Loading

Happiness Economics Does Easterlin paradox stand?

Economics is a subject that concerns humans’ decision making and behaviors. In classical and neoclassical economics models, rationality comes with maximizing individual utility, and aggregate social welfare. However, with increasing research in the field of behavioral economics, more and more assumptions in the classical economics model are challenged. People no longer feel most fulfilled when making the most rational choice; on a hungry Sunday morning, they would buy more food for the next week than they could possibly eat; they would value money more if they know they would lose them somehow; they would actually help friends out instead of caring about self interest all the time.

The more assumptions challenged, the more determined behavioral economists are about the interdisciplinary nature when exploring humans’ behavior and decision making rationales. It’s time to apply the knowledge in economics and psychology together to decipher the most complicated creature ever existed on the planet— the humans. Economists no longer assume that humans always feel the happiest when choosing the choice with most utility, so, what, if any, can make people happier?

Happiness economics is a branch in behavioral economics, where it explores the economics factors and consequences of happy humans. What makes people happier, and what benefits do we get when people are happier? This dossier introduces you to the field of happiness economics, from a review of economic factors proposed to influence people’s happiness, to a discussion of the economic consequences of happiness, and concludes with economic policy implications of happiness economics.

The following video is a good introduction to happiness economics, and interesting rabbit holes include Easterlin Paradox, Bhutan's introduction of Gross National Happiness, and the prevalent measure of using self reported survey results for subjective wellbeing.

Why, you may think, should economists care about people’s happiness? Was the traditional economics theory not enough to explain how countries develop? Here comes the Easterlin Paradox: as a country develops to a higher level of economic growth, its citizens aren’t necessarily happier.

This paradox was proposed by Richard Easterlin in 1974, in his essay titled “Does Economic Growth Improve the Human Lot?”. The work discusses the association of income and happiness, by analyzing self-reported survey data of individuals’ subjective well being in nineteen countries from 1946 to 1970. The paradox lies in the two-fold statement: within a country, people in a higher-class group are happier than those in the lowest class group, but between countries, such positive correlation between country wealth and citizen happiness is much weaker. As Easterlin explained, a positive explanation could be the relative income difference.

Following Easterlin’s work, a variety of studies have been performed to test his thesis statement, among which Hagerty M,&Veenhoven R.(2003), and Wolfers J,&Stevenson B.(2008) had contradictory findings to Easterlin’s. The authors argued that Easterlin Paradox do not stand, as they observed that as national income rises, national happiness rises as well, though it dissipates over the long term.

Easterlin responded as they used “inadequate data” and “confused short term relationship with long term” in his 2010 paper, along with his findings with more recent data that confirms his paradox. He also accepted an interview in 2011 that elaborates on his views.

While this paper remains somewhat controversial in the academia, more economists have realized the importance of individual well being and the inadequacy of traditional economic indicators in evaluating economic development.

In fact, two years before the Easterlin paradox was published, Bhutan’s former King introduced the Gross National Happiness (GNH) index, which includes psychological well-being as one of the determinants. In 2009, U.S.launched the Gallup Poll System that collected self-reported wellbeing data on a national scale. In 2010, Multidimensional Poverty Index (MPI) was introduced, which also includes psychological wellbeing. In 2011, UN released the World Happiness Report, using individual self-reported survey data on a ladder of 0-10, with 0 the worst possible life, and 10 the best. Finland, Denmark and Norway are the Top 3, and a majority of top 10 winners are Scandinavian countries.

Timeline of Introducing Happiness Into Development Metrics

It’s important for economists to weigh in the discussion of happiness, because

1. Economics fundamentally concerns the development of economies, which include not only higher economic growth rates, but how people live better lives, of which subjective well-being is an indispensable indicator.

2. Economics is human-oriented. Its subject is human, and it's within the domain of social science. With humans, there are social interactions, there are emotions, and there are concerns for subjective well beings. Classical economics models regard humans as homo economicus that make choices based on pure rationality, which is not always true, if we insist academic rigor.

Next, let’s deep dive into one of the most famous examples that prove Easterlin Paradox: China. China has experienced double digit annual growth for the past 30 years, yet its citizens are not feeling happier.

Here’s the paper featured in the above article that explores the U-shaped and then nil/declining trend in China’s life satisfaction. Potential reasons for declining satisfaction include: rising unemployment, and growing income inequality that dissolutes social safety net. While there was almost happiness and income parity in the 1990s, the divide between socioeconomic classes has grown much larger in recent years.

In general, there are several explanations for the disconnect between economic growth and rising happiness level.

