Well-being, income and economics: why money does not buy happiness

Introduction

The main ideas within the mainstream economic academia, an overwhelming and dangerous group with notable influence in our lives, are beyond questionable. One of the many examples to support this view is found within the misinterpretation of the Easterlin Paradox, the idea that there is no evidence that income strongly correlates with happiness. The highly quoted 2013 paper submitted by Betsey Stevenson and Justin Wolfers challenges the findings of Easterlin after conducting statistical analysis and concluding that “the relationship between well-being and income is roughly liner-log and does not diminish as income rises”. This statement seems very complicated to understand for someone not familiar with mathematics or statistics but it is not. Behind high-technocracy hides the biggest fallacy.  It suggests that money does indeed buy happiness.

The aim of this post is plain and simple. To point out how simple it is to:

  • Show how the methodology used by mainstream economics is far from the scientific method.
  • Discredit a well-researched academic paper to (probably) sustain a certain ideology/position and offer a completely flawed and manipulated view (by means of a bad usage of mathematics) of the topic that, to my judgment, should be given a higher priority in the agendas of politicians and citizens worldwide. I am referring to the obsession with economic growth and the generalized social consensus that it should be pursued at all costs feeding the idea that money, powered by fossil fuels, can indeed be a substitute of happiness.

I encourage the reader to review the papers and interpret the results by taking a look at both the original Easterlin [1] and the Stevenson & Wolfers [2] work that can be found in the following links:

http://graphics8.nytimes.com/images/2008/04/16/business/Easterlin1974.pdf

http://www.brookings.edu/~/media/research/files/papers/2013/04/subjective%20well%20being%20income/subjective%20well%20being%20income.pdf

The more a person reads and researches the more interesting facts can one discover. The facts can be truly enriching and stimulate positive discussions or become severely misleading and keep the reader trapped in the limbo of delusion, self-defection or confusion. This is what I believe has been increasingly common in economic faculties worldwide since approximately the 70s and particularly with the rise of supply-side economics and the takeover by the neoclassical religious creed. The post-war years in the USA gave economics the once change to exorcise its ghost for the past and move on. Unfortunately that was not the case. Not only were the ghosts not exorcised but they were resurrected and sanctified in the name of the father, the son and the Holy Spirit, infinite economic growth.

Most population in the western world, and becoming increasingly adopted by the so called emerging countries, have a blind faith in the virtues of unlimited economic growth fostered by the general belief that technology can be a substitute for everything and that we need not worry for increasing pressure on a planet with finite resources and considerable climate change. Not surprisingly, there also seems to be an ever increasing need for more and more so that money is considered to be the mean to fulfill this dream. Is it true that money correlates with happiness? If so, what is the nature of this causal relationship? Why or why not would that be the case and what are the implications? Those are the questions that I will try to assess here by first exposing Easterlin’s article, then Stevenson and Wolfers and finally giving my own thoughts on the questions.

Easterlin: Does Economic Growth Improve the Human Lot? Some Empirical Evidence

Richard A. Easterlin, an engineer graduate who decided to engage in the world of economics, is responsible for one of the most fundamental concepts in economics known as the Easterlin paradox, as mentioned before. Easterlin’s paper raised a fundamental question. Does economic growth make us happier? To analyze this question he divided the paper in 5 parts:

  • He starts discussing the different connotations and meanings that the term happiness has in economics.
  • He discusses reasons in favor of objective and subjective happiness and decides that subjective can give better answers to the question while pointing out the underlying assumptions that might threaten the validity of results taking into account time-consistency issues, self-reporting biases including rationality and information omission, social pressure (social norm bias) and differences among social groups and countries due to expectations.
  • He seeks evidence by using survey methods based on subjective happiness that can be somehow be quantified and basic statistics are employed and acknowledges the limitations of carrying on such analysis. He takes cross-sectional data (at a point in time) for different social classes (rich, medium-class and poor) for within a country and for 13 selected countries and displays percentages on how happy is each group. See the two tables below which show the main results of the article.

