Marshall Auerback — Higher GDP Growth Does Not Equate To Greater Social Well-Being And Happiness

For rich, developing, and transition countries, whether pooled or analyzed separately, there is no time series evidence that a higher economic growth rate increases the rate of improvement in life satisfaction. Doubling the rate of economic growth does not double the increase in life satisfaction; rather, the evidence is that it has no significant effect at all.

If there is any less developed country for which one would expect a positive impact of economic growth on SWB it is China, whose growth since 1990 from an initially very low value has been at the highest rate ever recorded, a four fold multiplication of real GDP per capita in two decades (Heston, Summers, and Aten 2012). Household appliances such as refrigerators and washing machines – quite rare in 1990 – are now commonplace in urban areas. Color television sets currently average over one per household. By 2008, almost one in ten urban households owned a car and China had become the world’s leading automobile producer, according to the OECD.

Yet, the combined evidence from six separate surveys is that life satisfaction in China has not improved, and, if anything, may have declined somewhat, according to Richard Easterlin, a Professor Emeritus at USC, who has made a lifetime study of the phenomenon…. 

Macrobits by Marshall Auerback
Higher GDP Growth Does Not Equate To Greater Social Well-Being And Happiness
Marshall Auerback

While psychologists have long used surveys of reported well-being to study happiness, economists only recently ventured into this arena. Early economists and philosophers, ranging from Aristotle to Bentham, Mill, and Smith, incorporated the pursuit of happiness in their work. Yet, as economics grew more rigorous and quantitative, more parsimonious definitions of welfare took hold. Utility was taken to depend only on income as mediated by individual choices or preferences within a rational individual’s monetary budget constraint. 

Even within a more orthodox framework, focusing purely on income can miss key elements of welfare. People have different preferences for material and non-material goods. They may choose a lower-paying but more personally rewarding job, for example. They are nonetheless acting to maximize utility in a classically Walrasian sense. 

The study of happiness or subjective well-being is part of a more general move in economics that challenges these narrow assumptions. The introduction of bounded rationality and the establishment of behavioural economics, for example, have opened new lines of research. Happiness economics – which represents one new direction – relies on more expansive notions of utility and welfare, including interdependent utility functions, procedural utility, and the interaction between rational and non-rational influences in determining economic behaviour.…