Easterlin paradox

What Is Easterlin Paradox?

The Easterlin paradox is a concept in behavioral economics that highlights a seemingly contradictory relationship between a nation's wealth and its citizens' reported happiness. It posits that while individuals within a country tend to be happier with higher income at a given point in time, the average happiness level of a country does not significantly increase over the long term, even as its economic growth and per capita Gross Domestic Product (GDP) rise substantially. This phenomenon suggests that beyond a certain point, increasing a society's overall material prosperity does not necessarily lead to a corresponding increase in collective subjective well-being.

History and Origin

The Easterlin paradox was first articulated in 1974 by American economist Richard Easterlin, then a professor at the University of Pennsylvania, in his seminal paper, "Does Economic Growth Improve the Human Lot? Some Empirical Evidence."²⁴, ²⁵, ²⁶ Easterlin was among the first economists to systematically analyze data on happiness and income. His initial findings were primarily based on data from the United States from 1946 to 1970, which showed that despite a significant increase in real income per capita, the average reported life satisfaction remained relatively flat.²³ This observation challenged the conventional economic assumption that higher income unequivocally leads to greater happiness. The paradox has since been examined across various developed, developing, and transitioning countries, with Easterlin and collaborators periodically reaffirming the long-term nil relationship between national income growth and happiness trends.²⁰, ²¹, ²²

Key Takeaways

• Cross-Sectional vs. Time-Series: At any given time, wealthier individuals within a country report higher happiness than poorer individuals. However, over long periods, national average happiness does not necessarily rise with increasing national income.¹⁹
• Relative Income Matters: A key explanation for the Easterlin paradox is the concept of social comparison. People's happiness is often more influenced by their income relative to others in their reference group rather than their absolute income.¹⁸
• Adaptation: Individuals tend to adapt to higher levels of purchasing power and material possessions over time, meaning that the initial boost in utility from increased income diminishes.¹⁷
• Non-Material Factors: The paradox suggests that factors beyond material wealth, such as health, social relationships, personal freedom, and environmental quality, play a crucial role in long-term subjective well-being.¹⁵, ¹⁶

Interpreting the Easterlin Paradox

Interpreting the Easterlin paradox involves understanding the distinction between short-term gains and long-term trends in happiness relative to economic prosperity. While a short-term increase in an individual's income can lead to a rise in their perceived well-being, this effect is often transient. As the overall standard of living in a society improves, people's aspirations and reference points also tend to rise.¹⁴ This means that what was considered a high income or comfortable lifestyle yesterday may become the new baseline today, muting the long-term happiness dividend from aggregate economic growth. The paradox implies that merely increasing a nation's wealth is not a sufficient public policy goal if the ultimate aim is to enhance overall societal happiness. It encourages a broader view of well-being that incorporates non-economic indicators.

Hypothetical Example

Consider two hypothetical countries, Alpha and Beta, that begin with similar average happiness levels and GDP per capita. Over a 30-year period, Country Alpha experiences significant and sustained economic development, with its GDP per capita tripling. Citizens in Alpha acquire more consumer goods, have access to more services, and their absolute incomes rise considerably. However, due to strong social comparison and hedonic adaptation, their reported average happiness levels show only a modest, if any, increase over these three decades. People compare their current economic status to their wealthier neighbors or to a rising societal norm, rather than to their own past. In contrast, Country Beta focuses its resources on improving social support systems, public health, and environmental quality, even with more modest economic growth. While individuals in Beta may not experience the same rapid increase in material wealth as those in Alpha, their average happiness levels might show a more significant or sustained improvement, aligning with the implications of the Easterlin paradox that non-pecuniary factors contribute substantially to well-being.

