Thursday, April 17, 2008

Does Money Buy Happiness?

It's often said that money doesn't buy happiness. This saying appeals to our concerns about the "crass materialism" of modern society. And it is sometimes used as an argument against measuring progress in strict economic terms like "per capita gross domestic product". There's even something in economics called "the Easterlin paradox" that is often cited to back it up. This paradox cites that, measured at a national level, happiness does not seem to rise once certain basic needs are met. In other words, "more is not necessarily better."

On a personal level, I don't think money necessarily equates to happiness. One also has to consider issues of personal values and self-satisfaction - psychic income if you will. But is it true on a national scale?

A recent article in The New York Times (HT to Greg Mankiw) points to some new research that, if it doesn't disprove the Easterlin paradox, at least raises new questions. The article looks at a paper by a couple of economists at the University of Pennsylvania that raises some interesting issues. Their study seems to show a possible link between economic well-being and happiness. But the paper also raises questions in my mind: how do you measure happiness? On a national scale? How time sensitive is the survey? (This last is important because questions of self-satisfaction and well-being can often be answered in widely different ways, depending upon mood and recent experience.) I will need to read the paper to answer the questions. Nevertheless, the graphic in the NY Times article seems to offer some basis for discussion. At the same time, we need to be aware of an issue raised here before: coincidence, correlation or causation?

We often talk to our students about the importance and value of economic development. Does the Easterlin paradox mean we should only worry about improving people's lot up to certain point? Or is there value in promoting economic development across the board? I think this article has "interesting classroom discussion" written all over it. What do you think and what do your students think?


Jonathan said...


I presume you've seen: Robert Frank, Luxury Fever: Money and Happiness, New York: The Free Press, 1999.

Frank argues that public policies should reflect the sharply declining marginal utility of money. Money, he argues, is mostly about status. Therefore, more money going to Joe can make a lot of other people feel relatively worse if their gains were smaller.

This is essentially a point Adam Smith makes in Theory of Moral Sentiments (see particularly, the parable of the poor man’s son – Part IV, Chap 1). The reason people keep working hard, even though it won’t make them happier, is the fatal deception within the human mind that leads us to be ambitious for things that will never satisfy us. Hence, “the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for...”


Jonathan B. Wight
Professor of Economics
Robins School of Business
University of Richmond, VA 23173
(804) 289-8570

Tim Schilling said...

I am not familiar with Frank's book. I'll have to look it up.

The point about money bestowing status would seem to coincide with Veblen's idea of conspicuous consumption, wouldn't it?

Thanks for commenting.

Winton bates said...

The paper by Stevenson and Wolfers is well worth reading. In my view there is not much now left of the Easterlin paradox.
The comments on my blog might be of interest.