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Income and Happiness: Getting the Debate Straight

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  • Andrew E. Clark

    (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - INRA - Institut National de la Recherche Agronomique - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres, IZA - Institute for the Study of Labor - IZA)

Abstract

Carol Graham (2011) asks a really good question: does higher income go with greater happiness and, if so, under which conditions? It is perhaps difficult to under-estimate how central the answer to this question is to Social Science. In particular, if well-being is indeed relative in income, then greater GDP per capita will not necessarily raise average well-being in an economy. Somewhat less feted, yet to my mind just as important, is the fact that income comparisons of the kind that Carol Graham is talking about have enormous implications for the analysis of individual well-being. In a nutshell, standard Economic analysis says that we will buy a good (or supply hours of work, or do whatever it is that we do) up until the marginal benefit from doing so, what we Economists call marginal utility, equals the marginal cost (the price of the good, or the value of the hour of leisure foregone). We typically think that such consumption is subject to the Law of decreasing marginal utility: the more of a good you have, the less you value having one more unit of it. This explains why we all, at some point, stop buying cars, eating ice cream, buying shirts, and earning income in general: the marginal utility from doing so just isn't worth the marginal cost we have to pay. All well and good, but the kinds of comparisons that we are talking about here actually mount a serious challenge to this Law of decreasing marginal utility. If I compare to you, and you compare to me, then your buying an expensive car may increase my marginal utility of spending more on a new car. In general, my marginal utility of more income (or consumption) may rise with your income (or consumption). If this is the case, then your higher income will provide me with a greater incentive to increase my own income, which provides you with a greater incentive to increase your income, and so on ad infinitum. We are here then in the world of the rat race or the Arms Race. If I compare to you and you compare to me then the Law of decreasing marginal utility may well be weakened or indeed fail to hold at all. If so, we will all end up consuming too much, and not necessarily be any happier for it. Of course, the macroeconomic flipside of this is that greater income for all may not lead to greater happiness for all, as Dick Easterlin (1995) has pointed out. So these are very central questions indeed, from the points of view of understanding public policy and explaining individual consumption and labour-supply behaviours.1 They are well-worth studying, and indeed have led to what is now a considerable literature across the social sciences.

Suggested Citation

  • Andrew E. Clark, 2011. "Income and Happiness: Getting the Debate Straight," Post-Print halshs-00654606, HAL.
  • Handle: RePEc:hal:journl:halshs-00654606
    DOI: 10.1007/s11482-011-9150-x
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00654606
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    Cited by:

    1. Alexandra Ganglmair-Wooliscroft & Ben Wooliscroft, 2019. "Well-Being and Everyday Ethical Consumption," Journal of Happiness Studies, Springer, vol. 20(1), pages 141-163, January.
    2. Tufan Ekici & Selda Koydemir, 2016. "Income Expectations and Happiness: Evidence from British Panel Data," Applied Research in Quality of Life, Springer;International Society for Quality-of-Life Studies, vol. 11(2), pages 539-552, June.
    3. Andrew E. Clark & Elena Stancanelli, 2016. "Individual Well-Being and the Allocation of Time Before and After the Boston Marathon Terrorist Bombing," PSE Working Papers hal-01302843, HAL.
    4. Clark, Andrew & Stancanelli, Elena, 2017. "Americans’ Responses to Terrorism and Mass-Shooting: Evidence from the American Time Use Survey and Well-Being Module," GLO Discussion Paper Series 26, Global Labor Organization (GLO).
    5. David Cantarero-Prieto & Marta Pascual-Sáez & Carla Blázquez-Fernández, 2018. "What is Happening with Quality of Life Among the Oldest People in Southern European Countries? An Empirical Approach Based on the SHARE Data," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 140(3), pages 1195-1209, December.
    6. Kaiser, Caspar F. & Vendrik, Maarten C.M., 2018. "Different Versions of the Easterlin Paradox: New Evidence for European Countries," IZA Discussion Papers 11994, Institute of Labor Economics (IZA).
    7. Andrew E. Clark & Orla Doyle & Elena Stancanelli, 2017. "The Impact of Terrorism on Well-being: Evidence from the Boston Marathon Bombing," Working Papers 201717, School of Economics, University College Dublin.
    8. David Bayliss & Wendy Olsen & Pierre Walthery, 2017. "Well-Being During Recession in the UK," Applied Research in Quality of Life, Springer;International Society for Quality-of-Life Studies, vol. 12(2), pages 369-387, June.

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