Economic Growth and Human Wellbeing (Part III)

By Carmen Lawrence
Winthrop Professor, School of Psychology, University of Western Australia
Posted on 5 May 2011
Filed under Cognition, Culture, Economic Equity

(This post is the final post of a three-part series. See Part 1: Introduction and Part 2: Revisiting Limits to Growth.)

Part 3: The Psychological Down Side of Growth

(a)  Subjective well being/ happiness

Despite attempts to develop a more complex understanding of human progress, policy makers and many economists still habitually conflate economic growth with improved well-being and greater happiness as did 19th century economic theorists. However, it is now clear that there is no necessary relationship between the two.

While it is true that increasing income improves health and wellbeing up to a point, the gains – whether measured at an individual or a societal level – flatten out very quickly (Bok, 2009). As many have shown, at low levels of economic development, when many people live in poverty, even modest economic gains produce significant effects on the quality of life – better food, clothing, shelter, medical care, education and life expectancy. It also improves people’s happiness and sense of wellbeing. In these circumstances, it makes sense for national policy to focus on economic growth. But beyond a certain threshold, and it turns out to be at quite a modest level of income, further growth results in little gain either in well-being or life expectancy. At this point other factors are more significant influences on the quality and length of life.

There is now a substantial literature on “subjective well being” designed to assess what factors affect people’s perceptions of the quality of their lives. The research is based on large scale surveys of national differences in responses to questions about happiness and general satisfaction. The scope of such studies is extensive, ranging from questions about whether and to what extent increases in income result in greater happiness to the effects of marriage on happiness and the impact of crime levels on life satisfaction. Subjective well being (SWB), measured by self-reports, is the indicator most often used. It refers to ‘a broad category of phenomena that includes people’s emotional responses, domain satisfactions, and global judgements of life satisfaction’ (Diener et al., 1999, p. 277). It consists of two elements: an affective one (positive or negative feelings) and a cognitive one, which is how people judge the extent to which their lives meet their expectations.  According to Diener and Seligman (2004) the major dimensions are pleasure, engagement and meaning.

It is no surprise that the two most important predictors of life satisfaction are health status and family situation, and while studies show that there is also a positive correlation between income and happiness, the effect is largely due to the benefits which accrue to low income earners. Put simply, $10,000 buys a lot more “happiness” for someone earning $20,000 than someone earning $200,000 a year. Although per capita income has continued to increase in the developed economies over the last half century or so, happiness has not, the so-called “Easterlin Paradox”.

Some recent research suggests that, at a national level, subjective well being depends less on income and more on people’s perception that they have free choice in their lives rather than being subject to external authority (Welzel et al., 2003). Radcliff (2001), for example, found that people tend to be happier under social democratic welfare regimes, although he is careful not to argue that this is a causal relationship. Ingelhart and Welzel (2005) have also shown that in all the major cultural groups, happiness is linked with people’s sense of freedom. In their most recent international comparisons,  Ingelhart and his colleagues take this a step further, showing that “democratization, economic growth, and growing social tolerance contributed to a rising feeling that people have free choice and control of their lives.” Using an index of the extent to which a given community accepted people of other races, immigrants and homosexuals as neighbours, they showed that people living in more tolerant societies tended to be happier, no matter what their own beliefs. In their review of the relevant literature, Diener and Seligman (2004) concluded that people with the highest reports of well being are not those who live in the wealthiest countries but those who live in nations which have effective political institutions, where human rights are protected, where corruption is low and mutual trust is high. A rational response would seem to be to shift the policy goals toward improving the quality of life rather than “to continue the inflexible pursuit of economic growth as if it were a good in itself” (Inglehart, 1997, pp. 64–65).

In fact, the research indicates that beyond a certain point, relative income is all that matters. Hence, an across the board rise in income will have little effect on happiness. Furthermore, there is also evidence that people readily adapt to their circumstances; while increased income may have a transitory effect on happiness, the effect quickly dissipates.


