The Easterlin Paradox

The Easterlin paradox is that Easterlin proposed a theory that explained some preliminary and inconclusive data in 1974. He then suggested that better data are needed. Now, more than 30 years later, better data are available and these data contradict his theory, but he continues to believe in his original theory.

In 1974, Richard Easterlin wrote an influential article on money and happiness. The article examined three questions.

1. Is a measure of money (income, SES) related to well-being measures (single-item global evaluations of life) in various surveys with national representative samples.
The answer was yes, in each and every data set the correlation was positive. Easterlin suggested that it mostly reflects a causal effect of money on wellbeing.

2. Are national averages of wealth (in terms of GDP) related to national averages of responses to wellbeing judgments (Cantril's ladder). The evidence was mixed, and limited by a small number of nations.

3. Are changes in nations' wealth over time correlated with changes in average levels of wellbeing judgments? Only data from the United States of America were available, and these data showed no significant correlation.

Easterlin proposes a plausible theory that was consistent with his findings, but he noted the limitations of his empirical evidence.
"The only sure conclusion is that we need more research on the nature and causes of human welfare." (Easterlin, 1974, p. 119).

In a 2003 article, Easterlin maintains his original theory formulated 30 years ago.
"An increase in income, and thus in the goods at one’s disposal, does not bring with it a lasting increase in happiness because of the negative effect on utility of hedonic adaptation and social comparison."

However, Easterlin fails to mention that the data on national differences in wellbeing have changed dramatically since his 1974 article appeared. Study after study shows strong positive correlations between nations' wealth and average life-satisfaction judgments. There is even evidence that some countries average judgment of wellbeing has increased with increasing wealth, and that East Germans report higher life-satisfaction now than at or before unification (Diener, Diener, & Diener, 1995; Diener & Oishi, 2000; Frijters, Haisken-DeNew et al. 2004; Hagerty & Veenhoven, 2003).

In a New York Times article, Easterlin rejects these findings as inconclusive. (Published: April 16, 2008 Economic Scene Maybe Money Does Buy Happiness After All)
"He agreed that people in richer countries are more satisfied. But he’s skeptical that their wealth is causing their satisfaction."

At this point, science has left the building. The fact remains that the new data are no longer consistent with Easterlin's theory that explained the old data. Easterlin introduces an ad-hoc explanation to rescue the theory and claims, without any scientific evidence, that the correlation between income and wellbeing judgments in the new data is due to response biases in life-satisfaction judgments.

"The results could instead reflect cultural differences in how people respond to poll questions, he said."

In other words, people in rich countries say that they are happier, but they are actually not. However, it is equally possible that response biases masked the true correlation between nations' wealth and wellbeing in his old data, and that a larger sample of nations and improved survey methodology were needed to reveal the true correlation between wealth and wellbeing. Additional evidence is needed to settle this issue.

The only sure conclusion that we can reach is that the new data on nations' wealth and nations' average level of wellbeing judgments are no longer consistent with Easterlin's old data and his old theory. Maybe it is time to revise the theory?

As suggested by Kahneman in the New York Times article, “There is just a vast amount of accumulating evidence that the Easterlin paradox may not exist.”

In conclusion, the main solid empirical fact is that, contrary to Easterlin's 1974 findings and theory, nations' average level of wealth is a strong predictor of nations' average self-rated wellbeing. Easterlin's theory is inconsistent with this finding.