Perhaps money can buy you happiness

posted in: Economics | 0

A lot of people believe that if they only had a bit more money – or perhaps a lot more money – then they would be happier. Many psychologists doubt this but some recent research on Swedish lottery winners suggests it is true.


Standard economic theory assumes that more of what you like is always more preferred, meaning that the more you have the higher your “utility”. Economists have spent a hundred years playing around with the idea of utility and have now relegated it to a largely meaningless term that merely captures the idea of whatever you prefer to something else. Economists do tend to believe that economic growth is good (apart from its external costs such as climate change) and that it’s a good goal for countries to try to raise the incomes of their people.

But does this mean that higher income people are happier? A famous research paper from 1974 by Richard Easterlin revealed what later became known as the Easterlin paradox, that although self-declared happiness does vary with income, over time there is little evidence that growing income leads to greater happiness.

Psychologists often cite the hedonic treadmill to explain the failure of growing income to raise happiness. The idea is that humans quickly adapt to new circumstances and what was at first new, exciting and happiness-raising can soon become normal and taken for granted. This might not be true for the shift from rural poverty to middle class life, but it could explain why people in a rich country who are already reasonably well off by most people’s standards don’t get much enduring pleasure from a pay rise.

This sort of research is difficult because it relies on questionnaire data, and the framing of the question is critical. There appears to be a difference in how people value greater income when asked about their immediate level of happiness, however they might define that, and their general sense of the value of their lives. In the latter case there does seem to be a positive relationship between growing income and this measure of happiness, or life-satisfaction. But it is a correlation, not necessarily a causal relationship.

One recent piece of evidence which suggests that higher income causes greater happiness comes from an analysis of lottery winners in Sweden. Erik Lindqvist, Robert Östling and David Cesarini investigated the short and long term effects of winning a lottery, compared with losing, and with varying sizes of prizes. Using a large sample of winners and matched controls (similar people who didn’t win) revealed that in general lottery winners declared themselves more satisfied with their lives, and this effect persisted for at least ten years. Larger wins generated larger increases in life-satisfaction. The authors write: “Relative to matched controls, large-prize winners experience sustained increases in overall life satisfaction that persist for over a decade and show no evidence of dissipating with time.”

Other authors, such as British economist Lord Richard Layard, an early pioneer in what is now known as “happiness economics”, dispute the idea that greater income should be the main goal of governments. Layard argues in his jointly-authored 2018 book The Origins of Happiness that the main source of unhappiness is not low income but failed relationships, and mental and physical illness. He points out in particular the enormous harm done globally by mental illness, including depression.

There is also reasonably strong statistical evidence for a correlation between unhappiness and national income inequality, though the causation is less clear. Many people would rather be in the upper part of a relatively low income society than the lower part of a richer society, reflecting how important relative status is to people. Higher income inequality may be bad for growth itself, if it means too much power concentrated in rich people’s hands.

The evidence suggesting higher income does make people feel better about their lives doesn’t at all mean that nothing else matters, nor does it suggest that governments should prioritise growth above everything else. Carbon intensive growth threatens the foundations of human civilisation, and local pollution damage from rapid growth is often not measured in national accounts, so it is ignored until the health effects are very serious (such as air pollution in China and India).

It is also unlikely to be a good principle for a happy life to simply maximise income. One of the key regrets of dying men, recorded in palliative care nurse Bronnie Ware’s very moving blog (and later book), is working too hard. Few of the dying people she met regretted they hadn’t earned more. The other main regrets were about having lost touch with other people, and not living the life they had really wanted (what is widely called living an “authentic” life).

Those who are so poor that they lack basic human needs and security can be forgiven for putting a big priority on increasing income. For those of us lucky to live in the middle class of the developed nations, we should probably worry less about more money and more about other people.

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