(b)The effects of environmental degradation on well-being 

 What is often also overlooked in the simple equation of wealth and happiness is that the social and environmental costs of rising consumption may generate health and well-being risks of their own. People exposed to persistent noise, drought and unusual weather are more likely to report feelings of unhappiness – and, in the case of extreme heat in Australia, even to be admitted in increased number to emergency psychiatric care (Nitschke et al., 2003). Sherwood and Huber (2010) have shown that, while it appears to be generally assumed that humans will simply adapt to warmer climates, in reality “even modest global warming could...expose large fractions of the population to unprecedented heat stress, and that with severe warming this would become intolerable” (p 9552).

In recent studies, the state of the environment has been shown to be an important in predictor of national differences in subjective well being. Rehdanz and Maddison (2005), for example, found that for 67 countries tracked  between 1972 and 2000, climate variables were shown to have a highly significant effect on SWB and projections from these trends indicated that countries with very high summer temperatures (like Australia) were the most likely to suffer reductions in wellbeing as a result of climate change. Panel data from 10 European countries were used by Welsch (2006) to analyse the effects of air pollution on SWB. He found that, after controlling for income, differences between countries and changes over time could be predicted by objectively measured air quality.

In one of the few studies to examine the effects of environmental conditions on well being in a developing economy, Smyth and his colleagues (2008) found that people living in Chinese cities with high levels of atmospheric pollution, environmental disasters and traffic congestion reported significantly lower levels of well-being. They later studied the relationship between environmental surroundings and personal well-being across six Chinese cities and found a strong negative association between atmospheric pollution and personal well-being.

The psychologically adverse consequences of destruction of the natural environment have also been documented in Australia (Conner et al., 2004). Interviews with people living in the Hunter Valley of New South Wales found that “the transformation of the environment from mining and power station activities was associated with significant expressions of distress linked to negative changes to interviewees’ sense of place, well-being, and control” (p 47). Pollution can affect well being both through an awareness of the adverse health and ecosystem effects of pollution as well as through the direct health effects. Several researchers (Ferrer-i-Carbonell and Gowdy, 2007; MacKerron and Mourato, 2008) have reported negative correlations between perceptions of pollution and well being.

Economic activities that diminish the quality of the environment and increase pollution harm the communities that are supposed to benefit. Conversely, contact with the natural environment has been shown to reduce stress, improve children’s behaviour and increase well being. Indeed patients appear to recover faster from surgery when they are able to see plants, flowers and trees. Although we might like to think that the natural environment is a tool at our disposal, that we are entitled, as the Book of Genesis suggests, to exercise “dominion” over “all the earth”, in fact we are part of the natural world and, for better and for worse, inextricably tied to the earth and deeply affected by it. Poets understand this. Politicians should too.



Bok, D. (2009). The Politics of Happiness What Government Can Learn from the New Research on Well-Being. Princeton University Press.

Conner, L., Albrecht, G., Higginbotham, N., Freeman, S. & Smith, W. (2004). Environmental Change and Human Health in Upper Hunter Communities of New South Wales, Australia. EcoHealth 1 (Suppl. 2), 47–58.

Diener, E & Seligman, M. (2004). Beyond Money. Toward an Economy of Well-Being. Psychological Science in the Public Interest, 5 (1), 1-31.

Diener, E., Suh, E., Lucas, E., & Smith, H. (1999). Subjective wellbeing: Three decades of progress. Psychological Bulletin, 25, 276–302.

Easterlin, R. (2001). Income and Happiness: Towards a Unified Theory, Journal of Economics, 111.

Ferrer-i-Carbonell, A.  & Gowdy, J. (2005). "Environmental Awareness and Happiness," Rensselaer Working Papers in Economics 0503, Rensselaer Polytechnic Institute, Department of Economics.

Inglehart, R. (1997). Modernization and postmodernization: Cultural, economic and political change in 43 societies. Princeton, NJ: Princeton University Press.