Practical Applications

The Easterlin paradox has significant practical applications in fields ranging from economic planning to public policy and even individual consumer behavior. For governments, it suggests that focusing solely on maximizing Gross Domestic Product might not lead to a happier populace. Instead, policymakers might consider investing in areas that foster non-material well-being, such as healthcare, education, social capital, and environmental sustainability. For example, some research suggests that the income-happiness correlation can be higher when income inequality is greater, implying that the distribution of wealth, not just its total amount, affects societal happiness.¹³ This perspective encourages a shift towards broader indicators of societal progress beyond purely economic metrics. For individuals, understanding the paradox can inform personal financial planning, highlighting that an endless pursuit of higher income may not yield commensurate increases in life satisfaction beyond a certain point. It underscores the importance of balancing financial goals with other life priorities that contribute to overall well-being.

Limitations and Criticisms

Despite its influence, the Easterlin paradox has faced considerable debate and criticism within behavioral economics and happiness economics. Some researchers argue that the paradox is a statistical artifact, suggesting that with more robust data sets and improved methodologies, a positive link between economic development and average subjective well-being can indeed be observed across countries and over time.¹¹, ¹² Critics, such as Betsey Stevenson and Justin Wolfers, have presented evidence asserting that richer countries are generally happier, and that as countries get richer, they tend to become happier, thus challenging the core tenet of the Easterlin paradox.⁹, ¹⁰

These critiques often point to potential issues with data comparability over long periods and the varying ways happiness and life satisfaction are measured.⁷, ⁸ Easterlin and his supporters, however, maintain that these observed positive correlations are often short-term fluctuations or cross-sectional comparisons, not sustained long-term trends, and that the fundamental finding of the paradox remains valid.⁵, ⁶ The ongoing discussion highlights the complexity of measuring happiness and the multifaceted nature of human well-being, which is influenced by numerous factors beyond just wealth accumulation or overcoming poverty.

Easterlin Paradox vs. Diminishing Marginal Utility of Income

While both the Easterlin paradox and the concept of diminishing marginal utility of income relate to income and happiness, they address different levels of analysis and implications.

The Easterlin paradox primarily focuses on the macroeconomic and long-term societal relationship between aggregate national income and average happiness. It posits that, over time, a country's overall increase in wealth does not necessarily lead to a proportional or sustained increase in the population's average happiness. This is often attributed to social comparison and hedonic adaptation, where rising incomes across the board change reference points and aspirations, negating the long-term aggregate happiness benefit.

In contrast, the diminishing marginal utility of income is a microeconomic principle related to an individual's utility or satisfaction derived from additional units of income. It states that each successive unit of income (e.g., an extra dollar) provides less additional satisfaction than the previous one. For instance, the first $10,000 earned by someone living in poverty brings a significant increase in well-being, allowing for basic needs to be met. However, for a high-income earner, an additional $10,000, while still beneficial, offers a smaller incremental increase in satisfaction. This principle applies at the individual level and explains why more money generally makes an individual happier, but at a decreasing rate. The Easterlin paradox essentially argues that while this individual diminishing utility holds, when applied across an entire growing society over time, the collective happiness doesn't simply sum up or linearly follow national income.

FAQs

Why is it called a "paradox"?

It's called a paradox because it presents a seemingly contradictory finding: while richer individuals are generally happier than poorer individuals at any given time, a nation's average happiness does not consistently increase over the long term as the nation becomes wealthier.⁴

Does the Easterlin paradox mean economic growth is bad?

No, the Easterlin paradox does not suggest that economic growth is bad. Instead, it implies that economic growth alone may not be sufficient to significantly improve overall societal happiness in the long run. It encourages a broader consideration of other factors, such as social well-being and environmental quality, as important components of a thriving society.

What are the main explanations for the Easterlin paradox?

The primary explanations include social comparison, where individuals compare their income to that of others, and hedonic adaptation, where people quickly adjust to higher living standards, causing the initial boost in happiness from increased income to fade over time.³ These factors can offset the positive effects of rising absolute incomes on long-term subjective well-being.

Is the Easterlin paradox universally accepted?

No, the Easterlin paradox is not universally accepted and has been the subject of ongoing academic debate. While Easterlin and his supporters maintain its validity based on long-term time-series data, other researchers have presented evidence challenging it, asserting that a positive link between economic development and average happiness can be observed, especially with more comprehensive data sets.¹, ²