To celebrate the start of my Christmas holiday, I've spent the morning baking: sausage rolls and a lemon drizzle cake. Doing so reminded me of the Easterlin paradox - the puzzle that rising incomes have not greatly increased happiness.

I say so because a new paper by Maurizio Pugno has formalized one explanation for this, which draws on Tibor Scitovsky's The Joyless Economy.

The idea here is that our leisure can be spent on either comfort goods such as watching TV, shopping or drinking, or creative activities such as baking, playing guitar or gardening. However, we do too much of the former and not enough of the latter, which is detrimental to our well-being.
One reason for this is that comfort goods can be addictive, with the result that we feel guilty afterwards about over-consuming. This isn't just true of alcoholics and shopaholics; we might also feel bad about slobbing out in front of the TV.

Another reason is that pure consumption goods might invite adverse comparisons with others, which make us feel worse off. If your neighbour has an expensive car, you might feel bad in a way that you don't if your neighbour is a good guitarist or baker. Through this route, economic growth - more neighbours with fancy cars - reduces happiness.

But why do we spend too much time on comfort goods and ordinary consumer spending and not enough on creative activities? One reason, says Pugno is that the latter require investment in 'leisure skills' - the ability to play an instrument, garden or appreciate art. Such investment, like any other, is costly. At any point in time, therefore, we might prefer the zero-cost option of comfort goods. But this means we never acquire the skills needed to make best use of our leisure.

I'd add three other mechanisms that exacerbate this problem:

1. The failure of affective forecasting (pdf)- our inability to predict our future happiness. Two aspects of this general failure are relevant here. One is duration neglect; we pay too much attention to the short-term costs of acquiring leisure skills (the burnt cakes or the inability to get a note out of the sax) and so prefer the easy option of watching TV. Another is immune neglect - our failure to anticipate that we'll get used to some things, and so lose satisfaction from repeating them.

2. Path dependency. If you grow up in a home where your parents came home from work too tired to do anything other than watch TV or go down the pub, you'll think of such leisure activities as normal, and so will not think of better ways of spending your time. Because of this, it was not until I was 40 that I laid a finger on a musical instrument. And even today I feel uncomfortable if the TV isn't on in the evening.

3. Lack of self-control. Even if we knew that investment in leisure skills would pay off in the future, in the sense of getting greater utility from leisure, our lack of self-control would cause us to under-invest. Bruno Frey has showed (pdf) how this causes folk to watch too much TV.

There is, therefore a strong bias towards over-consumption of comfort goods and under-investment in creative activities - which contributes to the Easterlin paradox.

Herein, though, lies a point which is under-estimated. A healthy capitalism probably requires that this be the case. The shopaholic who feels guilty about her purchases does more good for capitalism that the man who tends to his allotment instead. And the person who's desperate for work so they can spend is more use to capitalists than the guy who doesn't mind being unemployed for a while because he can practice his guitar.

In its small way, my lemon drizzle cake sticks it to The Man.