Source: Easterlin’s paper

  • He gives an interpretation of the results by stating that there does not seem to be empirical evidence to support the idea that higher growth brings up higher happiness and that this is particularly true for the comparison among countries. Where the relation seems to hold (within the US) he also casts some doubt by giving a relative income interpretation deeply rooted in a psychological and social explanation of the problem. He argues (although no explicitly) in favor of the idea that past a certain point what really matters is how is you compare with regard to other people, your closest people.
  • He summarizes and remarks that “the formation of aspirations might be subject to substantial manipulation by the business system” and that this manipulation might enhance the idea of ever increasing growth by deterring a possible state of satiation (people always want more and more). He does not argue for anti-growth or steady state policies but suggests that more research concerning “the nature and causes of human welfare” by questioning policies aimed at growth per se. I understand that as an invitation to psychologists, sociologists as well as for the rest social sciences.

Stevenson & Wolfers: Subjective Well-Being and Income: Is There Any Evidence of Satiation?

Steven and Wolfers paper attempt to challenge the idea of Easterlin and claim that “the increasing average income did not raise well-being” and by “analyzing multiple datasets, multiple definitions of basic needs and multiple questions about well-being, we find no support for this claim”. The paper is divided in 4 parts:

  • The introduction clearly states their findings. The authors find no evidence that income stops correlating with happiness even after a certain point and negating that there is such a satiation point where humans stop claiming ever increasing affluence.The first part develops a cross-country analysis such us that of Mr. Easterlin in a much more elegant way by developing an OLS regression estimate which attempts at capturing the causal effect that GDP has on happiness (well-being, on the authors’ terms). The OLS regression is a very limited statistical method used that has been popularized by its simplicity in usage but with severe limitations[3].
  • The first part develops a cross-country analysis such us that of Mr. Easterlin in a much more elegant way by developing an OLS regression estimate which attempts at capturing the causal effect that GDP has on happiness (well-being, on the authors’ terms). The OLS regression is a very limited statistical method used that has been popularized by its simplicity in usage but with severe limitations[3].

  • The second part develops a within country cross-sectional comparison of the effects of household income on happiness by taking as reference the Gallup poll used by Easterlin (click here for more information http://www.gallup.com/poll/101905/Gallup-Poll.aspx) as well and makes use of another OLS regression model. In both 2) and 3) the conclusions are the same. There is no evidence supporting any of Easterlin’s thoughts

  • The paper concludes by stating that “while the idea that there is some critical level of income beyond which income no longer impacts well-being is intuitively appealing, it is at odds with the data” and that “We are intrigued by the findings of Kahneman and Deaton and we are intrigued by these findings although we conclude by noting that they are based on very different measures of well-being, and so they are not necessarily in tension with our results.

Analysis

The authors’ rhetoric should not be applauded for the elegance in their mathematical analysis and should not be confused with empirical evidence and relevance. The main problems, to my judgment, of such biased interpretation can be summarized as follows:

  • A fundamental problem with understanding the exponential function. The x axis which accounts for different ways of measuring income is on a log scale while the y axis accounting for a subjective measure of happiness is on a linear scale. If income was plotted on a linear scale the result would most likely be a typical logarithmic function (see graph below) with a pick in happiness after a certain income. It is very interesting to see how the some media deliberately presents the result in a way that the reader might very easily oversee this very important detail[4]-

The argument that I have heard so far of why income should be presented on a log scale (maybe there are other arguments) is because “people consider changes to their income proportionately to their current income (for example, a 5% raise to someone making 1M dollars a year is about as significant to his life as a 5% raise for someone making 100k, even though the actual additive amounts are very different)”. This is an assumption, not a fact that, and I am very convinced it does not hold in practice. It seems that some economists have confused mathematical elegance with science (one only needs to compare one article, which uses simple graphs to develop a very simple idea with the econometrics that the other paper uses). Some thoughts by Albert Bartlett are worth noticing [5]. See http://www.youtube.com/watch?v=e_VpyoAXpA8

