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If these people look happy. Have they just had a pay rise or turned down a pay rise to help protect the environment?
If these people look happy, it’s odds-on that they have not just turned down a pay rise. Photograph: Image Source/Alamy/Alamy
If these people look happy, it’s odds-on that they have not just turned down a pay rise. Photograph: Image Source/Alamy/Alamy

The economics of happiness can make for sad reading

This article is more than 9 years old

The link between rising incomes and happiness was challenged before the financial crisis but falling living standards have muddied the waters

You have a job. You live in a small town in New Jersey, New South Wales or West Sussex. You are neither poor nor rich. You haven’t had a real pay rise in the past five years. For the first time in your life, your standard of living has been falling. So how happy do you feel?

This is not as daft a question as it might appear. The conventional wisdom is that people expect to become better off year after year. What’s more, they punish governments that make them worse off. Elections are won and lost on this bread-and-butter issue.

The notion that rising incomes makes people happier was challenged in the years leading up to the financial crisis. There were studies showing that above a relatively modest level an extra dollar, pound or euro of extra income did not bring any increase in well-being.

This finding mattered for two reasons. Firstly, it was a direct challenge to the economic orthodoxy of the past two and a half centuries, which has been based on a simple equation: more equals better. Secondly, it fed into a wider debate about global warming. The argument was that “more is better” economics was a threat to the existence of human life on Earth, so a different economics was needed.

The idea behind the new economics was that the whole gas-guzzling, consumer-bingeing, model had to be replaced or the planet would fry.

Telling voters that their budget flight for a weekend break in Prague was incompatible with capping carbon emissions was always going to be a hard sell. But that’s where the link between growth and happiness kicked in. If rising incomes led to more mindless consumerism that didn’t actually make people any happier, then the circle could be squared.

The position was a bit more complex than this, of course. It was recognised that there were plenty of people in the world for whom extra income would make them happier. So there would have to be redistribution from rich to poor, both within countries and between advanced nations and the developing world.

Let’s take this step-by-step. The scientific consensus is that man-made global warming is happening and that on the current trajectory carbon emissions are not compatible with preventing global temperature rising by less than 2C above pre-industrial levels. The consensus is not absolute but the evidence is certainly strong enough for the precautionary principle to apply. Even if just as an insurance policy, action needs to be taken now.

This involves a change in the way we think about economics and the way we measure success. But that is not going to be easy because the “more is good” model has proved durable and the reason it has proved durable is that it has been successful and seen off rivals such as Soviet-style communism.

From the collapse of the Roman empire to the dawn of the industrial age, incomes per head barely grew at all. The standard of living for the average European peasant when Attila the Hun was attacking the Roman empire was little different from that when Frederick the Great was on the throne of Prussia in the mid-18th century.

Since then, though, there has been a steady and spectacular increase in living standards. People in developed countries are richer, live longer and are healthier than they were 250 years ago. Growth has brought benefits.

This economic model has been based on the idea that consumer wants and needs are inexhaustible and that is the job of companies and the state to satisfy those demands as best they can. There has yet to be a political party that has won an election on the slogan: vote for us and we will make you worse off. A company’s share price is not based on what is happening to its global footprint. For businesses, even right-on businesses, the imperative is to expand.

The “more is better” model is, if anything, stronger now than it was before the financial crisis. That’s partly the result of the state of the economic cycle: environmentalism and alternative measures of progress to incomes per head rise in prominence during the good times, then slip down the political agenda when times are tougher.

That, though, is not the only factor. There have been challenges to the idea that there is no link between rising incomes and happiness. Betsey Stevenson and Justin Wolfers, for example, produced a 2013 study showing that money does matter. They say that happiness rises as income rises, and that this holds true in comparisons both between and within countries. The relationship between incomes and happiness does not diminish as incomes rise. “If there is a satiation point we have yet to reach it,” the pair conclude.

The debate between the two rival camps will rumble on. But the falls in living standards seen during the Great Recession and its aftermath should shed fresh light. Studies showing no link between income and happiness go back to Richard Easterlin’s work in 1974, but this came at the end of the long postwar boom. It will be interesting to see whether levels of happiness hold up even when living standards are falling.

Academic studies have shown that there is a strong correlation between rising unemployment and unhappiness, with longer dole queues leading to higher levels of stress, more ill health and an increase in family breakdowns. This is hardly surprising: people get anxious when they lose their jobs and find it harder to make ends meet. The strong assumption has to be that the same will apply to a period when living standards are falling. People forced to forego the little pleasures in life just so that they can afford to heat their homes or stock the fridge are likely to be less happy than they were before.

Now put this in the context of climate change. Governments of developing countries say that their people deserve what the people in developed countries have got. They want electricity, roads, cars, labour-saving domestic appliances, foreign holidays and better medical care. One way this could happen is through a go-for-growth strategy using plentiful and cheap (in monetary terms) forms of fuel such as coal.

Another way it could happen would be for the west to develop a greener growth model that could then be exported to poorer countries. This would mean a rapid shift away from fossil fuels and support for the new – and thriving – environmental sector.

Green growth is an anathema to some in the environmental movement, who see it as an oxymoron. But the alternative is to tell people living in New Jersey, New South Wales and West Sussex that they are going to see their living standards fall but that they should not worry because they will be no less happy as a result. Best of luck with that.

More on this story

More on this story

  • The credit boom is a ticking timebomb for UK plc

  • Putting a value on volunteering in the age of austerity

  • George Osborne’s autumn statement: I’m afraid there is no money

  • Bailouts, bail-ins and the banks: why we can’t afford another financial crisis

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