“WHEN you open the window, both fresh air and flies come in,” said Deng Xiaoping, describing the good and bad consequences of the opening of China’s economy. Most people see economic growth and rising incomes as desirable, but they have their disadvantages. Families break apart, as young people move to the cities. Jobs become more insecure if the labour market is liberalised. Rising inequality may upset even those who are becoming richer. Small wonder, perhaps, that the satisfaction ordinary Chinese expressed with their lot fell at the start of the economic boom sparked by Deng’s reforms, before rising again as growth accelerated. So, at any rate, concluded a study published in 2012 by Richard Easterlin of the University of Southern California and colleagues.
Mr Easterlin is best known for a hotly contested paper published in 1974, which argued that rising incomes do not make people happier. Ever since, in spite of the obvious benefits, economists have debated whether getting richer is all it’s cracked up to be. The most comprehensive study, published in 2012, looked at a range of countries over time, and concluded that there is a positive re
That study did not make clear, however, whether money leads to happiness or happiness to money. Andrew Oswald, Eugenio Proto and Daniel Sgroi of the University of Warwick have posited that happiness comes first. Depressed workers are less productive, after all, and so earn less. In addition, high incomes and happiness may have a common cause. Those with a big network of friends are both more satisfied in life and better at finding well-paid jobs.
One way to answer questions about causality is to look at evidence from randomised trials. Lotteries randomly allocate extra wealth, and so could serve as a focus of study, but in most countries only a small proportion of people buy tickets. The behaviour of those having a flutter may not be typical of people in general, skewing the results. The solution would be for economists to run their own experiments, doling out big jackpots at random among the population. In rich countries it is too expensive to mimic a lottery. But in poorer places some charities already do.
The Busara Centre for Behavioural Economics in Nairobi, Kenya, runs experiments with participants from slums and rural areas. Its researchers looked at the results of a lottery-like scheme in rural Kenya, in which a random sample of 503 households spread over 120 villages was chosen to receive cash transfers of up to $1,525. The average transfer, $357, was almost enough to double the wealth of a typical villager. The researchers measured the well-being of villagers before and after the transfer, using a range of different methods: questionnaires about people’s life satisfaction, screening for clinical depression and saliva tests for cortisol, a hormone associated with stress.
Since not all the villagers received a transfer, the experiment sheds no light on what would happen if everyone’s wealth increased equally. But the study does mimic the distributional results of economic growth, which tends to allot gains unevenly. As expected, those who received transfers reported greater satisfaction with their lot after the money arrived. Cortisol levels and the incidence of depression fell too.
However, the satisfaction of those who did not receive anything fell sharply as their neighbours’ fortunes improved. The decline in satisfaction prompted by seeing one’s peers get $100 richer was bigger than the increase of satisfaction from getting a handout of the same size. The bigger the handouts to others in their village, the greater the dissatisfaction of non-recipients. (The handouts did not seem to have any impact cortisol levels or the prevalence of depression among non-recipients.)
Both the bitterness and the joy that the windfalls produced were passing. The effects of changes in people’s circumstances wear off as they get used to them—a phenomenon economists call “hedonic adaptation”. The large swings in satisfaction were found in the middle of the transfer scheme. Within about six months, all the transfers had been made (if they had been spread over a longer period, as usually happens when a country develops, the outcome may have been different). A year later the happiness of both the recipients and those who did without had returned close to its initial level.
Moreover, it was not inequality in general that bothered the unlucky, so much as a decline in their own wealth relative to the mean. Participants in the experiment shrugged off changes in the Gini coefficient of their village, which measures overall inequality. Take the example of a village in which one person gets richer, and another gets poorer. The village is less equal, but the mean income is unchanged. In the Kenyan experiment this did not matter to the rest of the village. Instead, participants compared how well everyone else was doing (the village mean) to themselves.
Blinded by aspiration
A study by Ada Ferrer-i-Carbonell looking at data on life satisfaction from Germany might help explain the Kenyans’ reactions. She concludes that there is an asymmetry in the way people compare themselves with others. We tend to look exclusively at those better off than us, rather than contemplate our position within the full range of outcomes. When the lot of others improves, we react negatively, but when our own lot improves, we shift our reference group to those who are still better off. In other words, we are never satisfied, since we quickly become accustomed to our own achievements. Perhaps that is what spurs people to earn more, and economies to grow.