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.


AbleFable

It's a bitter sweet symphony... Your a Slave to money then you DIE.

Any data re: incidence of depression, mental illness, suicide, alcoholism etc... also related to wealth?

Here, in Alberta Canada, we are the richest province as well as the most mental. I think it's linked.

Excellent comments above "un-linking" GNP and happiness. I've always liked how Bhuttan measures their countris success It's with a GNH(happiness), not GNP.
http://en.wikipedia.org/wiki/Gross_National_Happiness

A F

There is a small matter that you seem to be overlooking. Your data could be skewed by the fact that due to mass communication, a closely connected world, and globalization the poor countries are comparing themselves to the rich countries and are therefore unhappier. The rich of the poor countries are now able to compare themselves to the average and rich of the rich countries (much as the poor in the rich countries can do) and are therefore less happier than them.

In essence you are not comparing rich and poor countries anymore, rather just global rich and poor which happen to be grouped in certain geographic boundaries but due to the aforementioned connectivity/media/Internet/inter-webs/etc. are now able to compare their lives with the other global citizens and feel unhappier in comparison.

Kevin H

I wonder about what even longer studies will reveal. If the idea's proposed by the authors will be believed, then 1000 years ago, everyone must have rated their happiness on a scale of 1 to 10 a 1 or maybe 2, yet I doubt that would have been the case. There must be some form of long term normalization, but presumably it acts over time scales beyond our current research scope.

Jamougha

Hmm, continuing the thoughts of some others above, if log income is a significant driver of well-being then redistribution and social justice seem well justified, even at the expense of some loss of GDP.

Maybe we can replace GDP with sum-log-income?

Otto

The answer to the paradox is that there is a false dichotomy between happiness and unhappiness

Removing unhappiness from one's life does not necessariily result in happiness. Similarly, removing some aspects of happiness from one's life does not necessarily result in unhappiness (strictly speaking, only "less happy").

Continuing the idea, many of the problems that bring about unhappiness could be resolved with money. A hungry man could buy food, a homeless man could rent a place, an "ugly" woman could get surgery, a "lonely" man could pay for an escort, etc...

While these purchases might not ultimately lead to happiness, they certainly do address the root of some unhappiness.

jason

Could it also be that with the advance of communications technologies people's internal comparison set has changed?

Imagine that the basic psychology is right - that what matters to happiness is relative income (or relative status). In the earlier data sets, people were using their local setting (their country say) in determining what their relative status was.

But now, with wider availability of television, internet, etc, people in poor countries now have a good idea of what life in rich countries is like, so they now use that in determining their relative status. They don't come out too well, so poor countries are now less happy relative to rich countries than they were. It seems like that could also explain the data.

Jamougha

Uh, so does this mean I should sell out?

frankenduf

I agree with Adam Herbst- perhaps the data has evolved along with 'globalization'- that is, as stratification increases worldwide, there is a greater 'happiness gap' that develops between rich and poor (with less middle ground to confound the data)- the third world is being forced out of relative happiness due to the deterioration of local subsistence economies and commodity price crises (food and energy)- the only way to bridge the gap is to empower workers to sustain local civil societies, thereby regaining their relative happiness- otherwise the happy get happier and the sad get madder

luke

i think there's one more major factor which has influenced the results:

we are now living in a global village where people around the world can easily witness (via tv, the internet, travel) the life standard in other countries. therefore insted of comparing within a local group the comparing takes place on a global scale which may also be causing the difference in the happiness assessment.

charles grubmeyer

I am really depressed that there is no ETF on this happiness stuff. Is there at least some kind of derivative so we make some money here? Would you guys recommend shorting SSRI's? Go long on laughter?

Chris

It does seem that there is a great deal of interest in correlating happiness with wealth, almost as if one was trying to "scientifically" justify the interpretation of "pursuit of happiness" as "pursuit of wealth".

It is amusing that those with the strongest beliefs in physicalism should ignore the fact that these happiness surveys are based on the reality of qualia, something that physicalism itself has been unable to "scientifically" prove.

Randy

The evidence is conclusive that the old saying eat drink and be merry for tomorrow you may die is correct. Americans, Politicians even the Fed hate the idea of having less or spending less. The art of consumption is so desired that we only give to the less fortunate from the fear of losing our own right to consume more and more.

Pragzz

My own take on why rich people are happier than poor people is that, on average people who are some of the richest in the world (Gates, Mittal, Buffett, The Google guys, Oprah, etc) all love their jobs. They got their wealth doing things they loved. I mean, they did something they loved extremely well and made a ton of money off it and created this powerful reinforcing loop.

It doesn't work the same way with poor people or rich countries. The rich countries generally have a gap between rich and poor, and the poor are always trying to catch up to the rich. Never going to happen.

Binh

From a developing country perspective, I believe that richer people tend to be happier than poor people because the poor are still struggling with food, health care and education opportunities. But I doubt that the ultra rich people are more happy than the middle class and the rich people. The ultra rich may have to worry about the way their children spend their money in a material society.
By the way, how many level of income classification do these research obtain? I think It should be around 5 levels to capture what's going on.

Linda Fitzjarrell

From an old plaque we have:

It's easy enough to be happy
When life goes along like a song
But the man worthwhile
Is the one who can smile
When everything goes dead wrong.

After the past three years, with my son having a stroke at 28, my mother in law dying, my partner almost dying, and our storage barn full of inventory going down in a wind storm, all I can say is ENJOY LIFE. Whether you have money or not!

Neil Lintern

As a country gets richer, it dose not get happier. Cannot be true,if your country was the poorest in the world and you struggled to eat and drink you could not be very happy.But if your country sudenly become very rich overnight and you found you could eat and drink to your hearts content, you would have to stay unhappy for that quoate to
work.

PSA

For anyone in the Boston/Cambridge area, Kahneman is giving a talk on this subject tonight, and Gilbert is the discussant:
http://mbb.harvard.edu/resources/kahneman08.php

Khan

I'm skeptical of the claim that one can figure out whether one person is happier than another by simply asking each to rate their levels of happiness on a scale from 1 to 10 and comparing the two. I personally am happy sometimes and not happy other times and would have no idea how to compare my happiness to another person even if they told me that their happiness was a 7.1/10.

Shan

It might be useful to rank countries by the following ratio:

(happiness rating) / (wealth rating)

Where the wealth rating is adjusted so that it increases linearly with happiness rating... basically wealth rating ~ log (GDP per capita).

This ratio would tell us which countries are the best at being happy with a small amount of money. Those countries should serve as models for being able to make the most from what they have.

Winton Bates

Congratulations on this paper.
Your work on Japan seems to me to be particularly important in demolishing the myth that economic growth does not make people happier in low and middle income countries.
I am less confident that you are right about the failure of happiness to rise in the U.S. as being associated with increasing income inequality. The evidence I have seen suggests that differences in happiness between those on high and low incomes in the U.S. are not great.