The Easterlin Paradox is explained by the Maslow Hypothesis

The Easterlin Paradox states that at a point in time, happiness varies directly with income—both among and within nations; But over time the long-term growth rates of happiness and income are not significantly related. The principal reason for the contradiction is social comparison. At a point in time, those with higher income are happier because they are comparing their income to that of others who are less fortunate, and conversely for those with lower income. Over time, however, as incomes rise throughout the population, the incomes of one’s comparison group rise along with one’s own income and negate the otherwise positive effect of one’s own income growth on happiness.

Figure 1: The relationship between income and happiness (Kahneman and Deaton, 2010)

Figure 2: The relationship between household income and wellbeing (Killingsworth, 2021)

The Maslow Hypothesis explains this paradox; Money matters insofar as it addresses the bottom two levels of Maslow’s hierarchy of needs (food, clean air & water, shelter, clothing, health care, safety & security…). That’s the rounding-off of well-being measures seen in Figure 1 and the inflection point at $75,000 in Figure 2. After that, Grant’s Razor kicks in, and the biggest factor affecting happiness and well-being is relationships.

This is why smaller, self-contained communities (The Blue Zones, Amish/Mennonite communities, indigenous tribes…)—even without modern comforts and technology—are happier and live longer than those living in modern society; they have unconditional love and belonging, experience no loneliness, and are never forced to bear stress or hardship alone.

In our culture, there is this insidious belief that one needs to earn their place on the planet through their behaviors or achievements. Thinking you have a debt to pay every time you wake up in the morning is emotionally exhausting and an untenable way to live life over the long term.

The key difference between our modern society and those happier tribal societies: we have made it possible to live life playing a series of finite games—best illustrated by the cooperation dilemma (aka the prisoner’s dilemma). Whereas in tribal society, everyone is playing the infinite game collectively. Sure, individuals can choose to give up the infinite game, but that means getting kicked out of the tribe.

Among the Amish, young adults leave their community and live in modern society (known as rumspringa-literally “running around”). At the end of their time, they get to choose: reject their community of origin and remain in modern society or rejoin the community along with all of the limitations and constraints therein. It’s notable that 90% choose to return. Community and connection matter more than modern comforts and technology.

Figures from “Will faster economic growth make us happier?” by Michael Plant