What is the paradox of affluence?
Faculty speech for Three Rivers Convocation, 9/9/2008
©2008 Anthony Benoit (home)

Oxford professor of economic history Avner Offer put it succinctly in 2007: "Richer is not (much) better." Economists sometimes call it "Easterlin’s paradox," after Richard Easterlin, who asked in 1974, "Does economic development improve the human lot?" But the paradox of affluence is older than that. Two hundred years ago at the height of the Industrial Revolution in England, Wordsworth observed, "Getting and spending we lay waste our powers."

Isn’t it better to be richer? How could it not be? If it isn’t, what are we to do?

We can look at differences in wealth in at least three ways: Poor people versus rich people in the same country, people in poor countries versus people in rich countries, and people who pass—perhaps we should be careful not to say "progress"—from lesser to greater wealth.

When Easterlin posed his question, he presented findings that within a nation, those with more wealth are on average happier. For example, in 1970 a survey revealed that the wealthiest Americans were almost twice as likely as the poorest to rate themselves as "very happy." Such results have been replicated many times and have been found across the world.

When Easterlin examined the relationship between income and happiness across countries, he found the results to be ambiguous. The relationship was certainly weaker, if not actually absent. And subsequent measurements and analyses have fueled a debate over the strength of the correlation, if any. There continues to be subtleties in methods and fine points in the results, but Angus Deaton reported in 2007 that the latest Gallup World Poll shows a clear trend. There are outliers, but people in rich nations are more satisfied with their lives than those in poor.

So we might expect that as income rises within a group of people, they become clearly happier. Not so clearly. Easterlin, working with limited data, found no increase in happiness. Happiness actually decreased over one period of rising income. The connection has been studied many times since then in many nations. At best, people do not get less happy with rising national income.

There are of course complicating factors. Perhaps the results are confounded by the social disruptions that accompany rapid economic change. And rising income brings improvement in access to health care and education, better housing and sanitation, and expanded career choices. These things do make people happier. But, once your house is heated and fitted with indoor plumbing, adding bedrooms is not likely to make you happier. Increasing wealth has diminishing returns. Why?

The two reasons commonly put forth in psychological and economic literature on the subject are adaptation and social comparison.

Adaptation is the well-documented process by which we get used to our surroundings. Our brains (and psyches) seem to be wired to react more to changes than to absolute levels of stimulation. In the case of money, our desire is not fixed. It has been observed by economists and psychologists that as we get more, we want more. In the most extreme form, this is called the hedonic treadmill. More isn’t better; it’s essential. And soon too much is never enough.

Social comparison is the tendency to judge ourselves and our situation by those around us. It matters to us not so much we make in absolute terms, but rather, how much more or less do we make than those around us. The most recent Gallup World Survey of Life Satisfaction most clearly showed that folks in poor countries tend to be poorly satisfied with their lives relative to those in rich countries. In the age of globalization, the average person in sub-Saharan Africa has the ability to compare his or her lot with the average American. These comparisons are not symmetrical. Alas, we tend to compare ourselves more with those above us on the income scale. So, when I get promoted from stockboy to store manager, I don’t see how much more than my former coworkers I am making now. I look at how much less I make than the corporate VP’s.

We measure affluence in dollars or by other crude material measures. A person with more is more affluent. The affluence of a country is expressed as its gross domestic product (GDP), the total value of all goods and services produced in and by a nation. It has long been observed, though, that GDP fails to measure what truly counts for human well being. A million dollars spent on prisons and toxic waste clean-up counts as much toward GDP as a million spent on education, food, or art.

Measurement of happiness may be even more complex. Some have argued that we can’t trust people to rate their own happiness—that people do in fact get happier as they get richer. They just don’t know it. I don’t have time to discuss the theory and practice of self-reported measures of subjective states, but I’m willing to accept that you can tell me whether or not you are happy. And I’m pretty much stuck with your answer.

Nonetheless, there is plenty of fuel for a discussion of the demographic, economic, psychological and social factors related to well-being. I hope that you will engage in that discussion over the coming year and beyond. But setting such debate aside for the moment, the mere existence of the question, "Does wealth bring happiness?," and the persistence of the question in common wisdom and social scientific research reminds us that it is very important.

In the recent film, WALL-E, humans have left a dangerously contaminated earth behind to float through space in a giant cruise ship. They have their every material need met by machines, which carry them from place to place, put food (in liquid form) into their hands, and bring all manner of video stimulation to a monitors floating in front of their faces. It’s Club Med 24/7/365, affluence on an unprecedented scale. Yet, these people have lost the ability even to stand up. They are absolutely starved for human touch, spend no time with their children (who are schooled by robots) and have never seen the sky, sea, or even a single flower. Their lives have no purpose, direction, or challenge and their relationships are entirely superficial. This is the paradox of affluence on the galactic level.

But that film was just a fantasy, right? Why should we worry whether richer is better? Governmental policy pursues economic growth. And as we can see from the show of hands, personal policy isn’t much different. But the pursuit of economic growth—nationally if not personally—typically has negative side effects: environmental degradation, economic oppression of the poor, and loss of opportunity for building other forms of value.

Monetary wealth can pay for many good things, and rising income in general leads to better nutrition and health, lower infant mortality, and more leisure time to pursue hobbies or volunteer work. Furthermore, there is a complex relationship between wealth and environmental quality.

Pre-industrial societies often have a relatively low rate resource consumption and environmental degradation, in part due to low population density. As they industrialize, resource consumption goes up and environmental quality can decline dramatically leading to disastrous pollution such as the killer smog of 1948 in Donora, Pennsylvania (or such as the air in Beijing today). Yet, in an industrial democracy, economic development increases the affluence of and the choices available to most citizens. These citizens choose a cleaner environment and the affluent society has the resources to make good on those choices. Thus, public outrage in the 1960’s led to government and industry action in the 1970’s and since such that our air, water, and land is cleaner now than it was 50 years ago. The path to a sustainable relationship between humanity and the global ecosystem on which it depends will require a tremendous investment of capital: Wealth brings the freedom to make more choices, which can be good choices.

Still we must not equate wealth with value. There are things we truly value—time with family and friends, connection to community, the satisfaction of helping others, the challenge of meaningful work. These consistently and reliably bring us fulfillment and even joy.

Keep these things safe from the ravages of the pursuit of affluence—from the "getting and spending"—in your own lives. And let us continue to work together as a community learning how to bring the fruits of affluence to those at the bottom of the curves.

Deaton, A. 2008. Income, health, and well-being around the world: Evidence from the Gallup World Poll. Journal of Economic Perspectives, 22:52-73. Downloaded 8/24/2008 from http://www.princeton.edu/~rpds/downloads/Deaton_Aging_and_wellbeing_
around_the_world_Aug_07_ALL.pdf.

Easterlin, R.A. 1974. Does economic growth improve the human lot? Some empirical evidence. In P. A. David & M. W. Reder (Eds.), Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz (pp. 89–125). New York, Academic Press. Downloaded 8/24/2008 from http://graphics8.nytimes.com/images/2008/04/16/business/Easterlin1974.pdf.

Easterlin, R.A. 2003. Explaining happiness. PNAS, 100:11176-11183.

Phi Theta Kappa. 2008. Essay: The paradox of affluence: Choices, challenges, and consequences. Downloaded 7/15/2008 from http://www.ptk.org/honors/guide/essay/.

Seligman, M.E.P. 2002. Authentic Happiness. New York: Free Press.