The Fake Paradox of Prosperity

So, you know all the paradox flogging books: The Progress Paradox, The American Paradox, The Paradox of Choice. Layard begins Happiness with “There is a paradox at the heart of our lives.”
Now, I'm increasingly baffled by the idea that there is anything paradoxical afoot. Many of these books refer to “Easterlin's Paradox,” in honor of Richard Easterlin's famous '74 paper showing that average self-reported happiness has not gone up as average income has gone up. Now, like I argued in my last post, this isn't a paradox relative to orthodox economics, because happiness isn't a concept in the theory of orthodox economics. There is a widespread folk theory, popular among economists, that says that desire satisfaction brings happiness, and that higher incomes brings more desire satisfaction, and so higher incomes ought to bring greater happiness. But the ideas of adaptation and social comparison most often used to explain the stability of the happiness trends are also part of popular folks theories, and, I think, much more plausible prior to rigorous investigation than the economist's money–>happiness folk theory. Its pretty obvious from personal experience, not to mention from about the entirety of our literary tradition, that we tend to take what we have for granted, that we tend to measure ourselves against others we imagine to be our peers, the money alone won't make you happy, that what we really need is each other, etc. So, the data show we're wealthier and that we say we're just as happy as we used to be. Where's the paradox? There is no paradox.
But maybe there are explanations, other than the economist's misguided folk theory, for the bullheaded insistence in describing as a “paradox” something that is in fact predictable and intuitive relative to intuitively plausible psychological principles.
In ages of yore there was a raging debate over whether capitalism or communism was best at delivering the goods. Capitalism now reigns as undisputed champ. But the conquest of scarcity under communism was also supposed to be psychologically transformative and liberatory. And so, yeah, capitalism delivers the goods. But are we transformed? No! We're almost exactly the same, and that's really disappointing. If you were expecting the era of material plenitude to free our minds for higher pursuits, and to enable deeper, more meaningful engagement with our fellow men, then capitalism may seem like a bust. We're left yearning for something else.
So, we're wealthier than ever, and have the extra freedom that entails. We're at least as happy as ever. (Despite what you may read in the papers, the average isn't flat, it's just rising very slowly.) Indeed, we're about as happy as people have ever been, as far as we can tell. Depression, like ADHD, is “on the rise” because simply because it is promiscuously defined and diagnosed. But there must be something wrong. Bowling alone? Ennervated by too many kinds of jam? Something. Because life's just what it's always been, only just a little better. And we were hoping for something more, well, dramatic.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center

8 thoughts

  1. This is now the second DeLong debate that I’ve seen or read (I watched the video debate posted at Thoma’s site as well.
    Is it just me or does DeLong argue ideas through anecdotes and he said/she said type statements?
    His video debate solidified this impression.

  2. Shouldn’t someone go through and delete all of DeLong’s comments, and tell him he’s being a troll?
    The most amusing thing: DeLong’s suggestion that the the Bush years were boom years! Well, now he tells us. What a hack.

  3. “Bad corporate governance coupled with bad government policies has destroyed the financial sector, scaring investors and freezing lending.”
    OK, how can we take anyone seriously who says something so stupid. What has scared investors and destroyed the financial sector is financiers making really really really bad investments. If we can’t agree on that simple point, wondering which economist we all are, is a waste of time.

  4. The voting was not for who won the debate — the question was “are we all keynesians now” which Brad argued that we aren’t (he argued for No!) since it appears that exhibit A: Luigi Zingales, is still 100 years behind on economic policy.
    And it’s a bald stretch to call any of those people on the list “geniuses”. Economic research is rather subjective. The field has traditionally been dominated by conservatives, so if you’re conservative, you’re likely to get your research published. Among thinking economists, there’s a consensus that technology shocks have nothing to do with the current crisis, and yet that’s what Prescott won his Nobel for — an idea which is now completely discredited (except in the eyes of many conservative economists, for whom it is like the Penteteuch…)
    Zingales basic premise is that the economic crisis and the banking crisis are completely separate. This is simply not so. Were the economy to grow at 10% next year, there would be no banking crisis (or, at least, a much more manageable crisis). Think about it — 10% growth implies unemployment down at 3% — suddenly, lot’s of unemployed people who are struggling with credit card debt and mortgage payments will have a much easier time, the housing market would turn around, corporate profits would be fat, and the Dow would hit 10,000 again… The automakers would certainly be able to sell SUVs again… Christ, 10% growth and Madoff would likely be back in business! On the other hand, every month that 650,000 people lose their jobs, that must imply at least another 30,000 defaults of some kind… Especially, the people losing their jobs now are not likely to have suspected it one year ago… Zingales is arguing that even if we were to suddenly employ 4 million more people, it would have no effect on the banking crisis; conversely, he argues that if 4 million more people lose their jobs, more people won’t default.
    Zingales makes no sense.

    1. “The field has traditionally been dominated by conservatives, so if you’re conservative, you’re likely to get your research published.” -Thorstein Veblen
      “Economists are often thought of as conservative, but that was not the case in
      the previous study nor in this one. In this study, 47 percent of the students classified
      themselves as liberal, 24 percent as moderate, 16 percent as conservative and
      6 percent as radical. (Six percent stated that politics were unimportant to them.)
      These percentages are very similar to the last study, although the share of those
      identifying themselves as radicals declined (from 12 percent). The students perceived
      their views as slightly more liberal than those of their parents, 40 percent of
      whom they classified as liberal, 36 percent as moderate, 16 percent as conservative
      and 3 percent as radical.” -Colander, David. The Making of an Economist, Redux. Princeton: Princeton University Press, 2008.

  5. Arnold Kling made a superbly clarifying comment over on Atlantic Business – Short excerpt: it “is unfair to Keynes to imply that his view of slumps is that they are caused by underconsumption. His primary explanation for a slump was a decline in “animal spirits” in the business sector. Another explanation was an increase in “liquidity preference” among households and investors. Both explanations apply in today’s economy, although in modified form. The loss of “animal spirits” can be seen in the housing market, which is no longer animated by the spirit of ever-rising values. “Liquidity preference” can be seen in surge in demand for U.S. Treasuries…… (go read the rest.)

  6. So how did Brad and Luigi do?
    1) Points to Brad for eviscerating Say’s Law. Germane and convincing.
    2) Points to Luigi for emphasizing the central role of trust, and how much reform of financial governance will be necessary to rebuild it.
    3) But Zingales’s prescriptions will affect the long term, not the short. Keynes might note that in the long run we are all dead. So: one key issue is how immediate-term the policy response must be. I think this is a point of difference: DeLong would argue that the ship is going down in the short term, and we need short-term action. Does Zingales agree?
    4) So, in other words, points to Arnold for pointing out that the key issue is really “what is the right prescription for the economy today.”
    5) Naturally, Arnold favors appropriate tax cuts over “government spending, no matter where or when.” This is closer to the crux of the real debate: I’m sure Brad would favor more – and more immediate – spending than Arnold. I doubt that he would say “no matter where and when” any more than Arnold would say that about tax cuts.
    6) This is the debate I would like to hear.

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