Since it was proposed in the 1970s, many economists have been sceptical of the Easterlin paradox, the claim that rising GDP doesn't increase happiness. Some of the scepticism - which Easterlin himself still rejects - is based upon the data, although this still seems to show that happiness increases only slightly with incomes. I suspect, though, that it is also motivated by a discomfort at the apparent implication of the paradox, which is that aggregate incomes don't (much) increase happiness because, as researchers such as Sheena Iyengar and Christopher Hsee has suggested, the increased choice that comes with higher incomes either demotivates (pdf) folk or causes them to choose badly (pdf).
However, a new paper by Katherine Guthrie and Jan Sokolowsky point out that this implication need not be true.They show that increased wealth and choice might not increase happiness even if people are rational utility maximizers.
Imagine a cinema opens in a dull town. Some people choose to go, others don't. Those who go experience an increase in utility - they would not go otherwise - whilst those who don't experience the same utility as before. Surely, then, happiness has increased.
Not necessarily. Utility is not the same as happiness. Cinema-goers might feel discontent or guilt if they feel they should be working or looking after the children instead. And non-goers might also feel unhappier at work because they think: "I could be at the pictures instead." Guthrie and Sokolow say: "An expanding choice set offers opportunity to increase one's utility, but it also evokes rising discontentment."
We don't, therefore, need to assume people are irrational to believe in the Easterlin paradox - the mere fact that they are aware of opportunity costs can do so.
This theory is consistent with (at least) five findings of happiness research:
- Well-paid workers aren't happier in their work than lower-paid ones. This is odd because better-paid jobs are generally nicer. One explanation is that well-paid people have more valuable alternatives; a job that gets you off a crime-ridden housing estate might be no bad thing, but one that gets you away from the golf course is.
- American women have become less happy (pdf) over time. This might be precisely because their options have increased. The career woman feels bad about leaving her kids, whilst the home-maker regrets abandoning her career, whereas Betty Drapers in the 60s never had this choice and so never suffered the higher opportunity cost of not working.
- Well-being declines in middle-age. This could be because we 40-somethings have more options than younger or older folk, and so are more discomforted by having to give them up.
- Commuters are unhappy. This is because they're aware they could be either at home or drinking with workmates.
- Happiness comes from "flow" - losing ourselves in an activity. One reason for this is that when we immerse ourselves in something, we lose awareness of the other things we might be doing, whereas when we are less engaged (for example when watching TV) we are aware of those opportunity costs.
Perhaps, then, the Easterlin paradox - even if it is true - is entirely consistent with rational utility maximization.