Danjae’s Blog

New York Times, April 2008 - 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 ‘70s. They were richer but apparently no happier.

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 — matters 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. As a 2006 headline in The Financial Times said, “The Hippies were right all along about happiness”.

But now the Easterlin paradox is under attack.

Last week, at the Brookings Institution in Washington, two young economist — from the University of Pennsylvania, as it happens — presented a rebuttal of the paradox. Their paper has quickly captured the attention of top economists around the world. It has also led to a spirited response from Easterlin.

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 United States, about 90 per cent 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 percent 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.

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 ‘60s, 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. When you look only at the years in which the question remained the same, the share of people calling themselves “satisfied” or “completely satisfied” did rise.

Easterlin himself, who’s now at the University of Southern California and who had received a copy of the paper from Stevenson and Wolfers, 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.

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