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Money can buy happiness – but only so much of it Add to ...

Can money buy happiness? This question, long pondered by philosophers, psychologists, sociologists and theologians, has more recently become a subject for empirical study by economists. Testing has been made possible by the accumulation over time and in many countries of survey data on happiness or life satisfaction, along with the discovery that individuals’ subjective responses correlate with objective measures of happiness such as left-hand side brain activity and independent assessments by relatives and friends.

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Evidence that happiness increases as incomes rise would justify the major focus economic policy gives to promoting long-term growth and achieving higher material living standards. The results of available research, however, are not reassuring.

While income is clearly important to the well-being of those struggling to finance the basics of life, a popular view has held that, for most individuals in developed economies, it is relative rather than absolute income that counts. According to the so-called “Easterlin paradox,” individuals are primarily concerned with how their living standard compares with others and so, raising the incomes of everyone does not increase overall happiness. Increased income will also have less influence to the extent a psychological process known as adaptation occurs. In this case, individuals’ initial excitement from income gains fades as they adapt to their new circumstances.

The view that increasing average income will not improve a society’s average well-being is challenged in a recent study. Betsey Stevenson and Justin Wolfers, two Wharton School professors, found that there is a significant link between income and happiness both within and across countries. Their results suggest that improvements in a society’s material standards will lead to increases in subjective well-being, although the impact gradually diminishes so that gains are successively smaller as average income increases.

Care is needed in trying to apply data to a complex phenomenon like happiness. The results of cross-country comparisons may be affected by the difficulties of controlling for the factors besides income that affect happiness. Moreover, while Ms. Stevenson and Mr. Wolfers show that there is a correlation between income and happiness, their analysis does not establish that more income causes greater happiness. Within countries, the results may partly reflect the greater productivity and higher earning power of individuals with a happier disposition and a more positive outlook. It is also possible that a partial source of the increased happiness of higher-income individuals is their more fulfilling work experience. Higher earners are more likely to have careers or callings, as opposed to “jobs,” and more liable to enjoy the positive “flow” psychologists have identified in individuals who are completely absorbed in their work.

Still, economic growth provides some clear benefits, and these extend beyond enabling the purchase of more consumer goods. Over the past several decades, average life expectancies have risen with improvements in economic conditions around the world. Economic growth has made possible reductions in poverty, improvements in health care, the upgrading of public infrastructure, and the availability of more supports and services for those in need. Over the coming years, economic growth is needed to help industrial countries cover the rising costs of medical care and income support for their aging populations.

Nevertheless, a striking finding from survey results going back to the 1950s is that in the United States, a country that has achieved impressive technological progress and economic growth, reported happiness has not increased. It may be that respondents are not fully aware of how conditions in their country have truly improved over the years. But it is also likely that these results reflect the influence of some undesirable developments that, in a relatively affluent country, may offset, and possibly outweigh, the benefits from increases in average income.

A report for a 2012 United Nations conference on happiness, edited by John Helliwell, Richard Layard and Jeffrey Sachs, provides some useful perspective. The study found that differences in income account for only about one-eighth of the variation in happiness among countries (and even less of the variation within countries) that could be explained statistically. The rest is accounted for by personal factors, such as mental and physical health, family relationships and education; and social factors, including job stability and quality, networks of social support, the degree of corruption in government and business, and the extent of personal freedom and security. While influencing happiness, some of the identified factors, such as health and education, are, at the same time, influenced by individuals’ happiness.

The failure of reported happiness to keep pace with economic growth in the U.S. has been partly attributed to the unequal distribution of the gains from growth. Most of these gains have gone to the top income groups, whose well-being is least affected by income increases. Lower-income households that would most benefit have experienced relatively modest gains, and, by some measures (since the early 1970s), actual declines in real income.

In addition, researchers have pointed to indicators for the U.S. that suggest all is not well among several key personal and social determinants of happiness. Disturbing developments include the increase in obesity, the higher incidence of type 2 diabetes, the greater prevalence of mental distress, the rise in divorce rates, the decline in organizational participation, and the loss in social trust.

The message from U.S. experience is not that economic growth is unimportant, but that a society’s well-being also depends on the route by which countries strive to achieve economic progress. What is called for is a balanced strategy in which governments recognize (as a number of Northern European countries, which rank high on international comparisons of well-being, apparently have) that some policies to promote growth are undesirable because of the losses they would inflict on low-income households or the harm they would cause to other sources of well-being – and that policies outside the growth agenda are also needed to advance the personal and social factors that contribute to a society’s happiness.

Ronald Hirshhorn is an economic consultant based in Toronto.

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