From the economics growth vs. development perspective, GDP growth rates don’t indicate the economic development level, which includes income inequality, environment quality, and other indicators more pertinent to people’s living standards. In the developing phase of a country, economic growth often comes with environmental pollution, which is a large negative externality that affects all economic sectors’ productivity. Therefore, contrary to GDP, Green GDP index (which takes into account the environment), Gini coefficient (income inequality), and Human Development Index (HDI) are good complementaries when evaluating a country’s development level.

From the behavioral economics perspective, happiness doesn’t always come with utility maximization. People are loss-averse, biased about future, and sometimes altruistic. The gap between perceived utility and real utility sometimes lead people to make irrational decisions with unhappy consequences. In a more socioeconomic setting, the gap is revealed in the relative income difference. Though people get higher salaries, if everyone else’s income rise as well, they still perceive themselves as poor as they were before. This aligns with the income inequality argument often discussed in developmental economics, which throws the Gini Coefficient onto the historical stage. A paper by Firebaugh G. & Schroeder M.(2009) found that Americans tend to be happier when living in richer neighborhoods in poorer counties , and “individuals are happier when living among the poor, as long as the poor don’t live too close”.

What’s more, there is a “hedonic adaptation” trend in human cognition. People get used to experience over time. Despite short term fluctuations after happy or sad events, the long term happiness level tends to remain stable. So it’s possible that as people’s income rises, they adapt to the new consumption level, and material wealth.

This video vividly discusses the hedonic adaptation in a lottery winning setting. It turns out that lottery winners don’t feel happier than before, as they adapt to new situations to maintain a stable emotional equilibrium.

In addition, people have endless desires, yet the society has scarce resources. How to meet the ever evolving desires, with scarce resources, is a question hard to solve. There are also diminishing marginal returns to material goods/experience’s utility, echoing the hedonic adaptation idea above.

From the feminist economics perspective, gender inequality is an important component in a society’s happiness level. Women in some societies face unequal opportunities to education and career, and have hard time entering the labor force. The unequal social atmosphere prevents the economy from unleashing its full potential. Research has found that women who grew up in contexts with higher gender equality have expectations increasingly aligned to those of their male counterparts.

To know more about economic inequality by gender worldwide, check out the entry below.

From the ecological economics perspective, environment quality and connection with nature largely affect people’s living standards and subjective well being. Research has found climate and air pollution significant in explaining regional differences in happiness, and the following is a paper using data in Spain, and a paper using panel data from happiness surveys in ten European countries.

From the labor economics perspective, a good worker-employer relationship, proper work-life balance, and a decent workplace affect a person’s happiness level as well. Throughout our lives, people spend the second most time in work, after sleep. This paper summarizes the work-happiness literature on various levels.

Happiness is a broad and highly contextual concept. Though recent years it’s proxied as “subjective well-being”(SWB) in self-reported panel survey data, there is still no fixed recipe for a happier country. Apart from what’s been reviewed above, other determinants of happiness include: individual income, social security, employment, relationships, freedom, religious diversity, leisure, economic security, political stability, economic freedom, democracy and many others.

What are the economic consequences of happiness? How is this going to help the economy? Are workers actually more productive when happier? In Zelenski J.&Murphy S.’s paper, analyses from both trait level and state level suggest that people are more productive when they are happier. “Among the happiness indicators examined (job satisfaction, quality of work life, life satisfaction, positive affect, and negative affect), positive affect was most strongly, but not exclusively, tied to productivity at both the state and trait levels.”

Piekałkiewicz M’s paper in 2017 also discusses a variety of economic implications of happy workers.

Happiness is indeed an interdisciplinary topic, and it has tight connections with economics, the human-studying subject that has long regarded humans as cold-blooded rational machines. The goal of economic development is to ensure a better life for people, yet many country and corporate leaders have forgot that along the way. Drawing from a variety of research in different economics branches, we explored the economic factors and consequences of well being, and here are some policy implications. Insights from behavioral economics have encouraged policy makers to design public programs in a wise choice architecture, like changing from “opt in” to “opt out” in pension fund programs. Insights from labor economics, feminist economics and ecological economics have shed light on the direction to create a better, happier society, with more friendly work relationship, less gender inequality, and better environment. Each country is a complex system with its own institutional, economic and social factors, and just like there is no fixed recipe for development, there is no fixed recipe for happiness either. However, an increasing number of economists have realized the importance of considering well-being in economics evaluation, and research in happiness economics should be encouraged to shed more light on this growing field.

If you are interested in this topic, check out the following resources as well:

More about behavioral economics:

More about happiness economics:

More about urban happiness:

More about psychological explanations on what make people happier:

Created By
Siyu Wang
Appreciate

Credits:

已使用以下人员的一张图像创建: Lidya Nada - "Happy Face"