Does the Easterlin paradox legitimize the implementation of degrowth policies in developed nations?

Seminar Paper 2014 24 Pages

Business economics - Miscellaneous


Table of Content

1. Introduction

2. Economic growth and happiness
2.1 Happiness
2.2 The Easterlin paradox
2.2.1 Within-country comparisons
2.2.2 Cross-country comparisons
2.2.3 Time-series data
2.2.4 Conclusion
2.3 Social comparison and relative income hypothesis
2.4 Adaptation effect and hedonic treadmill
2.5 Conclusion

3. Alternatives to the neoclassical growth paradigm
3.1 Neoclassical economics and the growth model
3.2 Jevon's paradox and uneconomic growth
3.3 Dematerialization and decoupling
3.4 Economic degrowth, developed nations and policy implications

4. Degrowth policy and prosperity
4.1 Government and policy
4.2 Feasibility of degrowth and social change
4.3 Normativity, sustainability accounts and institutions

5. Conclusion

6. Bibliography

7. Other sources

1. Introduction

“Every day, in every industrialized country of the world, journalists and politicians give out a conscious and unconscious message. It is that better economic performance means more happiness for a nation. This idea is rarely questioned. We feel we would be more cheery if our boss raised our pay, and assume that countries must be roughly the same. The results in this paper suggest that, in a developed nation, economic progress buys only a small amount of extra happiness.“ (Oswald 1997, p. 1827) Based on Oswald's introductory statement, this paper is going further than refuting the assumption that a certain kind of utility is solely contingent on absolute earnings. With the interpretation of utility as happiness, it would mean for the aggregate economy as well as for the individual that income secures happiness with a rising tendency. Having started with Oswald, another economist with well-known findings has to be made mention of: Richard Easterlin, who constructed the hypothesis that from a certain threshold of developmental achievements on, economic growth is of minor significance to the overall life satisfaction of a nation. The so-called Easterlin paradox originally arose as data on richer citizens within a country displayed a higher level of subjective well-being and led to the assumption that “economic growth improve[s] the human lot” (Easterlin 1974). Nevertheless, a comparison amongst well-developed states and over time revealed that there's little difference of each population with regard to happiness. Thus, it appears that not the absolute but relative wealth is of import to life satisfaction in cross­individual and cross-stratum comparisons. Even though it never gained as much attention as its foreshadowing counterpart by Easterlin, the phenomenon is also denoted as the “relative deprivation theory” (Oswald 1999, p. 360), pointing out the state of deprived happiness poorer individuals in a society suffer.

But if money cannot buy happiness, what then determines individual well-being? A further facet of the paradox becomes evident when the common striving for increasing financial remuneration, only compensated by decreasingly more welfare (decreasing marginal utility), is taken into account: as no additional, substantial happiness can be drawn from bigger amounts of money, both the personal and the widespread policy pursuit of continuous economic progress in developed nations begs the question, whether alternative yardsticks and agendas might serve the idea of a satisfied life better. “The typical individual has a utility or happiness function such that well-being depends on a variety of pecuniary and non-pecuniary conditions.” (Easterlin 2005, p. 51) The failure of the growth tradition to continuously advance happiness allows to join the contemporary discussion in degrowth economics, also coined as green, steady state economics and various other terms, in which the promotion of ecological and social goals is attached priority to over any key performance indicator. Although solid empirical evidence is sparse, subjective elicitations indicate that above a minimum of economic necessities, qualitative life aspects like family, health and work in private (Easterlin 2006), as well as a social security net (Easterlin 2013) and sustaining goods of intrinsic, i.e. the environment, and relational value, i.e. social ties (Jackson 2009) are perceived to be worthwhile enrichments governments ought to advocate. On this basis, policy recommendations are put to the test with respect to their practical adequacy. As the subject undeniably emerged only recently, the lack of data hinders extensive analysis and philosophical approaches have been rare.

Under which circumstances can a correlation between economic growth on the macro level or rise in income on the micro level and happiness be found? If the Easterlin paradox doesn't pertain, is growth in economic terms still worth striving for? Are there alternatives for developed nations to escape the growth paradigm? And ascribing the government the role of the ultimate arbiter, how excludable and rival can policies in the debate for degrowth be when it comes to the satiation of all possible civic needs? Can the implementation of degrowth measures be beneficiary for society as a whole at its current state? In the light of a growing popularity for sustainability research and interfaces, scientists start to oppose scenarios of a world with continuing growth and degrowth. However, the feasibility of such won't be of decisive import here. Policy­making in favour of degrowth and in pursuit of national prosperity is less a matter of materialized empiricism, but of philosophical reflection.

2. Economic growth and happiness

2.1 Happiness

With the purpose to visualize the potential relationship between economic growth and happiness, the terminology in use needs to be clarified. What is happiness, how is it measured and compared? Is the state, i.e. government, obliged to maximize it, and how?

In order to fully exhaust the notion, it appears to be indispensable to firstly exclude what happiness is not, especially as entrenched conceptions of its determinants exist: for instance, the quantity of a good together with the doctrine “the more the better”.

Expressing this line of thought micro-economically, as soon as a preference is revealed, one could improve well-being by increasing one's own income, implying that a policy measure aimed at raising the income of society as a whole leads to greater well-being (Easterlin 2006, p. 30). In several studies, Easterlin refutes this stance.