  • The authors of the article misinterpret Easterlin results (deliberately or no) and do not proof absolutely anything against his point. Earterlin does not point out that “increased income does not raise average well-being”. He just doubts it happens, particularly for higher levels of income with a well-researched paper and examining several assumptions. You might agree or not with his points but the latest authors don’t discuss anything, they simply assume. Furthermore, Easterlin argues that there is no evidence of satiation and discusses what that reason might be (psychological, of expectations, arguing that expectations of economic growth might involve ever increasing expectations of growth, no satiation). He makes a very important point, that after all what might matter is relative income, that is, not so much what you earn but how does it compare with your family, circle of friends and society. Stevenson and Wolfers go to the same point (even if they are claiming that they are not) to apparently justify the idea that sustained growth and money equals well-being.
  • Even in if this causal effect would hold – a linear or exponential effect of income on happiness – we should still be wondering why. Is happiness something that a person decides by herself, bringing it to an oversimplistic reductionist view, or have aspirations been influenced by social manipulation by means of the business system, as explained on the article? Omitting answering to this question is very consistent with the principle of methodological individualism which is the framework in which neoclassical economists have been operating by negating a macroeconomics holistic (even conventional macroeconomics is highly mixed and dependent on microeconomic analysis).
  • After all it might be not so relevant weather or not more money means more happiness since there are boundaries, biophysical limits to everything, and those limits might have been achieved already [6]. When I mean everything I mean everything, the material world. That is consistent with complex system thinking, with how some ecologists, physicists, biologists… (Those that have resisted the temptation of the business-orientated way of thinking) see the world. This is a world that acknowledges some fundamental laws that apply to how we perceive it, at least so far, like thermodynamics, and that does not reduce things to the individual level but sees it from a bigger picture such as the holistic idea of the emerging properties in ecology.

Going back to Easterlin’s paper, one can agree or disagree with the results. I am particularly in agreement with the fundamental message and with the idea that it is not only as valid as it was on the 70s but much more given the current circumstances of global crisis and slow or 0 economic growth, even though I disagree with some interpretations of the assumptions and the omission of others. However, one cannot argue that he makes an effort to discuss the validity of the approach and its underlying assumptions. Easterlin uses the scientific method, something that most economists seem to have forgotten. He starts by trying to define the fundamental term he is going to analyses, happiness, and puts on the table a wide set of assumptions, under which conditions they hold or don’t and what are the implications. He still omits some fundamental ones, those related to biophysical limits to growth by taking into account absolute scarcity of resources (the fact that we live on a finite planet). Then he goes to empirical evidence and attempts at testing his hypothesis. Stevenson and Wolfers do neither. They simply take a set of assumptions for granted, both at the social, psychological and biophysical level. Henry L. Ellsworth, as mentioned on the last page of Easterlin’s article, is a beautiful metaphor of this fact when he predicted in 1843 that

Electricity and machinery would so transform life that fifty years ever after men and women will then have no harassing cares, or laborious duties to fulfill. Machinery will perform all work –automata will direct them. The only task of the human race will be to make love, study and be happy”.

Well, after nearly 200 years I don’t think this is the case. As absurd as this statement might sound I believe that this idea is truly shared among the general population. It appears that the internet revolution will change the way we perceive the world indefinitely and that we will become mere exchangers of bits. Even some critics with the mainstream paradigm spread this false idea that we will be able to operate at the 0 energy input level [7]. This is in fact so true that if I were to ask the most basic tasks of survival among people (how to farm, hunt or put up a fire) most of us would fail to even attempt at coming up with an answer. This disconnectedness with the natural world is a consequence of a very general misinterpretation of history and lack of rigorous empirical analysis. One can only wonder how we reached such state of self-defection. This disembeddednes, as Karl Polanyi would put it, is being perpetuated by the artificial idea that technology can act as substitute for everything and that innovation and human creativity will lead us beyond St. Peter’s Gate. Economists such as Robert Solow, have claimed that natural resources can indeed by substituted by any form of capital. His very elegant model (irony intended) takes up 3 months of our lives in advance macroeconomic courses taking place in most economic faculties.

The same reasoning can be applied to the criticism towards the Easterlin paradox and, I would dare to say, to the economic profession in general. The general accepted view of the human nature in economics is shown by the paradigm of the Homo Economicus, a rational man with limited means but unlimited wants which is framed as a perfectly rational problem-solver that computes with regard to his utility. Utility is used as proxy for satisfaction or happiness and can be computed by allocating an arbitrary number to it. It is yet to be seen evidence supporting such behavior in humans as Albert Rodríguez explained in his last post in Pompeunomics [8].

