The Interview: Why GDP growth doesn't make people happier

Economist and professor Richard Easterlin who pioneered wellbeing economics, visited New Zealand this week, (Photo via Getty Images).

Will a bigger TV make you happy? How about a bigger house? Or a boat?

While the question of what makes us happy is age-old, for many years it was not central to economists' thinking.

But that's changing.

The UK statistics department now regularly measures public happiness and New Zealand's Government was the first in the world to pass legislation putting "wellbeing" at the centre of its economic management.

Around the world, economists are increasingly questioning the dominance of GDP growth as the measure of social progress.

This week the man who pioneered this new approach almost 50 years ago was in New Zealand to speak at the University of Auckland Business School, as the 2019 Sir Douglas Myers Visiting Professor.

Richard Easterlin, 93, has been called the father of wellbeing economics.

The affable California-based professor might have been born in 1926, but you wouldn't guess it.

He's still working and writing and, yes, he does seem to be a pretty happy character.

In the early 1970s, Easterlin was the first economist to apply the discipline to studies of personal happiness.

In doing so, he discovered an intriguing paradox which puts weight behind the old saying: money can't buy happiness.

The theory, known as the Easterlin Paradox, states that over time, happiness at a national level does not increase with rising incomes.

Easterlin looked at a time series of economic growth against surveys of happiness that had already been carried out by social scientists.

What he found was that while incomes had more or less doubled over the time, happiness levels hadn't moved.

"So at a point in time the evidence is that higher-income people are happier and also higher-income countries are happier than lower-income countries, which is what everyone expected," Easterlin says.

"But over time, as income goes up in a country, people don't seem to get happier."

It turns out that's got a lot do with the way humans think in terms of social ranking.

Easterlin explains with a question he likes to ask his undergraduate students.

"Imagine you are graduating and you have a choice between a salary of $50,000 or $100,000, with everything else being the same," he says.

Of course, 100 per cent will choose the higher figure.

But if you give people a choice between $100,000 - but everyone else makes $200,000 - or $50,000 - but everyone else makes $25,000 - then about two-thirds of people will choose the lower option.

"What it's showing is that how you feel about what you make depends, not only on how big the number is, but also on what others are making," he says. "And the more others are making, the less happy you are.

"So the explanation is a phenomenon we call social comparison," Easterlin says. "It's really a phenomenon of relative income not absolute income."

It applies to consumption too - the ever-increasing size of our TVs, for example.

Are we really much happier watching television now than people were with small fuzzy screens 50 years ago?

The paradox raises some fundamental questions about economics.

If all our efforts are focused on striving to improve a measure that doesn't raise our overall happiness, then what is the point?

"Throughout the centuries, there was always interest and speculation about what makes people happy, but it had to do with what should make people happy," he says. "Rather than what actually does make people happy."

One of the best things about happiness as a measure of economic wellbeing is that people understand it, Easterlin says.

"When we say people's happiness has improved more in the current year than the past five years, then people know what we mean.

"If we say GDP has gone up, people say: 'well that's nice to know', but they're not at all sure how that affects their lives."

Easterlin says how you feel about what you make depends, not only on how big the number is, but also on what others are making. Photo / 123RF

The big change in this approach to measuring wellbeing is that the ones making the decision about how well off people are ... are the people.

"GDP is not decided by the people. It's decided by experts telling you you're better off because your GDP is higher," Easterlin says.

For many years, Easterlin's work put him at the fringes of a discipline obsessed with GDP growth.

Now it seems attitudes are shifting – not least in New Zealand, where the Coalition Government now puts together the national Budget with a focus on wellbeing.

"For 25 years or so, this was sort of like a fascinating a cocktail conversation," he says of his work.

But in the 1990s it began to be taken more seriously by a new generation of economists.

"Then as it became more accepted academically as a serious research subject, governments have started to take it up," he says.

The British were one of first to start serious measurements and now New Zealand is attempting to put wellbeing into a policy framework.

"It is really gratifying to see a government make wellbeing the goal of public policy rather than just economic growth," Easterlin says.

"That doesn't mean I'm against economic growth. My mentor was Simon Kuznets (who won a Nobel Prize for his work on economic growth) but I've learnt over time that it doesn't make people happier. I think Simon Kuznets would have accepted that."

So how does an economist define happiness?

"Basically, by happiness, what we mean is how people feel about their lives," Easterlin says.

"We get measures through survey questions where we say: in general, how happy would you say you are these days - pretty happy, very happy not, so happy?"

The surveys can get more complex with a one-to-10 scale and a broad range of indicators.

Ultimately, there are three things that are fundamental to happiness, he says.

"First, people's living conditions - having a job and enough money to live comfortably. Then, good family lives, and third, health."

Easterlin believes New Zealand's policy approach to these core values is behind our relatively high ranking on indexes like the World Happiness Report.

New Zealanders tend to be unduly concerned about slipping in the GDP rankings and don't yet put enough store in the fact we are world class in wellbeing rankings, he says.

"The reason you're eighth out of a total of 150-plus countries is because you have policies that address those issues ... if you lose a job or having unemployment [benefits] and help finding a job, having childcare, good schooling, care of the elderly and provision of healthcare for both physical and mental purposes."

Robert MacCulloch, the Matthew S. Abel Professor of Macroeconomics at Auckland University, who hosted Easterlin this week, says the Easterlin Paradox should serve as a reminder to New Zealanders not to lose sight of how historically successful we've been in terms of wellbeing.

"My gut feeling is that he makes a profound point: New Zealand, at its heart, is not a particularly rich country in terms of per capita incomes, but New Zealand sure has been a place with an extraordinarily high level of wellbeing. If we lose the latter, what will we be left with?"

I ask Easterlin to what makes him happy.

"The answer is my daughters and sons, my granddaughters and grandsons, dining out with my wife, playing golf with friends," he says.

Easterlin also seems very happy to be seeing a shift in economic thinking taking place - to see his life's work being put into practice.

There is still plenty of pushback from more traditional economists, he says.

On balance, GDP and economic growth still hold sway. But Easterlin is optimistic.

"My feeling is eventually the discipline of economics will come around and there will come a day when happiness is taken as the thing you are looking at when you ask what's going to make people better off, not income or GDP per capita.