Assume that your income increases considerably compared to anyone around you. Will you feel much better off with that? Many of the people will say yes.
Now imagine that everyone around you is experiencing an increase in their income while yours stays the same. So how do you feel about that? Many of the people would feel worse off.
What if you and everyone around you are experiencing an increase in income – would you all experience changes in your happiness?
This is the exact question economist Richard Easterlin attempted to answer in his research study titled Will raising the incomes of all increase the happiness of all?
Easterlin evaluated the discoveries of a national happiness survey conducted in the Usa every year from 1972 to 1991. The survey posed a single question:
“Taken all together, how would you say things are these days – would you say that you are very happy, pretty happy, or not too happy?”
The percentage of participants who replied “very happy” every year is shown here:
It is clear from the graph that there was no major change in the percentage of people who have said they are “very happy” during this time frame. There is a small gradual decline over the years.
What renders this finding particularly shocking is when we glance at how the disposable income per capita (the average amount of money that each person has available to spend after paying taxes) has altered over the same period:
Over the same period, disposable income increased by more than a third. So although people had a lot more cash to spend on average in 1991 relative to 1972, there was no overall increase happiness.
But this survey only looked at the United States of America. Perhaps European countries have shown a different trend?
Easterlin evaluated the research results of a similar survey of nine different Countries in europe over a similar time frame (1973 – 1989). The percentage of people who said that they were “very satisfied” with life each year is shown here:
Over the years, there’s no noticeable trend. Like the United States, most European countries have experienced considerable increases in pay, but there has been no change in happiness levels.
Easterlin reports that “The overall pattern, however, is clearly one of little or no trends in the period when real GDP per capita is rising from 25 to 50 per cent in all of these countries (OECD, 1992).”
Despite an increase in income of as much as half in some countries, there was still no noticeable increase in overall happiness.
But the increase in income in the U.S. and Europe may not have been enough. Perhaps an even sharper increase in income was required to make people happier. So Easterlin started looking at one of the most extreme income increases in human history over a short amount of time: Japan from 1958 to 1987.
In 1958, Japan was a devastated country trying to bounce back from the catastrophe of the Second World War. Their economy was in the trash and their prospects look gloomy. But over the next 30 years, they have made among the most impressive transformations ever seen and experienced a five-fold growth in per capita income.
Easterlin states, “Consumer durables like electric washing machines, electric fridges and tv sets, which were discovered in few homes at the beginning of the period, has become almost universal, and owning a car increased from 1 to around 60 per cent of households.”
Certainly, with all this economic prosperity, the country must have noticed a tremendous spike in happiness, right? But a major survey of happiness carried during this time frame tells a very different story. The average happiness of people over the years is shown here:
Again, the same trend is emerging in Japan as in the U.S. and Europe. Despite huge increases in income, the level of happiness stay static.
So what’s offering? Why is it that when everybody in a country senses an increase in income, everyone looks fairly at the same happiness levels?
Easterlin and his colleagues have reached a rational conclusion to explain this hypothesis:
“Raising everyone’s income does not boost everyone’s happiness. This is because the tangible standards on which well-being decisions are based rise in the same proportion as the overall income of society.”
As income rises in society, people will naturally rise their expectations of what they think is essential to lead a decent life. No matter how much earnings tends to increase, society will immediately increase its standards for what material things are required to live well. It is seen clearly with Japan: whilst also their income increased fivefold, their material needs have also risen exponentially, leading in no increase in happiness .
Another instance of this can be seen from a research conducted in the United states by the social scientist Lee Rainwater, in which he discovered that “the income perceived as necessary for recovery increased in the same ratio as the actual per capita income between 1950 and 1986.”
So not only do folks assume that they will need more income to survive well, but their income actually defines how much they believe they need to live excellently.
This implies that a family that earns $100,000 annually may think $90,000 is required to survive well (90 percent of their income). But if their income goes up to $200,000, they might see $180,000 as a required income to live a decent life (still 90%)
When taking into account why people are quick to increase their quality of life, Karl Marx may have said that the finest:
“The house may be large or small; as long as the surrounding houses are equally small, it satisfies all social demands for housing. But if the palace rises beside the little house, the little house falls into a hut.”
Put differently: if the whole country lives in huts, they should all be lucky.But as soon as the castle is built, the hut immediately becomes inadequate. This results in feelings of deprivation,
Breaking the Norm
It is quite clear from these studies that raising everyone’s earnings in a country only tends to lead to one result: greater wants. When everyone receives more, everyone appears to believe that they will need more to live possibly the best. This is disappointing at a time when most people in developed nations already have much more than they will need live a “better life.”
So all of this economic growth over the last decade is good news for people who are able to follow the system of spending more as they receive more. Today is one of the best times throughout history to make the most of the extraordinary standard of living that we have at our disposal.
People who can enhance their income, while not trying to give in to the standard of raising their standards as their raises and bonuses rise, will find a great deal of freedom. Not only financial freedom. They’re going to find freedom from inordinate materialistic desires and aspirations. They will find that perhaps a “better life” can be survived on much less than social system actually intended to live well.
Will you break this standard?