A bit more on the economics of happiness

I was discussing the economics of happiness with my son, and in particular the Easterlin paradox. Within a given country, people with higher incomes are more likely to report being happy. However, in international comparisons, the average reported level of happiness does not vary much with national income per person, at least for countries with income sufficient to meet basic needs. The same is true over time – average happiness levels don’t change much even as incomes rise.

This is often taken to mean that it’s relative rather than absolute income that determines happiness, so an increase in everyone’s income won’t make anyone happier. Hence, we shouldn’t worry so much about increasing income, but should focus more on factors likely to contribute to happiness. The point that struck me was that, given Easterlin’s data, the paradox is almost certain to apply whatever potential source of happiness we consider, in one form or another.

Let’s consider religious belief, for example and suppose that, in national surveys religious belief is correlated with (self-reported) happiness. But we know that countries differ widely in religiosity and not much in average happiness, so presumably it’s relative religiosity that makes you happy. In Australia, perhaps, going to church at Christmas and Easter is enough, while in the US maybe you have to go every week and pray daily as well. And of course, proselytising is a zero-sum game, since every convert reduces the relative religiosity of existing believers.

Of course, there may be sources of happiness for which there isn’t much variation across countries or over time, so that the generalized Easterlin paradox doesn’t apply. But if something has been observed to be constant across countries and over time (even though people have a very good reason to want more of it), it seems likely that it’s hard to change.

Overall, this leads me to think that the main implication from the happiness research program is one of stoic acceptance of the world as it is. Not being much of a stoic, I tend to the view that we should promote improvements in health, wealth and other good things, and let people take care of their own happiness. As Spike Milligan didn’t quite say “Money can’t buy you happiness, but it does buy a better class of unhappiness”.

32 thoughts on “A bit more on the economics of happiness

  1. Paul @ 22; while there no longer seems to be a paradox, it’s important to note the logarithmic scale of those graphs. A log linear relationship means that, if I am a millionaire, it would take another $9 million to increase my happiness by the same extent as increasing someone else’s wealth from $100 to $1000 would do. If we want to maximise happiness, there’s still an argument for highly redistributive taxation there.

  2. That is a damned good qualifier James Houghton. It puts the correct complexion on these ridiculous CEO salary packages.

  3. Just remember, happiness can’t buy you money.

    As for trying to maximise happiness by progressive taxation, it makes more sense to use regressive taxation whereby only a small group pay taxes at all. It gets the maximum number ahead of the misery point, at the point of making a few very miserable.

  4. P.M. Lawrence, isn’t the normal definition of regressive taxation a tax that affects the poor more than the rich? e.g. the GST (or carbon taxes, for that matter). I don’t understand your point.

  5. Have you read Stevenson and Wolfers (NBER working paper 14282)? I’m not an expert on the literature, but they make a pretty good case that income has a diminishing but positive effect on happiness over the whole range we have data on – crudely happiness = log(income) rather than happiness = a if income > b. They claim that the US postwar experience is an outlier.

  6. JH, if you have a regressive tax you will increase the total misery, but by making a few people very miserable. You have a better chance of a greater number not being miserable.

  7. So if happiness, H is proportional to ln(I) where I is income then the rate of change of happiness is proportional to 1/I. Since your income (which can be negative) is in fact the change in your wealth, is happiness then inversely proportional to your wealth?

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