The Easterlin Paradox: How much money do you need to be happy?

11 March 2016
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Does money make you happy? It certainly helps, but how much do you really need?

In 1974, Richard A. Easterlin wrote a chapter in the book “Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz”. He discovered that there is a positive correlation between income and happiness within a given country. However, this correlation does not seem to exist in other countries, creating an apparent paradox. People living in rich countries are not necessarily happier than people living in poor countries.

How do you measure happiness?

Easterlin used a self-assessment that is quite common practice to measure people’s happiness. People were first asked whether they felt very happy, fairly happy or not very happy. They were then  asked to rate – on a scale from one to ten – their hopes and fears for the future and further questions followed. The happiness survey was conducted in several countries globally and always in the local language. Without going into detail, the following key priorities came out across all cultures: economic stability, health and family.

Rising income, rising happiness?

Easterlin’s paradox has been challenged by Ruut Veenhoven and Michael Hagerty. They concluded that a higher absolute income does lead to a higher happiness. It is true that certain basic necessities need to be met and also that a certain minimum income is needed for that. Once those are met and you meet the minimum income, the correlation between absolute income – measured by GDP – and happiness flattens. Veenhoven argues that there is a logarithmic correlation between absolute income and happiness. Whichever is true, the positive effect of a rising income on happiness slows down with increasing income; it seems that a lot more money does not make you a lot happier.

The Relative Income

In a way, you could state that happiness is linked to “keeping up with the Joneses”. This expression was first launched in a comic strip of the same name by the cartoonist  Arthur R. “Pop” Momand. Your happiness depends on how your income compares to the people around you. Easterling also pointed out that Karl Marx once quoted: “A house may be large or small; as long as the neighbouring houses are likewise small, it satisfies all social requirements for a residence. But let there arise next to the little house a palace, and the little house shrinks to a hut” (Karl Marx – Wage Labour and Capital). Easterlin refers to this in his paper as the relative income. People compare their income to their neighbour’s and this will determine whether they feel they have enough or not. Furthermore, the reference level that people use in each country is linked to the GDP.

The key to nationwide happiness

The important conclusion from the Easterlin paradox is that governments should not focus too much on the size of their GDP but on the relative income differences within a country instead. New research by Shigehiro Oishi and Selin Kesebir from the University of Virginia and London Business School shows that an increasing GDP can yield an overall higher happiness when the wealth is shared. For that reason, happiness has continued to rise in countries such as the Netherlands, Sweden and the United Kingdom.

So don’t get caught in the comparison trap. Your happiness does not depend on what you have. Think carefully about what you really need. The bigger house or the better salary won’t necessarily make you happier. It’s better to focus on the things you have rather than what you don’t have.

Want more?

In the mood for more food for thought? We redesigned our money system in a way that it supports our quality of life. We call it the Sustainable Money System. Do you want to find out more about it? Go explore the model!

Categories:   Health
Stephane Berghmans

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