Finance:Easterlin paradox

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Short description: Finding in happiness economics

The Easterlin paradox is a finding in happiness economics formulated in 1974 by Richard Easterlin, then professor of economics at the University of Pennsylvania, and the first economist to study happiness data.[1] The paradox states that at a point in time happiness varies directly with income both among and within nations, but over time happiness does not trend upward as income continues to grow: while people on higher incomes are typically happier than their lower-income counterparts at a given point in time, higher incomes don't produce greater happiness over time. One explanation is that my happiness depends on a comparison between my income and my perceptions of the average standard of living. If everyone's income increases, my increased income gives a short boost to my happiness, since I do not realize that the average standard of living has gone up. Some time later, I realize that the average standard of living has also gone up, so the happiness boost produced by my increased income disappears. It is the contradiction between the point-of-time and time series findings that is the root of the paradox: while there is a correlation at a fixed point, there is no trend over multiple points. That is, in the short run, everyone perceives increases in income to be correlated with happiness and tries to increase their incomes. However, in the long run, this proves to be an illusion, since everyone's efforts to raise standards of living lead to increasing averages, leaving everyone in the same place in terms of relative income. Various theories have been advanced to explain the Paradox, but the Paradox itself is solely an empirical generalization. The existence of the paradox has been strongly disputed by other researchers.

Richard Easterlin has updated the evidence and description of the Paradox over time. His most recent contribution is from 2022.[2] There is also a free working paper version.[3]

Evidence

The original evidence for the paradox was United States data. Subsequently, supporting findings were given for other developed nations,[4] and, more recently, for less developed countries and countries transitioning from socialism to capitalism.[5] The original conclusion for the United States was based on data from 1946 to 1970; later evidence through 2014 confirmed the initial finding — the trend in United States happiness has been flat or even slightly negative over a roughly seven decades stretch in which real incomes more than tripled.

The time series conclusion of the paradox refers to long-term trends. As the economy expands and contracts, fluctuations in happiness occur together with those in income,[6][7] but the fluctuations in income occur around a rising trend line, whereas those in happiness take place around a horizontal trend.

Possible explanations

A couple of explanations for the paradox have been offered.

The first explanation draws on the effect of social comparison. The effect of additional money on how we feel about our lives is not just about how wealthy we are in absolute terms, but how wealthy we are compared to other people.[8][9]

The second explanation appeals to hedonic adaptation and the fact that people get used to having more income and higher living standards.[10][11] For example, the theory of hedonic adaption would suggest that progress from iPhone 5s, to iPhone 6s, to iPhone 7s, to iPhone 8s and so on, have not made a lasting improvement to happiness.

Criticism

Objections to the paradox focus on the time series generalization, that trends in happiness and income are not related. In a 2008 article economists Betsey Stevenson and Justin Wolfers state that “the core of the Easterlin paradox lies in Easterlin’s failure to isolate statistically significant relationships between average levels of happiness and economic growth through time,” and present time series evidence of a significant positive statistical association between happiness and income.[12] A 2012 article by the same authors and Daniel Sacks returns to this time series criticism with new data, though at times the article asserts that the paradox is a contradiction between two types of cross-section evidence — data for persons and for countries.[13] Outside of economics, two founding fathers in the study of self-reported happiness, Ed Diener in psychology, and Ruut Veenhoven in sociology, have each, with their collaborators, also presented evidence of a significantly positive time series relationship.[14][15] A rebuttal by Easterlin points out that these studies do not focus on identifying long term trends; rather, they are based on time series that are short or have only two observations — in both cases, insufficient observations to establish a trend. The positive association they present is that between the fluctuations in happiness and income, not the trends.[16]

It is sometimes said that the flattening of the happiness trend occurs after some minimum level of income.[17] While cross-sectional data supports a curvilinear relationship between income and happiness in Chinese [18] and Asian samples,[19] time series for China and Japan, both of which start from low income levels, give no indication of a threshold.[20][21]