 Inglehart, R., Foa, R., Peterson, C. & Welzel, C. (2008). Development, Freedom, and Rising Happiness: A Global Perspective (1981–2007). Perspectives on Psychological Science, 3 (4).

Sherwood, S. & Huber, M. (2010) An adaptability limit to climate change due to heat stress. Proceedings of the National Academy of Science, 107 (21), 9552-9555.

Smyth, R., Nielsen, I., Zhai, Q., Liu, T., Liu, Y, Tang, C.Y., Wang, Z., Wang, Z. & Zhang, J. (2008). Environmental surroundings and personal well-being in urban China, Monash Department of Economics Discussion Paper 32/08.

van Praag, B., & Baarsma, B. (2004). Using Happiness Surveys to Value Intangibles: The Case of Airport Noise (Tinbergen Inst. Discussion Paper No. 04-024/3).

Welsch, Heinz (2006). ‘Environment and happiness: Valuation of air pollution using life satisfaction data.’ Ecological Economics, 58 (4), 801-813.

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Comments 1 to 10:

  1. Thanks Carmen, it seems eminently sensible that environmental degradation should have detrimental effects on ‘well being’. Ironically the very things that people are so afraid of losing (comfort, the status quo, standard of living etc) through actively addressing climate change; and are the very things that will be the antecedents to declining wellbeing if nothing is done.

    We can also use behavioural and psychological insights to promote perceptual and behavioural change

    For example we know that people fear losses more than they value gain and tend to discount the future

    People will often take large risks to avoid losses while avoiding small risks to make gains (Kahneman and Tversky, 1984; Thaler, 1992; Dawnay and Shah, 2005). Because of this loss aversion, whether information is framed in terms of losses or gains leads to systemically different decisions (Kahneman and Tversky, 1992). For example, telling people that conserving electricity via a solar PV system will save them $X per year is likely to be less effective than telling them that not conserving electricity will lose them $X per year (Sunstein and Thaler, 2008).

    We also tend to discount the future, in that we perceive immediate threats as more rel¬evant and of greater urgency than future problems. Yet governments and their communicators portray the threat from climate change as a future rather than present risk. Additionally, research indicates that many people count environmental and financial consequences as less important with every year they are delayed. For example, the average person finds little difference between getting $250 now or $366 in one year (implying an interest rate of roughly 46%). The rates of discounting applied to environmental con¬sequences; would find the average person sees little difference in 21 days of clean air now over 35 days of clean air next year. (Hardisty & Weber, 2009)

    Framing and ordering affect the choices people make

    It’s pretty well accepted that, the way in which information about policies are framed has influence on consumer acceptance or rejection of the subsequent policy (Milch et al., 2009; Swim et al., 2009). We’ve all probably heard about the following experiment, but it’s worth briefly recounting to illustrate the power of framing. Hardisty, Johnson and Weber in 2006 conducted an experiment where an optional 2% fee was added to airline tickets, alternatively described as a ‘carbon tax’ and a ‘carbon offset’ to fund carbon reduction technologies (Gertner, 2009). Passengers were asked to identify with a political group (Republican or Democrat, as it was an American experiment), and to write down their thoughts in order as they decided whether to pay. They found that 65% of those identifying as Republicans were willing to pay for a carbon offset, but only 27% were prepared to pay for a carbon tax (Swim et al., 2009). Democrats were largely willing to pay for both. When Republicans considered a carbon tax they had very negative early thoughts about the costs of the tax (resulting from a strong aversion to the tax frame), leading to strongly negative conclusions. When considering the carbon offset, both Republicans’ and Democrats’ early thoughts were more positive as they considered the benefits of funding clean technology before the costs of funding the offset, leading to positive overall conclusions and willingness to pay. People’s initial willingness to pay the 2% fee was determined by their receptiveness to the ‘tax’ and ‘offset’ frames (not the tax mechanism itself), which in turn affected whether they considered benefits or costs first (Gertner, 2009).

