A narrow focus on GDP is leading to myopic economic policy, a London Business School expert warns. New research finds an increase in wealth does not make a country happier if it comes with increased inequality.
New research by Selin Kesebir, Assistant Professor of Organisational Behaviour, London Business School, and Shigehiro Oishi, Professor of Psychology, University of Virginia, finds that a country’s economic growth only makes its citizens happier if the gains are evenly spread.
Dr Kesebir explains: “Our research provides an explanation for one of the most puzzling findings in the social sciences over the past half century: an increase in wealth not always increases happiness. This is the famous Easterlin paradox.
“We find that an increase in GDP only makes us happier if wealth is evenly distributed. Countries with growing income inequality often fail to increase average happiness, even if they succeed in boosting GDP. We know that happier people are also more productive, so this really matters. Even wealth distribution should create a virtuous cycle – more happy people, more productively contributing to the country’s economic growth.”
The findings come at a time when income inequality is growing globally. A recent Oxfam report (‘An Economy for The 1%’) shows that the world’s wealth is becoming ever more concentrated, with 62 billionaires now holding as much wealth as the world’s poorest 3.5 billion.
“When wealth is concentrated among a small group it evokes a sense of unfairness among the rest of society”, Dr Kesebir says.
“When growing wealth is more evenly distributed across income brackets, we often observe an increase in life satisfaction,” explains Dr Kesebir. “For example, in Scandinavia, where income inequality is low, happiness increases with increasing GDP. Finland has the strongest correlation between an increase in GDP and average happiness. In many developing Latin American countries however, where wealth is still very much concentrated among a small portion of elites, increasing wealth does not come with more happiness, and happiness levels sometimes even go down as the economy grows.”
Dr Kesebir and Professor Oishi examined the relationship between GDP per capita and happiness in two different data sets covering 34 nations in total. These sets consisted of 16 developed nations and 18 developing Latin American nations.
The researchers found that economic growth had a less positive and more negative effect on happiness as income inequality increased. The study has important implications for economic policy in both developed and emerging nations.
“To achieve an increase in national happiness, countries must recognise that producing more wealth alone is not sufficient. Countries with a greater gap between rich and poor need to consider that growing economic wealth may not create a happier citizenry.”
The implications are particularly relevant in the current climate. The US for one is seeing widening income inequality and happiness has stagnated since the 70s. But the US is not alone and others will follow if they fail to re-frame the economic policy debate.