A seminar participant, Heloise Robinson, who is familiar with the burgeoning “happiness” literature, told me something a couple of days ago that could provide a novel defense of economic inequality. The happiness literature seems to show that increasing wealth doesn’t really correlate with increasing happiness; instead, individuals appear to have a certain “set point” of happiness they tend to reach regardless of material success, so long as their material well-being is above some minimum level. (This much I knew already.) I pointed out that while I don’t think I’m appreciably happier (or sadder) than I was in graduate school, I still wouldn’t want to return to my graduate school income, which was less than a third of my current income. I brought up this point to show that maybe we care about things that don’t necessarily lead to “happiness” as measured in surveys.
Then Heloise said – and this is the part that was new to me – that measured happiness does seem to correlate with doing better over one’s lifetime. People like to perceive that their condition is improving. So how does this connect with economic inequality? As Steve Horwitz noted in his lecture earlier today, much of the mobility between quintiles of the income distribution happens because of life cycles: people start off in low quintiles, then tend to move up over time as they get older and acquire more experience and skills. (This happens within quintiles too, of course.) To the extent this is true, the happiness literature could be taken as an argument in favor of greater income inequality, because people moving through their lifetimes and up the quintiles will be experiencing larger improvements in their positions.
I wouldn’t want to rely on this as the sole argument in defense of income inequality (Steve made many more), but I do think it’s a counterintuitive implication of research usually deployed by researchers who wish to denigrate capitalist institutions.