Thought du Jour

There is a simple explanation for the ‘Easterlin Paradox’, so it is no longer a paradox.

Direct survey measures of happiness have grabbed attention because of the ‘Easterlin Paradox’: within any country, richer people claim to be happier than do poorer people, on a scale of 1 to 3 or 1 to 5. But the average level of happiness does not rise in proportion with GDP per capita after a level of around $17,000 a year has been reached, either comparing countries at any point in time, or in one country over time. This has been translated into the received wisdom that higher GDP doesn’t make us happier. ….

But this supposed fact rests on a statistical error. Measured happiness can never go above 3 – and it’s at about 2.6 now in the UK. That’s because it comes from a survey – and anyway, happiness isn’t a boundless concept: how could we go beyond euphoria? GDP is a statistical construction that can rise without limit (it’s a non-stationary time series). To expect happiness to go up at the same pace as GDP is like expecting height to rise in line with economic growth. There is a link – people are taller in richer countries. But not 8 metres tall. A growing number of economists have pointed out this error – for example Helen Johns and Paul Ormerod in their book Happiness, Economics and Public Policy; and recently Betsey Stevenson and Justin Wolfers in a recent paper Economic Growth and Subjective Well-being. When you take the logarithm of GDP to deal correctly with the nature of the data, there’s a strong positive link.

Diane Coyle, “Sense and nonsense about happiness“, The Enlightened Economist, 25 November 2010.

British economist Diane Coyle (born 1961) is a prolific writer who also teaches at the University of Manchester’s Institute for Political and Economic Governance. Her latest book, The Economics of Enough: How to Run the Economy as If the Future Matters (Princeton University Press, 2011) has received rave reviews. A copy is on my desk, and I look forward to reading it. I will also be reading more of Ms Coyle’s blog entries, and will flag those of particular interest (to me, at least!) for future thoughts du jour.

Tags: happiness

This entry was posted on Saturday, May 14th, 2011 at 07:49 and is filed under Development Economics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.