See also

References

  1. ↑ Easterlin (1974). "Does Economic Growth Improve the Human Lot? Some Empirical Evidence". Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz. New York: Academic Press, Inc.. http://graphics8.nytimes.com/images/2008/04/16/business/Easterlin1974.pdf. 
  2. ↑ Easterlin; O'Connor (2022). "The Easterlin Paradox". in Klaus F. Zimmermann. Handbook of Labor, Human Resources and Population Economics. Switzerland: Springer Nature. pp. 1–25. doi:10.1007/978-3-319-57365-6_184-2. ISBN 978-3-319-57365-6. https://doi.org/10.1007/978-3-319-57365-6_184-2. 
  3. ↑ Easterlin; O'Connor (2020). "The Easterlin Paradox.". IZA Discussion Paper Series (13923). https://docs.iza.org/dp13923.pdf. 
  4. ↑ Easterlin, Richard (1995). "Will Raising the Incomes of All Increase the Happiness of All". Journal of Economic Behavior and Organization 27 (1): 35–48. doi:10.1016/0167-2681(95)00003-B. 
  5. ↑ Easterlin, Richard (2017). "Paradox Lost?". Review of Behavioral Economics 4 (4): 311–339. doi:10.1561/105.00000068. 
  6. ↑ DiTella, R., R. J. MacCulloch, and A. J. Oswald (2001). "Preferences Over Inflation and Unemployment: Evidence from Surveys of Happiness". American Economic Review 91 (1): 335–341. doi:10.1257/aer.91.1.335. 
  7. ↑ Wolfers, Justin (2003). "Is Business Cycle Volatility Costly? Evidence from Surveys of Subjective Well-Being.". International Finance 6 (1): 1–26. doi:10.1111/1468-2362.00112. http://www.nber.org/papers/w9619.pdf. 
  8. ↑ Clark, Andrew E.; Frijters, Paul; Shields, Michael A. (2008). "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles" (in en). Journal of Economic Literature 46 (1): 95–144. doi:10.1257/jel.46.1.95. ISSN 0022-0515. https://www.aeaweb.org/articles?id=10.1257/jel.46.1.95. 
  9. ↑ Ehsan, Latif (2015). "Happiness Adaptation to Income: Evidence from Canada". Economics Bulletin 35 (3). http://www.accessecon.com/Pubs/EB/2015/Volume35/EB-15-V35-I3-P148.pdf. 
  10. ↑ Diener, Ed; Lucas, Richard E.; Scollon, Christie Napa (2009), Diener, Ed, ed., "Beyond the Hedonic Treadmill: Revising the Adaptation Theory of Well-Being" (in en), The Science of Well-Being: The Collected Works of Ed Diener (Dordrecht: Springer Netherlands): pp. 103–118, doi:10.1007/978-90-481-2350-6_5, ISBN 978-90-481-2350-6, https://doi.org/10.1007/978-90-481-2350-6_5, retrieved 2022-07-14 
  11. ↑ Graham, Liam; Oswald, Andrew J. (2010-11-01). "Hedonic capital, adaptation and resilience" (in en). Journal of Economic Behavior & Organization 76 (2): 372–384. doi:10.1016/j.jebo.2010.07.003. ISSN 0167-2681. https://hal.archives-ouvertes.fr/hal-00870190/file/PEER_stage2_10.1016%252Fj.jebo.2010.07.003.pdf. 
  12. ↑ Stevenson, B., and J. Wolfers (2008). "Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox.". Brookings Papers on Economic Activity 1: 1–87. doi:10.1353/eca.0.0001. http://www.nber.org/papers/w14282.pdf. 
  13. ↑ Sacks, D. W., B. Stevenson, and J. Wolfers (2012). "Subjective Well-Being, Income, Economic Development, and Growth." In …and the Pursuit of Happiness: Well-Being and the Role of Government.. London: Institute of Economic Affairs. pp. 59–97. http://www.iea.org.uk/sites/default/files/publications/files/IEA%20Pursuit%20of%20Happiness%20web.pdf. 
  14. ↑ Diener, E., L. Tay, and S. Oishi (2013). "Rising Income and the Subjective Well-Being of Nations.". Journal of Personality and Social Psychology 104 (2): 267–76. doi:10.1037/a0030487. PMID 23106249. https://ink.library.smu.edu.sg/soss_research/3049. 
  15. ↑ Veenhoven, R. and F. Vergunst (2014). "The Easterlin Illusion: Economic Growth Does Go with Greater Happiness". International Journal of Happiness and Development 1 (4): 311–343. doi:10.1504/IJHD.2014.066115. https://mpra.ub.uni-muenchen.de/43983/1/MPRA_paper_43983.pdf. 
  16. ↑ Easterlin, Richard (2017). "Paradox Lost?". Review of Behavioral Economics 4 (4): 311–339. doi:10.1561/105.00000068. 
  17. ↑ Layard, R., A. Clark, and C. Senik (2012). "The Causes of Happiness and Misery". In World Happiness Report 2012.. Sustainable Development Solutions Network. http://worldhappiness.report/ed/2012/. 
  18. ↑ Monnot, Matthew (2017). "Marginal Utility and Economic Development: Intrinsic Versus Extrinsic Aspirations and Subjective Well-Being Among Chinese Employees". Social Indicators Research 132: 155–185. doi:10.1007/s11205-015-1153-9. 
  19. ↑ Monnot, M. J.; Beehr, T. A. (2022). "The Good Life Versus the "Goods Life": An Investigation of Goal Contents Theory and Employee Subjective Well-Being Across Asian Countries". Journal of Happiness Studies 23 (3): 12–15–1244. doi:10.1007/s10902-021-00447-5. 
  20. ↑ Easterlin, Richard (1995). "Will Raising the Incomes of All Increase the Happiness of All". Journal of Economic Behavior and Organization 27 (1): 35–48. doi:10.1016/0167-2681(95)00003-B. 
  21. ↑ Easterlin, R. A., F. Wang, and S. Wang (2017). "Growth and Happiness in China, 1990-2015." In World Happiness Report 2017.. Sustainable Development Solutions Network. http://worldhappiness.report/ed/2017/. 

Further reading

Clark, A., P. Frijters, and M. Shields (2008). “Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles,” Journal of Economic Literature: 46(1), 95-144.

Beja, E. (2014). “Income Growth and Happiness: Reassessment of the Easterlin Paradox,” International Review of Economics: 61 (4), 329-346.

DeNeve, J., D. Ward, G. Keulenaer, B. van Landeghem, G. Kavetsos, and M. Norton (2018). “The Asymmetric Experience of Positive and Negative Economic Growth: Global Evidence Using Subjective Well-Being Data,” Review of Economic Statistics: 100 (2), 362-375.

External links



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