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I. Introduction

Economic growth has long been considered an important goal of economic policy, yet in recent years some have
begun to argue against further trying to raise the material standard of living, claiming that such increases will do little to
raise well-being. These arguments are based on a key finding in the emerging literature on subjective well-being, called
the “Easterlin paradox,” which suggests that there is no link between the level of economic development of a society and
the overall happiness of its members. In several papers Richard Easterlin has examined the relationship between happiness
and GDP both across countries and within individual countries through time (1974, 1995, 2005a, 2005b). In both types of
analysis he finds little significant evidence of a link between aggregate income and average happiness.

In contrast, there is robust evidence that within countries those with more income are happier. These two
seemingly discordant findings—that income is an important predictor of individual happiness, yet apparently irrelevant
for average happiness—have spurred researchers to seek to reconcile them through models emphasizing reference-
dependent preferences and relative income comparisons (Easterlin, 1973, p. 4).2 Layard offers an explanation: “people are
concerned about their relative income and not simply about its absolute level. They want to keep up with the Joneses or if
possible to outdo them” (Layard, 2005a, p. 45). While leaving room for absolute income to matter for some people,
Layard and others have argued that absolute income is only important for happiness when income is very low. Layard
argues, for example, that “once a country has over $15,000 per head, its level of happiness appears to be independent of
its income per head” (2003, p. 17).3

The conclusion that absolute income has little impact on happiness has far-reaching policy implications. If
economic growth does little to improve social welfare, then it should not be a primary goal of government policy. Indeed,
Easterlin argues that his analysis of time trends in subjective well-being “undermine the view that a focus on economic
growth is in the best interests of society” (2005c, p. 441). Layard argues for an explicit government policy of maximizing
subjective well-being (2005a).4 Moreover, he notes that relative income comparisons imply that each individual’s labor

2 Easterlin summarizes his findings:

“In all societies, more money for the individual typically means more individual happiness. However, raising the incomes of all
does not increase the happiness of all.
The happiness-income relation provides a classic example of the logical fallacy of
composition—
what is true for the individual is not true for society as a whole.

The resolution of this paradox lies in the relative nature of welfare judgments. Individuals assess their material well-being, not in
terms of the absolute amount of goods they have, but relative to a social norm of what goods they ought to have (italics in
original).”

Layard (1980, p. 737) is more succinct: “a basic finding of happiness surveys is that, though richer societies are not happier than
poorer ones, within any society happiness and riches go together.” For a recent review of the use of reference-dependent preferences
to explain these observations, see Clark, Frijters, and Shields (2008).

3 For other arguments proposing a satiation point in happiness, see Veenhoven (1991) Clark, Frijters, and Shields (2008); Frey and
Stutzer (2002).

4 For a concurring view from the positive psychology movement, see Diener and Seligman (2004).



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