Summary

Money is nothing but a proxy value for energy. You have more money you buy more energy. You can buy more kcal to spend on food, on the last generation car or on others. Happiness it is a subjective quality of humans and any attempt to estimate it will always fall short. However, it seems quite reasonable to think that:

  • For the most basic activities. Food, shelter and health money is definitely a good proxy. Add to that a bit of social entertainment and education and beyond that psychological and cultural expectations come in place.
  • It is important how you spend your money and spending it on others might be a good point as Michael Norton shares on Ted [9]. Not only quantity but quality matters. It is not the same spending your money on insecticidal nets for malaria than on a 10o€ gift voucher in your favorite commercial center.
  • Money as we know will become increasingly scare in this century, ergo, the sooner we overcome the obsession with money the better.

Attempts to discredit Easterlin work do not seem credible to me so far.  In fact his thoughts on this paper are becoming more and more relevant even though he only accounts for the psychological and social issues. Once physical limits are taken into account as well the concept becomes even more powerful. Society and particularly young people need to understand the massive implications of the Easterlin paradox and get over this obsession with economic growth and excess. We should start thinking of new ideas, new ways of coping with the current state of the world, accepting boundaries, minimizing social injustices while enhancing cooperation and overcoming a 24/7 dependence on money to purchase bigger houses and bigger, cars as Nobel Prize Elinor Ostrom laid out when assessing the tragedy of the commons paradox. [10] We should be discussing what kind of technology is best considering our most immediate future is at stake instead of becoming increasingly dependent on high-tech which creates dependence and unrealistic expectations. It is yet to be seen evidence supporting such behavior in humans as Albert Rodríguez explained in his last post

There is urgency in proposing new policies that would tackle the problem. Ways to deal with overpopulation, much stricter caps on production and consumption rates, energy-saving and better waste treatment policies, and a call for the right redistribution policies, all within institutional and cultural change are needed, among other measures, ASAP. Those will not be discussed in this post but the truth is that once one proposes such measures one is either ignored, treated as nerd/idealist or is accused of being a neomalthusian, a Luddite or a peak-oiler fanatic. Why can’t we create different scenarios for a steady state o degrowth economy if we acknowledge that popular claims by mainstream economists are so wrong? Is it too late so that we have reached a Rubicon with catastrophic and unimaginable consequences in this XXI century? And the most important want… When will people break the vicious circle of self-defection and dare to get out of the comfort zone and start worrying by what is really important?

This article was just an attempt to try to explain that young economist need to go back a few decades, even centuries, to confront today’s problems. The new International Student Initiative for Pluralistic Economics gives us a first glimpse of where things should start going in universities. The best start would be to start looking at ourselves. What are we investing our time in? What is the purpose of graduating in Economics? Did it meet our expectations? What were those expectations and their foundations?

References

  • [1]      R. A. Easterlin, “Does Economic Growth Improve the Human Lot? Some Empirical Evidence.,” New York Acad. Press, vol. Nations an, pp. 89–125.
  • [2]      B. Stevenson and J. Wolfers, “Subjective Well‐Being and Income: Is There Any Evidence of Satiation?,” Econ. Rev., 2013.
  • [3]      A. D. Freeman, “Limits of Econometrics,” Econom. Rev., vol. 1, pp. 5–17, 2009.
  • [4]      D. Thompson, “Yes, Money Does Buy Happiness: 6 Lessons from the Newest Research on Income and Well-Being,” The Atlantic, 2013.
  • [5]      A. A. Bartlett, Arithmetic, Population and Energy. 2012.
  • [6]      D. H. Meadows, J. Randers, and D. L. Meadows, Limits to Growth: The 30-Year Update, Edition, 3. Chelsea Green Publishing, 2004, p. 338.
  • [7]      “Capitalism is Making Way for the Age of Free,” The Guardian, 2014.
  • [8]      A. Rodríguez, “L’homo Economicus vs. L’homo Sapiens: el paper de les emocions en la presa de decisions,” Pompeunomics, Barcelona, 2014.
  • [9]      M. Norton, “How To Buy Happiness,” TED, Canada, 2011.
  • [10]    E. Ostrom and F. Korten, “No Panaceas! Elinor Ostrom Talks with Fran Korten,” YES Magazine, 2010.

Autor: Roger Carles, graduat en Administració i Direcció d’Empreses per la Universitat Pompeu Fabra i col·laborador de Pompeunomics

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