The Easterlin Paradox and the Decline of Social Capital: An Integrated Explanation

Abstract

During the most recent decades people in industrialised countries have reported both a stagnant or even declining subjective well-being, as Easterlin (1974) originally observed, and deterioration in their social and family ties, as Putnam (2000) has claimed. The paper proposes an integrated explanation of these two stylised facts by extending the analysis of the relative income explanation of the Easterlin paradox to social relationships as enjoyable ends of choice. Drawing on the evidence-based results of social psychology, the paper constructs a model whose premises are (i) that individuals produce social relationships by means of relational ability, (ii) that this ability is primarily shaped during infancy and remains largely unpredictable, and (iii) that commercial pressure on children to consume in competition with others may displace the enjoyment of social relationships. The model extends microfoundations to encompass new psychological dimensions. It is thus able to merge individuals' idiosyncratic dynamics - which may deteriorate across generations - with improving economic contextual conditions, and to indicate some new priorities in policy options.

Keywords: Easterlin paradox, social capital, relative income, well-being, happiness, relational goods, relational ability

JEL Classification: A12, D01, I31, J22, O40