    Social norms are powerful influences on behaviour

    We all routinely compare our actions with those of others (Festinger, 1954) and derive subjective and descriptive norms from their observations (e.g., Heath & Gifford, 2002) about what is the “proper” course of action.

    Schultz et al. found that when household power bills displayed the average amount of electricity that other households in the same community were using (descriptive normative information), people tended to decrease or increase their electricity use to fit the norm. The undesired boomerang effect (low-energy users increasing their energy use to fit the norm) was prevented by giving people positive feedback (injunctive normative information). High-energy users received frowning-face emoticons on their power bills, while low-energy users received smiley-face emoticons (Schultz et al., 2007; Swim et al., 2009; Sunstein and Thaler, 2008). The combination of descriptive and injunctive normative messages meant that heavy users made even bigger cuts, and the light users remained frugal (Schultz et al., 2007).

    Sunstein and Thaler (2008) describe an experiment where taxpayers were sent four kinds of information. One group was told that their tax money funded public goods; another group was threatened with information about the legal risks of not paying their taxes; a third group was given increased information on filling out their tax return form; and the final group was told that 90% of people had already fulfilled their tax return obligations. The only intervention that had any effect on people’s behaviour was the final one, which told people that there was a high compliance rate.

    Divergence of self-expectations and behaviour can lead to cognitive dissonance

    Stoll-Kleemann, O’Riordan and Jaeger (2001) showed that people find the consequences of climate change alarming. However, they also found that people find the idea of changing their energy-intensive lifestyles more daunting. These competing tensions create cognitive dissonance, and people form ‘socio-psychological denial mechanisms’, meaning they overestimate costs and underestimate benefits of shifting to less energy-intensive behaviour while blaming other people’s and government’s inaction.

    By contrast, in situations where we have publicly expressed our attitudes or beliefs, we are more likely to change our behaviour so that it remains consistent with them (Dawnay and Shah, 2005). Therefore, commitments and promises are important for ensuring people stick to behaviour. When people make a small commitment (for example, signing a petition), they are more likely to agree to make a much larger commitment a few days later (for example, donating money). People are also more likely to stick to a commitment if it is public, if they verbally agree or write down their intentions, or if they make the commitment as a member of a group (Finkelstein, 2009).

    We all have a finite pool of worry and are susceptible to the single-action bias

    Weber identifies single-action bias occurring when one action (such as buying a hybrid car, or voting for a green candidate) effectively assuages the fear (climate change or evidence of good green credentials) that prompted the action, meaning that we don’t take further actions (Gertner, 2009; Weber, 2006).

    For example, although buying a hybrid is worthy, it should be but one activity in a series of behaviour chang¬es aimed at reducing climate change. Switching to solar, consuming less meat, con¬serving daily energy use, and eating locally grown food are other effective ways to mitigate climate change, to name but a few. However, if individuals and institutions participate in recycling programs, they may be prone to the single action bias and feel like they are already doing enough to protect the environment. Policy makers need to be aware of these biases so that they do not abandon policy efforts aimed at multiple risk behaviours.

    Interestingly, Gertner (2009) describes in an unintended effect of the 2008 US election there may be evi¬dence of a mass single action bias—the election of Pres¬ident Barack Obama seemed to have shifted Americans’ attitudes about whether or not the state of the envi¬ronment is improving. Gallup in a February 2009 poll found that Democrats voters believed the environment had improved simply based on Obama’s election, whereas Republican voters who believed the environment had improved did not shift from its’ pre election base. The poll showed 41 percent of Democrats think the environment was getting better, compared to just 26 percent in 2008.

