Tuesday, December 14, 2010

Does Economic Growth Increase Life Satisfaction?

The question of whether economic growth increases life satisfaction has been the subject of debate in some circles for many years. In fact, the issue came to the forefront back in the early 1970s, when Richard Easterlin published a paper arguing that no relationship existed between growth and life satisfaction. The finding became known as the Easterlin paradox. He has published more recent papers re-emphasizing this point. Justin Wolfers, writing on the Freakonomics blog over at the New York Times, offers a strong and very persuasive rebuttal. Here's an excerpt from Wolfers' column:

Easterlin’s Paradox is a non-finding. His paradox simply describes the failure of some researchers (not us!) to isolate a clear relationship between GDP and life satisfaction. But you should never confuse absence of evidence with evidence of absence. Easterlin’s mistake is to conclude that when a correlation is statistically insignificant, it must be zero. But if you put together a dataset with only a few countries in it — or in Easterlin’s analysis, take a dataset with lots of countries, but throw away a bunch of it, and discard inconvenient observations — then you’ll typically find statistically insignificant results. This is even more problematic when you employ statistical techniques that don’t extract all of the information from your data. Think about it this way: if you flip a coin three times, and it comes up heads all three times, you still don’t have much reason to think that the coin is biased. But it would be silly to say, “there’s no compelling evidence that the coin is biased, so it must be fair.” Yet that’s Easterlin’s logic.

Wolfers makes a compelling case. Moreover, he ends his column by displaying a graph from data generated by the Gallup World Poll. This chart, shown at the top of this blog post, looks at levels of satisfaction and GDP, as opposed to rates of change/growth - which are the measures used in the Easterlin studies. As Wolfers points out, "If rich countries are happier countries, this begs the question: How did they get that way? We think it’s because as their economies developed, their people got more satisfied. While we don’t have centuries’ worth of well-being data to test our conjecture, it’s hard to think of a compelling alternative."

No comments: