Wednesday, September 10, 2008

The Easterlin Paradox

One of the many reasons people dislike economists is this idea that they favor growing the pie rather than redistribution.  The resulting wealth inequality is a problem for some people, who argue that relative income is a bigger deal and equality is a moral value.  Many of these people choose to earn less money than they could.    

There's a good deal of truth to this.  Clearly people tend to compare themselves to a reference group.  But I've always been skeptical of this theory, because it doesn't seem to explain migration.  

As far as I'm aware, most people move accross or within countries in order to make more money, even if their relative standing drops substantially.  The reverse movement--people trading up in relative income but lower in absolute income--seems rarer.  Many people move to poorer countries, but such moves often increase opportunity or consumption.  It's always possible that people retain their peer group at home as a reference group.  But if reference groups are relatively fixed, a wealth-maximizing theory will yield better predictions of behavior.  
And now you have some evidence against this theory in the form of happiness surveys.  Sure, the whole happiness studies field is a little wooly, but numbers are awesome.  Kahneman, that radical right-winger, argues that income differences explain differences in reported happiness.  A more comprehensive study from some smart people at Wharton makes the same point with the same survey.  Some 90% of people with incomes over $250,000 count themselves very happy; something only 42% of people with incomes under $30,000 feel.  That group would not be happier if transplanted into a poorer country.  

It's easy to say that money doesn't make people happy, but development changes countries in all sorts of ways.  There are moral changes encouraging fellow-feeling, less discrimination, and the general spread of progressive values.  It's worth pointing out that liberals champion these values, while decrying the process by which they spread through society, and conservatives support the process, while harboring sentiments incongruent with the realization of an affluent society.  

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