The term happiness is treated equivalently with life satisfaction (LS) and subjective well-being (SWB). One kind of data relies on self-reports, i.e. statements of individuals on their subjective happiness, gathered in surveys like the Gallup Poll or World Value Survey which are used by Easterlin (2013). Questions targeted differentiable levels of LS by asking if a person was very, fairly or not very happy (Easterlin 1974, p. 91). Here, the scaling and cardinal ranking is emphasized. A further type of data is the approach of Cantril, which examines the hopes, fears and happiness of agents of 14 nations (Cantril 1965). With the “Self-Anchoring Striving Scale”, Cantril positions an individual within the spectrum of two extremes. Formulations were designed dichotomously into “if you imagine your future in the best possible light, what would your life look like then, if you are to be happy?” and “if you imagine your future in the worst possible light, what would your life look like then?” (Easterlin 1974, p. 91). In Cantril's case, the ordinal ranking is stressed. Despite differing procedures of data collection, the methods are unified by the commonality that they are subject to the subjective evaluation of the respondent. The individual is not objectified, but relied on as the main source of data generation. The only alternative left would be to rely on outsiders' observations. In the end, not the exactness or the degree of scientific formalization, but the average satisfaction of a sample of people or a whole population in comparison to each other is decisive (ibid. p. 92).

This touches upon the commensurability of happiness from an objective perspective. Put more precisely, how is subjective well-being to be compared cross-individually, and in a further step, cross-culturally?

“Reported SWB is expected to depend on the order of questions, the wording of question, the scales applied, actual mood ant the selection of information processed. The relevance of these errors, however, depends on the intended usage of the data. Often, the main use of happiness measures is not to compare levels in an absolute sense betwee single individuals. Research rather seeks to identify the determinants of happiness. For hat purpose, it is often neither necessary to assume that reported SWB is cardinally measureable nor that it is interpersonally comparable.” (Frey & Stutzer 2007, p. 303- 4 304). Again, it is not the single agent which serves as a yardstick but the means of a bigger agglomerate of people that is put into relation to another. Their overall satisfaction level allows drawing conclusions about the determinants of happiness which strongly resemble in most cultures, as Cantril's studies gave proof of (Easterlin 1974, p. 93). From the nine categories of general hope he discerned, economic aspirations dominated the remaining satisfactory sensations in the most diverse nations, closely followed by family and health. Cantril reasons that the workday in many countries is constructed of the same elements: Working, providing for and raising a family. Thus, it hardly seems surprising that this outer structure influences the inner perceptions of joy and trouble in human beings in a similar way, across borders and irrespective of ethnicity.

2.2 The Easterlin paradox

Subsuming the Easterlin Paradox, it is an umbrella term that hosts several related thoughts coined as one paradox which actually requires distinct explications. First of all, it is essential to distinguish unlike processes of data collection: Was the data collected in one moment in time over several society stratums of a country, or over numerous nations, then we deal with cross-section data. If the data was gathered at a specific location with the same individuals over time, then we use time-series data. Combining both methods provides us with panel data which are ascertained for several locations over time. Easterlin covered all kinds with his research, as within-country, cross-country and time-series data bear witness of. The following explications are thought to serve as insights into the subject to provide a sufficient understanding of this seminar paper and do not attempt to substitute any in-depth look.

2.2.1 Within-country comparisons

Using cross-sectional data from various nations in one point in time made it possible to compare different social stratums, i.e. people belonging to lower and higher socio­economic statues, within one country. The result for all states yields that the more affluent display a higher LS (Easterlin 1974, p. 104). The happiness differences are clear and consistent, leading to a presumed causal correlation between income and SWB.

2.2.2 Cross-country comparisons

Again cross-section data is used, but the situation is far from obvious for the cross­country comparison between less and more developed economies for one point in time. Although better-off nations indicate higher happiness levels, the relation is not very robust und might be culturally biased, as Easterlin argues (1974, p. 105).

2.2.3 Time-series data

For within-country comparisons substantiated by time-series data, the same individuals of different societal groups are considered for a longer time span. Again, the link between LS and income is not sufficiently significant: for example, the US experienced an increase of happiness with rising wealth during the late 1970s, but this development was soon offset and returned to the initial level. Like with most time-series data, an effect proves to be robust on a long time horizon, which suggests that happiness data would at least have to bet taken for several decades if not a whole generation, in order to best illustrate the human life cycle.

2.2.4 Conclusion

The short- to mid-term correlation between income and happiness remains weak. Long­term studies show that in spite of a growing GDP, average SWB remains stable on a constant or even slightly decreasing level (Kahnemann et al. 2006, p. 1909). The effect of pecuniary gains seems to be limited both to a financial threshold and for a period of time. Despite the significance of the first finding, no evidence for the absolute influence of income on happiness can be stated: Be it international, i.e. a comparison between countries in one point of time, the unit of comparison being a single nation, or intra­national, i.e. a comparison within a state over time, the unit of comparison being one moment in a series of records. It is rather the relative effect income has on happiness, since people tend to measure their welfare in terms of what they have more or less of compared to others.

2.3 Social comparison and relative income hypothesis

The examination so far revealed what happiness covers conception-wise, and that economic welfare on a national level alone can only be meaningful if it is put into relation with other states or the domestic development over time as a yardstick.



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Title: Does the Easterlin paradox legitimize the implementation of degrowth policies in developed nations?