The Paradox of Happiness



Economists tend to bang on about how great economic growth is- the theory being that as income rises everyone gets more stuff and everyone gets happier. But a new branch of economic research is challenging the primacy of growth (the research is so fresh and new, even Call me Dave is getting involved)

The "Paradox of Happiness" is a succinct expression of this challenge. The Paradox says that within a country at a point in time happiness varies directly with income, but over time happiness does not increase as a country’s income increases. Put another way, people are happier being at the top of the income distribution, but as
everyone in the distribution gets richer, no one gets appreciably happier (NB this result only applies to developed countries, developing countries behave differently).

The table below shows how people at the top of the distribution are happier than people at the bottom of the distribution. It also shows % of people in each happiness band stays relatively constant across generations, despite growth.

How happy are the Rich and the Poor? (USA Gallup poll data)


Top quartile (The Rich)

Bottom quartile (The Poor)


1975

1998

1975

1998

% Very happy

39

37

19

16

% Quite happy

53

57

51

53

% Not too happy

8

6

30

31

The graph below shows there is no direct relationship between proportion of people reporting themselves to be very happy and growth in GDP.


Two things explain the Paradox. Firstly, recalling my last post, I argued we are an envious bunch- every pound you earn makes me worse off, you wicked swine. So whilst we all get richer, we all get miserable at each other's wealth- offsetting the benefits of higher growth. Whilst the amount of material goods we can produce is potentially huge, the actual good that creates happiness is status- which is in fixed supply (only one dog can be the top dog, so if its being top dog that makes people happy, we have a problem)

Secondly, something called habituation.
Habituation is the process through which individuals adapt to new situations by changing their expectations. This adaptation implies that higher incomes are accompanied by rising expectations, such that higher incomes lead to only temporary or small increases in well-being. The evidence for this process is widespread. For example, Clark (1999) finds that job satisfaction in the UK is unaffected by the level of wages, and depends only on their rate of change- implying a strong negative effect of habituation coming from the lagged wage.

Taken together, income rivalry and habituation can explain why economic growth is not increasing the proportion of people who report themselves to be very happy.
These phenomena represent powerful challenges to economic orthodoxy.

Neoclassic stalwarts will complain:
i) you can't measure an individual's happiness
ii) you can't compare people's happiness (inter-personal comparisons are impossible)
iii) happiness economics sounds like something studied by sociologists, and sociologists should be ignored

I leave my response to the Neoclassic critique to a later post (you lucky things).



by Rational Man | Wednesday, February 27, 2008
| | The Paradox of Happiness @bluematterblogtwitter

3 comments:

  1. Gabriel Mihalache Says:

    Surveys? No, really.

    I think you saw this joke too:
    http://www.voxeu.org/index.php?q=node/910

    >> "Economists tend to bang on about how great economic growth is- the theory being that as income rises everyone gets more stuff and everyone gets happier."

    Eh... no. People are "better off", as in they'd rather be in the new state rather than the old, caeteris paribus.

    The economist's notion of "better off" is not Bentham's but rather Pareto's, Samuelson's and Varian's.

    But that does a Neoclassic stalwart like me knows?

    -- I won't claim that you can't compare *whatever* between people. I will claim that you can't compare it and aggregate it *in a scientific manner*.

    And yes, surveys are for sociologists. Comparative advantage, anyone?

  2. pushmedia1 Says:

    A third explanation is decreasing returns. If there's decreasing returns to income a upperly bounded measure (like these 1 to 5 or 1 to 10 happiness scales) will have a harder and harder time detecting increases in happiness as the marginal changes get smaller and smaller.

  3. Anonymous Says:

     

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