Although economic growth is considered a primary goal by most governments, there’s not much evidence that it actually improves our lives. Certainly, recessions make us profoundly unhappy, and there are cases where economic growth matters – but only if it is directed towards certain goals. Growth for the sake of growth, or even for cool technological gizmos (which I like as well as the next person), does not improve our lives, while growth directed towards human development in terms of education and health does increase people’s self-reported life satisfaction.
First, a note on the use of self-reported well-being. This is in no way a perfect measure. But if I had to choose only one question to ask someone to assess their well-being, I wouldn’t ask about their income – I’d ask them directly about how happy they are with their lives. The data is also relatively robust to slightly different forms of questions (happiness v. life satisfaction), and for most of what we’re looking at the data forms very clear patterns, which suggest that life satisfaction questions are measuring something that’s about as close as we can get to an actual measure of well-being. Caveats about self-reported data aside, let’s start by looking at some data from the U.S. over the past 40 years. Below, I compare GDP growth with the results of two different surveys, one of which asks individuals how satisfied they are with life (the World Values Survey) and one that asks how happy individuals are (the General Social Survey). While GDP per capita has quintupled, subjective well-being has remained flat.
This trend isn’t just limited to the U.S. Over time, life satisfaction scores tend to remain about the same across the world despite increases in GDP. Now, there are two other important cases to consider. First, individuals who increase their income experience a marked short-term increase in happiness, and a small increase in long-term happiness. So, why does income make individuals happier, but not nations?
The boost in happiness from an increase in income is negated in part because as individuals make more money, they get used to having more money. So after a year, about 60% of the gain in happiness is gone simply because individuals establish a new baseline for how much money is enough to live a good life. The other reason is income is often used as a positional good – a good where the main point is to have more than other people. Individuals with more income are happier not because they can buy more stuff, but because they feel like they are valued by others and good at their jobs. This is not a new idea. Adam Smith wrote about it in 1776, arguing wealth accumulation beyond basic food and shelter was driven by vanity. Thorstein Veblen made his reputation based on the idea ‘conspicuous consumption’ he described in his Theory of the Leisure Class (1899). More recently Alain de Botton has written an excellent book called Status Anxiety. Thus, while individuals may feel better off by making more than other people, there is no net effect across the U.S. as incomes rise.
The other important case to consider is happiness across nations. Most studies find that income increases happiness up to about $15,000 dollars, and after that there is no impact. This remains controversial, with some contending that while there is a steeper increase below $15,000, there is still some impact after that. As you can see in the graph below, there’s really not enough data to settle the question. (Countries are abbreviated using their three-letter World Bank abbreviation.) Back in 1879, Henry George marveled in Progress and Poverty that a century of economic growth had not been enough to eradicate poverty. The simple truth is that it matters how we, as a nation, use our wealth. People who are not in poverty and have access to education, democratic processes, and can form good social relationships really are happier than others. We can work to increase our well-being by focusing on the economy as a form of managing our resources instead of as a way to accumulate more and more wealth. Less focus on growth and more attention on how that growth occurs and what it is used for is necessary if we want to improve individual well-being.