Human Happiness and Economic Growth: The Easterlin Paradox

I originally wrote this article in October 2020 – better to publish it here now than have it sit on my hard drive forever!

So Australia has officially entered its first recession in 29 years. Heads are hanging in parliament and a chorus of concern is rising. But the most important question is not being asked: what is the purpose of it all?

Since antiquity some philosophers and religious leaders, in both the East and West, have held that the final purpose of a human life is happiness. Buddha based his teaching on the release from suffering, and in turn the promotion of happiness, and Aristotle too based his ethics on living a happy life. These traditions continue today: the Dalai Lama, for example, has stated that he always starts from the premise that people want to be happy and avoid suffering. In the West, it might come as a surprise to find that many economists have carried forth Aristotle’s philosophy, particularly those associated with the World Happiness Reports, like John Helliwell.

What does economics have to do with human happiness? A lot, in fact. Modern economics is based on the ethical tradition of utilitarianism, the most important contributors of whom were Jeremy Bentham, James Mill and his son John Stuart. Utilitarianism’s catch phrase is ‘the greatest happiness for the greatest number.’ However, as economics has developed it has come to conceive this principle from a materialistic point of view, where happiness increases from material gain. Whatever the merits are of this perspective, and in the original state of indigence there probably were some, common sense, and increasingly, scientific investigation, have revealed the limitations of this approach to achieving happiness.

Beginning in the 1960s researchers began studying human happiness by asking people to report their levels of life satisfaction and then trying to relate their answers to their various life circumstances. Richard Easterlin was the first economist to probe the utilitarian maxim by exploring the relationship between this data and economic growth. This led to what is called the Easterlin Paradox: (1) rich people report higher levels of happiness than poor people, but (2) economic growth, which increases wealth, does not result in people reporting higher levels of happiness. Researchers have suggested several explanations for this paradox, but the most persuasive is that, despite exhortations by spiritual leaders to the contrary, people judge their wellbeing relative to others. As economic growth proceeds, the rising tide which lifts all boats, even if it does do so evenly (and often it does not, instead increasing inequality), results in people continuing to judge their wellbeing relative, not to their own past circumstances, but to those around them.

The US is the classic example of the Easterlin Paradox. In the last few decades it has experienced a threefold increase in real per capita GDP, the common measure of economic growth, but no increase in Americans’ reported levels of happiness – if anything there has been a small decrease. This applies to Australia, too. Prior to the current economic recession, Australia experienced uninterrupted economic growth since the early 1990s. Yet according to the 2019 World Happiness Report, from the mid-2000s to the mid-2010s, Australians did not report higher levels of happiness during this growth period. Instead, like the US, it declined slightly.

Humans are a purpose-driven species. Almost everything we do is for some reason or another and we often employ intricate means in fulfilling our goals. Modern technology, for example, makes a mockery of the original Marathon run by allowing us to communicate with people around the world in real time. But no amount of technical wizardry will ever enable us to decide what we should do. So long as we avoid the question, such advances in technology are simply a distraction from it. In that case, we can end up hitting our goals with great precision, only to find that they were the wrong ones to pursue, especially when we end up feeling frustrated, anxious, and dissatisfied. If the purpose of human life is happiness, evidently the means by which we are striving to achieve it, namely economic growth, are misguided. This is egregious not only from the point of view of society, where depression is the leading cause of disability worldwide, but from that of the environment too, which cannot keep up with the ever increasing demands for resources and places to dump our wastes. While economic growth was supposed to be the means to an end, it has instead become an end in itself; one could even argue that growth is the overarching purpose of our civilisation.

So, what should we do? The Dalai Lama and the World Happiness Reports both suggest that the prime determiner of human happiness is social relationships. Rather than fixating on material gain, fulfilling our purpose would be better served by cultivating our friendships and increasing our compassion for others. Not only would this serve the greatest happiness for the greatest number, but our ecological problems would abate too, by reducing our demands for material resources to a steady, sustainable flow.