Economics

Can Money Buy Happiness?

Economists probe the nexus between wealth and well-being.

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“Everybody wants more cash!,” declares Capital One bankcard TV pitchman Jimmy Fallon. Except for the cute baby, that is, who throws Cheerios at Fallon when he offers 50 percent more cash back. Perhaps the Capital One baby is a devotee of the Easterlin Paradox and rejects the offer of more cash because she believes that more cash doesn’t buy more happiness

In his seminal 1974 article, “Does Economic Growth Improve the Human Lot? Some Empirical Evidence," economist Richard Easterlin noted that while incomes in various countries had increased, reported well-being and life satisfaction on surveys had not. In other words, more money didn’t make people happier. For four decades, the Easterlin Paradox has more or less been the conventional wisdom.

So why doesn’t more dough produce more delight? Later researchers argued that relative income is what really matters for a person’s overall life satisfaction. The implication is that if relative socioeconomic positions don’t change when everyone gets richer together then average happiness in a country doesn’t increase. Getting out ahead of the Joneses makes a person happier, but just keeping up with them doesn’t. Other researchers argued that rising incomes put people on a hedonic treadmill. The claim is that when people’s incomes increase they get a short-term boost in happiness, but once they get used to their new riches and their aspirations grow, their level of happiness drops back to where it was before the raise.

Looking over cross-country comparisons of income and happiness, London School of Economics professor Richard Layard concluded [PDF], “Above $15,000 per head, higher average income is no guarantee of greater happiness.” The upshot is that fostering economic growth is futile: When everyone becomes richer, no one becomes happier. In addition, Layard argues that your income competition with the Joneses is a negative externality, because the Joneses' success lowers your relative income, making you feel less happy. Novelist Gore Vidal summarized this observation with his quip, “Every time a friend succeeds, I die a little.” If the Easterlin Paradox is real, the Capital One baby is right to reject more cash since it likely won’t produce more happiness.

In recent years, however, additional research has called the Easterlin Paradox into question. Maybe more cash does make people happier. Especially salient are analyses done by University of Pennsylvania economists Daniel Sacks, Betsey Stevenson, and Justin Wolfers. In their updated 2010 study, “Subjective Well-Being, Income, Economic Development and Growth,” the three compare subjective well-being survey data from 140 countries with those countries' income and economic growth rates. The researchers find that within individual countries richer people are happier than poorer; people in richer countries are happier than people in poorer countries; and over time increased economic growth leads to increased happiness. “These results together suggest that measured subjective well-being grows hand in hand with material living standards,” they conclude.

Interestingly, the researchers find that “a 20 percent increase in income has the same impact on well-being, regardless, of the initial level of income: going from $500 to $600 of income per year yields the same impact on well-being as going from $50,000 to $60,000 per year.” Obviously, this means that at higher levels of income it takes more money to buy an extra bit of happiness, but the three researchers find no point at which more money will not buy more happinessâ€"certainly not at Layard’s $15,000 per capita income.

How much happier on average are people living in rich countries compared to those living in poor countries? On a zero-to-10 point life satisfaction scale, Stevenson noted people in poor countries average three points; those in middle-income countries score around five or six points; and rich country citizens report happiness levels between seven and eight points. For what it's worth, World Happiness Database reports that the U.S. averages 7.4 points on the happiness scale. If rich countries are happier places that would strongly suggest that they got that way by means of economic growth.

Since 1970 total world product has more than quintupled (in constant 2005 dollars) from $ 11 trillion to $57 trillion today. At the same time world population has increased from 3.7 billion to 7 billion, which means that the globe’s average annual per capita income has increased from about $3,000 to over $8,000. Taking into account the trends in all of the well-being survey data, the researchers do find, “Over recent decades the world has gotten happier, and nearly all of the gains are attributable to gains in GDP (gross domestic product).” 

There is one outlier in the trend data collected by Stevenson and Wolfersâ€"the United States. As average per capita incomes have increased from around $20,000 in 1972 to $42,000 today, average American happiness has hardly budged. On the other hand, according to their data from the General Social Survey, 86 percent of Americans in 1972 said they were either pretty happy or very happy. The figure was 89 percent in 2006.

What Stevenson and Wolfers did find is that differences in levels of happiness among some demographic groups narrowed. “Two-thirds of the black-white happiness gap has been eroded, and the gender happiness gap has disappeared entirely,” they note. The gender difference evidently diminished because American women became a bit less happy than men over time. And the college educated became happier whereas Americans with only a high school education or less became less happy. The researchers speculate Americans have been unsettled by “a host of economic, social, and legal changes” that have offset the gains in American happiness that one would ordinarily expect higher incomes to have produced.

Nevertheless, recent findings in happiness research appear to vindicate the wisdom of novelist Gertrude Stein’s wry observation, “Whoever said money can’t buy happiness didn’t know where to shop.”