In the aftermath of World War II, the Japanese economy went through one of the greatest booms the world has ever known. From 1950 to 1970, the economy’s output per person grew more than sevenfold. Japan, in just a few decades, remade itself from a war-torn country into one of the richest nations on earth.
Yet, strangely, Japanese citizens didn’t seem to become any more satisfied with their lives. According to one poll, the percentage of people who gave the most positive possible answer about their life satisfaction actually fell from the late 1950s to the early 1970s. They were richer, but apparently no happier.
Illustration: Jayachandran/ Mint
This contrast became the most famous example of a theory known as the Easterlin paradox. In 1974, Richard Easterlin, then an economist at the University of Pennsylvania, published a study in which he argued that economic growth didn’t necessarily lead to more satisfaction.
People in poor countries, not surprisingly, did become happier once they could afford basic necessities. But beyond that, further gains simply seemed to reset the bar. To put it in today’s terms, owning an iPod doesn’t make you happier, because you then want an iPod Touch. Relative income—how much you make compared with others around you —mattered far more than absolute income, Easterlin wrote.
The paradox quickly became a social science classic, cited in academic journals and the popular media. It tapped into a near-spiritual human instinct to believe that money can’t buy happiness.
But now the Easterlin paradox is under attack.
This month, at the Brookings Institution in Washington, two young economists—from the University of Pennsylvania, as it happens—presented a rebuttal of the paradox.
In the paper, Betsey Stevenson and Justin Wolfers argue that money indeed tends to bring happiness, even if it doesn’t guarantee it. They point out that in the 34 years since Easterlin published his paper, an explosion of public opinion surveys has allowed for a better look at the question. “The central message,” Stevenson said, “is that income does matter”.
If anything, Stevenson and Wolfers say, absolute income seems to matter more than relative income. In the US, about 90% of people in households making at least $250,000 a year called themselves “very happy” in a recent Gallup Poll. In households with income below $30,000, only 42% of people gave that answer. But the international polling data suggests that the under-$30,000 crowd might not be happier if they lived in a poorer country.
Even the Japanese anomaly isn’t quite what it first seems to be. Stevenson and Wolfers dug into those old government surveys and discovered that the question had changed over the years. In the late 1950s and early 1960s, the most positive answer the pollsters offered was, “Although I am not innumerably satisfied, I am generally satisfied with life now.” But in 1964, the most positive answer became simply, “Completely satisfied.” It is no wonder, then, that the percentage of people giving this answer fell.
To put the new research into context, I called Daniel Kahneman, a Princeton psychologist who shared the 2002 Nobel Prize in economics. He has spent his career skewering economists for their belief that money is everything and has himself written about the “aspiration treadmill” at the heart of the Easterlin paradox.
Yet, Kahneman said he found the Stevenson-Wolfers paper to be “quite compelling”. He added, “There is just a vast amount of accumulating evidence that the Easterlin paradox may not exist.”
I then called Easterlin, who’s now at the University of Southern California and who had received a copy of the paper from Stevenson and Wolfers. He agreed that people in richer countries are more satisfied. But he’s sceptical that their wealth is causing their satisfaction. The results could instead reflect cultural differences in how people respond to poll questions, he said.
He would be more persuaded, he continued, if satisfaction had clearly risen in individual countries as they grew richer. In some, it has. But in others—notably the US and China —it has not.
“Everybody wants to show the Easterlin paradox doesn’t hold up,” he told me. “And I’m perfectly willing to believe it doesn’t hold up. But I’d like to see an informed analysis that shows that.” He said he liked Stevenson and Wolfers personally, but he thought they had put out “a very rough draft without sufficient evidence”.
They, in turn, acknowledge that the data on individual countries over time is messy. But they note that satisfaction has risen in eight of the 10 European countries for which there is polling back to 1970. It has also risen in Japan. And, a big reason it may not have risen in the US is that the hourly pay of most workers has not grown much recently.
So, where does all this leave us?
Economic growth, by itself, certainly isn’t enough to guarantee people’s well-being—which is Easterlin’s great contribution to economics. In the US, for instance, some big health care problems, such as poor basic treatment of heart disease, don’t stem from a lack of sufficient resources. Recent research has also found that some of the things that make people happiest—short commutes, time spent with friends—have little to do with higher incomes.
But, it would be a mistake to take this argument too far. The fact remains that economic growth doesn’t just make countries richer in superficially materialistic ways.
Economic growth can also pay for investments in scientific research that lead to longer, healthier lives. It can allow trips to see relatives not seen in years or places never visited. When you’re richer, you can decide to work less—and spend more time with your friends.
Affluence is a pretty good deal.
©2008/The New York Times
David Leonhardt is a New York Times columnist. Comment at email@example.com