The Pursuit of Happiness: Understanding the Easterlin Paradox of Growth Economics

Happiness in India

What is happiness, really? In layman terms, happiness translates to satisfaction. Economists tend to relate happiness to the satisfaction of wants- fulfilment of desires through the consumption of goods and services that possess utility.  Economic thought has been built over the past centuries with the belief that human beings have unlimited wants and desires which in fact, can never be fulfilled. However, off late, Economists and Psychologists have discovered a disconnect between how we buy and spend- and what actually makes us feel better; feel satisfied. According to traditional economics, there is a correlation between greater income and greater happiness that prevails across cultures. But, it’s also a fact that more money in fact, has diminishing returns when it comes to our day-to-day happiness. ‘Trust’ is a contributory factor as well. When people perceive trust in business and government, happiness increases. Similarly, when people sense corruption in business and the government- happiness decreases. 
The ‘Happiness Index’ which is published every year is a development philosophy as well as an index used to measure the collective ‘happiness’ of a nation- in terms of quantitative economics. ‘The World Happiness Report’ is a comprehensive document that tries to measure this level of happiness by taking into factors like Housing, Income, Community, Education, Civic Engagement, Safety, Life Satisfaction and Life-Work Balance.
According to the latest World Happiness Index rankings, countries like the US, UK, Germany, Japan, China- some of the most developed and advanced economies of today- do not feature in the top 10. India, for instance – one of the fastest growing economies in the world with a growth rate of about 6.5% – is placed at 140, a drop by 7 places from 133 in 2018. Measuring ‘happiness’ in terms of numbers is a difficult task and there’s a complex methodology that’s used to come up with this index. That being said, what could possibly explain why nations like Bhutan (95), Bangladesh (125) and Pakistan (67) are ranked higher than India, in accordance to this index? Maybe, Richard Easterlin’s theory could shed some light onto this mystery. 
In Economics, what is the ‘Easterlin Paradox’? In short, it refers to the paradoxical relationship between the GDP growth of an economy and its happiness level. It is named after the American Economist, Richard Easterlin, who came up with this theory in his paper “Does Economic Growth Improve the Human Lot? Some Empirical Evidence” in 1971. Richard argued that an increase in the GDP numbers (growth and development of a nation) didn’t necessarily indicate that its citizens were moving towards being happier. This is because, he said, the marginal gain in happiness starts to decrease beyond a particular point. Few critics, however, have opposed this theory and stated that richer countries are usually happier than the poorer ones. Studies have found that the negative effects of unemployment are greater in high income countries. There’s also research showing that the happiness of middle-age people is more negatively affected by unemployment than older people. The loss of well-being due to unemployment is greater than can be explained by the immediate loss of a pay cheque. One explanation is that, unemployment makes people worried of not just paying the bills today but also the future. Have a look at the unemployment figures of India. Perhaps, it’s one of the leading causes of the 140 we’re at.  Economists have also found out that moving from a part-time job to a full-time job makes people happier. But the correlation between hours worked and happiness doesn’t continue up. The U-shaped curve of Labor Economics precisely explains this phenomenon. The Reference-Income Hypothesis also provides us with some valuable insight. It says that the satisfaction Mr. X gets from his or her income and consumption level depends on how the individual has been doing compared to everyone else around him. A study found out that Americans were happier when they lived in rich neighbourhoods in poor countries. The authors stated that, “It appears that individuals, in fact, are happier when they live among the poor, as long as the poor do not live too close.”  This is the idea that, status matters- maybe more than even absolute income! This leads us back to the Easterlin Paradox. 
Economic Growth has been at the center of Economic policy-making for years now. But maybe, income growth isn’t the best way to judge or assess the progress and growth of a society. A focus on GDP and growth might hide and even exacerbate issues like income inequality. In the 1970s, the King of Bhutan proclaimed that Gross National Happiness (GNH) is more important that Gross National Product. GNH focuses on the social, spiritual, environmental health of its citizens. In 2011, even the UN adopted a resolution which calls for its member states to give importance to the happiness factor of its citizens and their well-being when figuring out the track to social and economic development.  

How can Public Happiness be fixed? A Marxist revolt is an unlikely answer. There are no socialist dictatorships in the top ten happiest counties. Having said that the Scandinavian counties that tend to dominate happiness surveys are more likely to accept progressive fiscal policies (taxing and spending) because they trust governments to use public money to provide services that are in the national interest, for example, health and education. Trust is a two-edged sword. But “top-down” policy changes take time. In the meantime, there are “bottom-up” changes we can make right now that are known to increase happiness. (Desmond, 2018). 

Srideep Das
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Srideep has worked with Dr. Duke Ghosh at Global Change Research, on various projects including the Smart Cities Mission India. He has also worked with Dr. Luisa Cortesi (Yale University) during her research in India. Currently, he’s an International Master in Business student at SDA Bocconi. He is an Economics enthusiast.

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