The Pursuit of Happiness: A Look Into Happiness in Economics and the Easterlin Paradox

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When I first became interested in economics, I really wanted a way to help others. I firmly believed that poverty was the greatest problem humanity faced in the 21st century, and that humans could live happily ever after if only it were eradicated. I thought the answers to all my questions resided within economics: the secret to happiness. However, I hadn’t realized I was thinking too small. Poverty definitely still exists, and it exists everywhere. Poverty strips one of their place in the world and their sense of self. However, it does not purely reside in the physical realm. Poverty of spirit, of love, of joy - all of these are a malaise on the fullness and totality of the human experience. Economics has always focused on the physical form of poverty but never the experiential form of it. The field has pushed aside happiness.

Happiness in Motion

There has always been debate regarding what constitutes happiness. In 1759, Adam Smith published his Theory of Moral Sentiments which touched greatly upon well-being. “Wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquility of mind than the tweezer-cases of the lover of toys,” he writes. To classical economic thinkers, wealth was the instrument that facilitated well-being and happiness. The accumulation of wealth was expected because people sought ways to increase their prospects for happiness. Nevertheless, the philosophical separation of happiness and wealth posed an the challenge of measurement

As a field obsessed with tools and models, subjective measures were seen as problematic by many economists. At the end of the 18th century, Jeremy Bentham tackled this exact issue. Viewing happiness as the realm of an individual’s perceptions, he argued that economists should seek to measure the pleasures and pains of life in his so-called “felicific calculus”. Building upon these ideas, early 19th century economists such as Leon Walras and Stanley Jevons consolidated the role of happiness in economics as no longer purely separate from the realm of wealth, but a crucial factor in measuring value.

Utility as a catch-all term for value, and its inherent connection with the human pursuit of happiness, was foundational for the economic tradition of the upcoming centuries. In fact, Alfred Marshall built upon price as an indicator of utility in creating the economic models used to assess market equilibriums. Yet, there was still an issue of transferring the benefits of wealth into well-being. He writes in his Principles of Economics (1890), “and this again compels us to examine how far the exchange value of any element of wealth, whether in collective or individual use, represents accurately the addition which it makes to happiness and wellbeing.”

If utility was a proxy for happiness and price a proxy for utility, many economists chose to focus on what was easily and objectively observable: price. In the early 20th century, economists such as Irving Fisher and Wilfred Pareto proposed using an ordinal ranking of preferences to explain economic decisions, completely avoiding the subjectivity present in happiness. Choices became the new focus of economics, further abstracting the why behind everyday decisions into prices, bundles, markets, and other increasingly esoteric concepts.

It’s not that economists ignored the value of happiness in general, they just believed that their science shouldn’t concern itself with vague measurements when prices clearly indicated (through observation) what people valued anyway. Nevertheless, this shift in focus made it very difficult for economics to directly answer how wealth, production, and consumption decisions affected well-being. In this way, it can be said that economic thought bypassed the separation of wealth and happiness by only focusing on wealth while claiming well-being would resultantly improve.

That is not to say there aren’t good reasons for thinking so. The classical conception of wealth as a vehicle for happiness would agree with a utility theory of value: an increase in wealth would enable more happiness. Increasing income would give people more options, more ways to achieve happiness, and more avenues for pleasure. The prominence of GDP as the measure for how well a country is doing is merely an application of these aforementioned principles on a national scale. Simon Kuznets would pioneer the national accounting system in 1937, which was adopted as the method for calculating the aggregate availability and exchange of goods and services. Yet even he understood that “the welfare of a nation can scarcely be inferred from a measurement of national income.” This just goes to show that, philosophically, nothing had truly changed. However, the methods, tools, and focus of economics had shifted away from a direct observation of well-being towards analyzing decisions, preferences, and markets as a proxy for how people sought their own well-being.

A Paradox in Pursuit

Many economists saw the inherent limitations with this approach and decided to directly observe what had been considered too subjective for the field. In 1973, Richard Easterlin (a pupil of Simon Kuznets) used data collected by Hadley Cantril and the Gallup Company to scientifically answer if money brought happiness. While the research itself was important to the shift in economic thinking of the era, the conclusion Easterlin came to was ground-breaking.

Money didn’t bring happiness, at least not in the long-run. In the short-term, in one specific time frame and location, an increase in income was correlated with happiness. However, when observing happiness across time and regions, income did not have any strong correlation with happiness. This research opened the possibilities of not only what economists could measure, but what the entire field of economics could be. Not just a study of ordinal preferences and utility a priori, but of the real, subjective, human experiences of people aimed at ultimately uplifting the well-being and circumstances of everyone.

The question posed by the Easterlin Paradox has been explained in many different and unique ways. One prominent explanation for the paradox is the idea of reference levels and social comparison. People judge themselves and set their standards based on the observations they have of other people. They set reference levels about their life and their satisfaction based on others. In the short run, people who increase their income become happier because they see themselves lifted above their peers. In the long run however, their new peers are just as rich as they are so the effect of the increased income diminishes. Thus because of our psychological quirks, we always view our own happiness relative to others.

Another perspective to the paradox is the idea of the marginal utility of income. Angus Deaton and Daniel Kahneman found in 2010 that income had diminishing returns to well-being once it had passed $75,000 USD. This direction of theory has been taken by others to suggest that for low-income countries, the paradox does not hold. While there are definitely stronger correlations between income and happiness in low-income countries, the increase in happiness that one would expect does not systematically increase with growth in wealth. While not outright refutations of the argument, some research shows that there are much more complexities regarding these dynamics which may align with Easterlin’s conclusions..

The Economic Answer

Economics tells us that it is not material goods that bring us joy, but rather our perception of the things we already have. Our eyes are oftentimes the focus of our world. We live every moment from sight to sight, from distraction to distraction, without listening to any of the rest of ourselves. The eye growls far louder than the stomach. The human appetite for any physical thing is limited, it is rather the human greed for more than it needs that creates scarcity. At the end of the day, economics tells us that happiness is something we experience. We choose how we experience our circumstances. It is not up to any number in the sky to determine whether or not we are happy. The experience of ecstatic living comes freely to every person, so why squander that chance? Ultimately, we are responsible for our own happiness and I find that to be the most liberating truth of all. Our happiness isn’t reliant on anything besides ourselves.

Reading and Reference

The Economics of Happiness: How the Easterlin Paradox Transformed Our Understanding of Well-Being and Progress, Edited by Mariano Rojas, Published on 2019, Chapters 1,4,8 Economics, Wealth, and Happiness in Historical Perspective, Written by Luigino Bruni, Published on 2015 Beyond Economics: Happiness as a Standard in Our Personal Life and Politics, Written by Jan Ott, Published on 2020 Measuring Happiness: The Economics of Well-Being, Written by Joachim Weimann, Andreas Knabe, Ronnie Schöb, Published on 2015 The Easterlin Paradox, Written by Richard Easterlin and Kelsey J. O’Connor, Published on 2020