Shaping the Economics of Happiness: The Fundamental Contributions of Richard A. Easterlin

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1 I Shaping the Economics of Happiness: The Fundamental Contributions of Richard A. Easterlin Holger Hinte and Klaus F. Zimmermann Did it take a global economic and financial crisis to remind us that money and material wealth alone cannot make people happy? It almost seems that way. While countries around the world are dealing with the impact of the recent crisis, there have been increasing calls for alternative indicators of well-being, including happiness and life satisfaction as important criteria. But this impression is misleading. A long-established subfield of economic science has provided in-depth analyses of the economics of happiness and individual well-being, which increasingly take into account findings from behavioral economics. Widely regarded as the founding father of this discipline, Richard Easterlin has made a number of seminal contributions. His broad and innovative approach has had a profound impact on the entire research community and continues to be echoed in academic science and beyond. The visibility of this research field and its pioneers has increased substantially in recent years. For instance, as shown by the Social Science Citation Index (SSCI), Easterlin s work is remarkably well cited, particularly in the recent past. Easterlin s fundamental 1995 article Will Raising the Incomes of All Increase the Happiness of All? in the Journal of Economic Behavior and Organization, to be found in revised form in this book, has been cited in scientific work on average 9 times per year between 1997 and Subsequently, the num- 1

2 bers went up dynamically to 26 citations in 2005 and peaked at 57 in Followed by 41 in 2009 the number of citations reached and additional 36 by October 2010; hence this influential paper has an impressive total of more than 270 citations so far. Other work by Richard Easterlin has experienced a similar rise in citations, particularly in journals with a high impact factor, which shows how influential Easterlin s work has been until this day. The number of articles in this area has also grown fast and become increasingly diverse. Created a decade ago, the World Database of Happiness already contains more than 10,000 contributions to happiness research. 1 Innovative approaches to the relatively young field of behavioral economics are often strongly reminiscent of Easterlin s work, even if they arrive at different conclusions. The economics of happiness is also undergoing a dynamic development, which could hardly be imagined without the foundations laid by Richard Easterlin. Overall, there is a strong and growing demand for deeper knowledge of the relationship between wealth and happiness. It is certainly no coincidence that this comes at a time when the limitations of the market model are becoming strikingly apparent in the light of climate change, fast structural change and an alarming North-South prosperity gap. For instance, the Commission on the Measurement of Economic Performance and Social Progress installed by the President of France in 2008 has been inspired to a large extent by Easterlin s work. As part of the Commission, a working group is dealing exclusively with issues of measuring quality of life beyond the established indicators of wealth. 2 In fact, several of the statements by the Commission could have been written by Easterlin himself: Quality of life includes the full range of factors that make life worth living, including those that are not traded in markets and not captured by monetary measures. While some extensions of economic accounting allow including some additional elements that shape quality of life in conventional money-based measures of economic well-being, there are limits to the extent to which this can be achieved. Non-monetary indicators have an important role to play in measuring social progress, and recent advances in research have led to new and credible measures for at least some aspects of quality of life. These measures, while not replacing conventional economic indicators, provide an opportunity to enrich policy discussion and to inform people s view of the conditions of the communities where they live; today, they have the potential to move from research to standard statistical practice. (Stiglitz, Sen, Fitoussi et al. 2009, p. 216) 2

3 In its report, the Commission rightly emphasizes that sustainability and inequality should be more in the focus of and that the time is ripe for our measurement to shift from measuring economic production to measuring people s well being. 3 Against this background, the 2009 IZA Prize in Labor Economics is a long overdue honor for Richard Easterlin, whose original work has had a profound influence not only on today s research in economics but also on the recent policy debate on happiness. Running its own research programs on behavioral and personnel economics as well as on employment and development, the Institute for the Study of Labor feels a particularly close connection to Easterlin s work. An IZA Research Fellow for over ten years, Easterlin has published a number of influential IZA Discussion Papers. He also served since its beginning on the editorial board of the Journal of Population Economics, which is headquartered at IZA. Easterlin s impact on labor economics, which is the focus of IZA s activities, is indisputable. The relationship between well-being, social status, labor market status and income is a key determinant of such individual behavior as job search effort, female labor force participation, entrepreneurship or political activity. Moreover, Easterlin s relative income hypothesis of fertility is a core theory of population economics, a field that is closely associated with IZA s approach to labor economics. In its Award Statement, the IZA Prize Committee emphasizes Easterlin s leading role in demonstrating the importance of material aspirations and relative economic status for human behavior. His work has laid the foundations for enlarging the scope of traditional economic analysis and has increased our understanding of behavior in several important domains, such as fertility choices, labor market behavior, or the determinants of individual well-being. [ ] His central idea the so-called Easterlin Hypothesis or cohort size hypothesis posits that the economic and social fortunes of a cohort tend to vary inversely with its relative size. [ ] Richard Easterlin s findings have spurred the interest in the economic analysis of fertility and family decision-making. By integrating insights from demography, psychology, and sociology, the cohort size effect contributed to understanding phenomena such as long-term swings in fertility, but also swings in labor and goods market conditions. At least of equal importance is Easterlin s analysis of individual well-being. The Easterlin Paradox has become a household name for anyone involved in this field of research. While in cross-sectional analyses of subjective well-being within countries, people with 3

4 higher income on average report higher levels of happiness, the relationship between income and subjective well-being does not hold in time series analyses: Countries which experience economic growth do not necessarily become happier. At the same time, measuring across countries shows that happiness does not vary much with national income once material wealth is sufficient to meet basic fundamental needs. These basic needs being fulfilled, an increase in absolute income does not further raise well-being if it is not accompanied by an improvement of relative position within the society. This paradox is of crucial relevance not only for the analysis of human behavior with respect to workplace motivation, incentives, and wages, but also for the study of social cohesion and welfare system reforms. If an increase in income tends to induce an adaptation of income and consumption aspirations, firm employment strategies as well as public policies cannot but calculate with such a rational paradox. Based on Easterlin s findings, fundamental research has been done to explore the nexus between socioeconomic, health, and employment status, and individual well-being. There is a clear line from Richard Easterlin s inspiring work to the recent development of behavioral economics that aims at integrating psychology into economics. The international reputation of IZA in this area must to some extent be attributed to Easterlin as well. Richard Easterlin considers himself a reluctant economist. His work shows how effectively economics can be extended beyond its original realm, and that it is rightfully regarded as a social science. The 2009 IZA Prize laureate has managed throughout his career to transcend the borders of economics, thus broadening the horizon of the profession. The fact that economists, sociologists, psychologists and even neuroscientists are increasingly finding common ground and mutual benefits is a laudable trend that has been set by scientists like Richard Easterlin, according to his motto: It is good to be an economist, it is better to be a social scientist. 4 This volume provides an authentic account of a remarkable lifetime achievement. It contains a blend of Richard Easterlin s seminal papers. Newly arranged by the author and enriched with thoughtful introductions and an epilogue, the new volume is a must-read for anyone interested in a subfield of economics which is of great significance for shaping the future of the global society. 4

5 It will be interesting to witness how Easterlin s message continues to find its way into policymaking. The proposal of the above-mentioned Commission on the Measurement of Economic Performance and Social Progress to better integrate aspects of sustainability and subjective well-being into measures of wealth is no guarantee that this idea will actually be realized in practice. Achieving this would in fact be the ultimate triumph for the great pioneer in the economics of happiness Richard A. Easterlin. He truly is the founding father of happiness research. 5