Thursday, July 14, 2005

L&S: Happiness and Income Inequality

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.


Jadagul said...

Actually, from what I've read, happiness seems to corellate pretty strongly with economic freedom itself:

"Freedom generates happiness. Veenhoven classified three kinds of freedom: economic, political, and private. He found that all are correlated with happiness, but economic freedom much more so than political or private freedom. Veenhoven candidly remarks: "This is a pleasant surprise for the right-wing free market lobby but a disappointment for liberals like me" (Veenhoven, in Diener and Suh, p. 276)."
Liberty Magazine

Perhaps a utilitarians should value economic freedom as an end in itself?

Anonymous said...

Anyone care to post Steve's other defenses of income inequality?

I have a fair idea what they are, but I'd be interested to know if I missed any.

Anonymous said...

That's crack-smoking, unless, I'm missing something.

The logical extension would be that we make income as unequal as possible, such that we maximize happiness when someone moves between categories.

Or am I the crack smoker?

Glen Whitman said...

Anon of 8:30pm -- No, you're not on crack (to my knowledge). That is indeed the implication of the argument, so long as widening the distribution doesn't cause more people to spend more time below the necessary minimum. Consider two sequences of incomes, which result from a person moving up the income distribution:

(A) $10K, $20K, $30K, $40K
(B) $10K, $25K, $40K, $55K

In both A and B, the person starts with $10K. But in B, which involves greater income inequality, they experience greater improvements over time. If the happiness research says what Heloise told me it says, the implication is that sequence B is preferable.

Steven Horwitz said...

Joel - you can find my discussion of various myths here.

Anonymous said...

Glen, it seems like Heloise' analysis, and the example you gave, argue for greater income mobility (the extent to which an individual can expect his economic status to rise over time) rather than greater income inequality (the differences between people's economic statuses overall). I think most people already agree that opportunities for mobility should be as great as possible; it's raw inequality that reduces capitalism's appeal.

You could defend inequality by supposing that rising inequality reflects rising mobility over the life course, but that requires that mobility increases at a constant rate with inequality. On the contrary, I would expect that if economic inequality rose -- if people became clustered farther apart economically -- then the differences between people's economic "starting points," their incomes at the outset of their life courses, would similarly widen, giving rich young people a greater and greater head start over their poor counterparts -- i.e., reducing mobility.

Did you just mean that greater economic inequality offers people the opportunity to improve, not relative to others (by moving to the next quintile) but in absolute terms (by having a longer "economic ladder" to climb before you stop progressing)? That would only seem to benefit the oldest, who, I have a hunch, glean far less of their happiness from continual accumulation of wealth.

And of course, the whole argument relies on faster improvement in an individual's position providing more intense happiness. From your post, I can't tell if Heloise meant to imply that, or simply to state that feeling like you are improving at all correlates to greater happiness. Does happiness scale as the rate of mobility scales, or is happiness affected only by the presense or absense of mobility?

(Great blog, by the way -- long-time reader, first-time poster.)

Glen Whitman said...

Jon -- yes, I think the point is income mobility. But Steve did a good job of pointing out that there *is* a high degree of income mobility in the U.S., and that much of it arises from rising income over one's lifetime. Combining that with Heloise's point, I was arguing that a larger income dispersion would lead to greater jumps in income over a person's lifetime. But to reach that conclusion, I did have to assume implicitly that income mobility would remain the same as the dispersion increased -- which is an important assumption, but not totally implausible. Greater income dispersion often accompanies a more dynamic economy, which is also one that creates more "churning." Also, you're right that I've presumed that *greater* improvement corresponds to *greater* happiness, which may or may not be what the literature shows.

Anonymous said...

I was unaware until today that my comments caused such debate. First, here is what I think I remember from my Psychology 101 course (I have forgotten the name and author of the textbook): So long as people have their basic needs covered (food, shelter, etc), happiness does not depend much on wealth, nor on age or a slew of other factors. What does seem to matter is the person's relative situation compared with his or her past financial situation, as well as the person's relative situation compared with others around him or her currently (which would support the idea that it is better to be a big fish in a small pond). Apparently at the end of the chronicles of Narnia, C.S. Lewis describes paradise as a place where you are a bit happier every day - not where you have reached a maximum and unchanging level of happiness. (I am not saying this to endorse C.S. Lewis or christianity, but I think the author may have understood something about happiness). Given this information, starting poorer and finishing richer might increase a person's happiness, as Glen Whitman posits, because the person's personal situation is improving financially (although let's not forget that happiness doesn't only depend on money, and that many other factors also matter, like love, health, etc). However, if the person, let's say a successful businessman, is surrounded by other wealthy people, incuding even wealthier people, then the businessman may not feel any happier. In fact, he may feel just as happy as he was as a poor student, because he is comparing himself to different people now that he has moved up in the world (when he was 20 he admired CEOs, but it was all so distant, whereas now it is just so frustrating that the neighbour has a better pool).

Thus, the happiness coming from economic mobility may be mitigated by new sources of comparison.
A thought: maybe happiness is relative so that people can avoid getting too depressed if they are at the bottom of the ladder, or too lazy if they are climbing high. The fact that human beings want to always do better compared with their own past and compared with those surrounding them may be a reason why our species can evolve and innovate. Also, it can get people through tough times (some people say "you can get used to anything"). I would be interested in hearing someone else's interpretation of why human beings are happy the way they are.

Captain Capitalism said...

Could you refer me to any data on income mobility in countries outside the US? I'm currently only using US data from the Heritage Foundation.


Anonymous said...

I love it! What you are interested in is not anything sensible, like people being happy on the whole, but whatever you can do to provide a defense of "income inequality". "Ah, thank goodness, another defense of income inequality, I hadn't thought of before, just in case all the other ones turn out to fail and the do gooders try to take away some of MY income!"

Thanks for tipping your hand.

Anonymous said...

Robert Nozick touches upon the subject of different distributions of happiness throughout life in *The Examined Life*.