relate to inequality within a given society?