    References & Further Reading

    Ariely, D. and J. Heyman (2004) ‘Effort for payment: a tale of two markets’, Psychological Science, 15 (11), pp.787-93

    Dawnay, E. and H. Shah (2005) Behavioural Economics: seven principles for policy makers, London: New Economics Foundation

    Fehr, E., U. Fischbacher, U. and S. Gächter (2002) ‘Strong reciprocity, human cooperation and the enforcement of social norms’, Human Nature,13, pp.1-25, 17 September 2009

    Fehr, E. and U. Fischbacher (2004) ‘Third party punishment and social norms’, Evolution and Human Behavior, 25, pp.63-87, September 2009

    Fehr, E. and S. Gächter (2002) ‘Altruistic punishment in humans’, Nature, 415, pp.137-40, doi:10.1038/415137a

    Hannant, A. (2007) ‘Problems with the climate change story’, background paper for ‘Making change – taking the initiative on climate change communications and engagement’ conference, Wellington

    Hardisty, D. J., Weber, E. U. (2009). Discounting Future Green: Money Versus the Environment. Journal of Experimental Psychology: General. 138, 329-340.

    Kahneman, D. and A. Tversky (1984) ‘Choices, values, and frames’, in D. Kahneman and A. Tversky (eds), Choices, Values, and Frames, Cambridge: Cambridge University Press

    Kahneman, D. and A. Tversky (1986) ‘Rational choice and the framing of decisions’, in D. Kahneman and A. Tversky (eds), Choices, Values, and Frames, Cambridge: Cambridge University Press

    Kahneman, D. and A. Tversky (1992) ‘Advances in prospect theory: cumulative representation of uncertainty’, in D. Kahneman and A. Tversky (eds), Choices, Values, and Frames, Cambridge: Cambridge University Press

    Kaplan, S. (2000) ‘Human nature and environmentally responsible behavior’, Journal of Social Issues, Fall200, pp 230 – 252.

    Krantz, D., N. Peterson, P. Arora, K. Milch and B. Orlove (2008) ’Individual values and social goals in environmental decision making’, Decision Modeling and Behavior in Uncertain and Complex Environments, pp.165-98,

    Lawrence, C, (2010) ‘The Psychology of Climate Change Communication and Scepticism’

    Lejarraga, T. (2009) ‘When experience is better than description: time delays and complexity’, Journal of Behavioral Decision Making,

    Marshall, G. (2001) ‘Denial and the psychology of climate apathy’

    Milch, K., E.U. Weber, K.C. Appelt, M.J. Handgraaf and D.H. Krantz (2009) ‘From individual preference construction to group decisions: framing effects and group processes’, Organizational Behavior and Human Decision Processes, 108, pp.242-55.

    Pichert, D. and K. Katsikopoulos (2007) ‘Green defaults: information presentation and pro-environmental behaviour’, Journal of Environmental Psychology, 28, pp.63-73, doi:10.1016/j.jenvp.2007.09.004

    Schultz, W., J. Nolan, R. Cialdini, N. Goldstein and V. Griskevicus (2007) ‘The constructive, destructive, and reconstructive power of social norms’, Psychological Science, 18 (50), pp.429-34

    Stoll-Kleemann, S., T. O’Riordan and C.C. Jaeger (2001) ‘The psychology of denial concerning climate mitigation measures: evidence from Swiss focus groups’, Global Environmental Change, 11, pp.107-17,

    Swim, J. et al. (2009) Psychology and Global Climate Change: addressing a multi-faceted phenomenon and set of challenges, Washington DC: American Psychological Association

    Thaler, R. (1979) ‘Toward a positive theory of consumer choice’, Journal of Economic Behavior and Organization, 1 (1980), pp.39-60,

    Thaler, R. (ed.) (1992) The Winner’s Curse: paradoxes and anomalies of economic life, New York: The Free Press

    Weber, E. (2006) ‘Experience-based and description-based perceptions of long-term risk: why global warming does not scare us (yet)’, Climate Change, 77, pp.103-20,

    Weber, J. M., Kopelman, S., Messick, D.M. (2004). A conceptual review of decision making in social dilemmas: Applying a logic of appropriateness. Personality and Social Psychology Review, 8(3), 281-307.
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