Sunday, April 27, 2008

Sunday dollars+sense: Money can buy happiness

Guess what? Money does buy happiness. For years I and a number of other economic journalists have been saying that it doesn't - not really; not in a sustained way.

What we thought we knew was that as people got richer their happiness improved, but then fell back to about where it was before.

Japan was shockingly poor after the war and is now rich. But the surveys found its people little happier than they were before.

Increased wealth helps when countries are extremely poor, but after the basic needs have been met, it does little - so went the conventional wisdom...

It was actually a paradox, named the “Easterlin paradox” after a US economist Richard Easterlin who asserted in 1974 that more money OUGHT to make people happier, but didn't.

It ought to make people happier because it can buy many of the things that make people happy.

As the US economist Economist Robert Frank put it: “Would we really not be any happier if, say, the environment were a little cleaner, or if we could take a little more time off, or even just eliminate a few of the hassles of everyday life?”

His answer was that money could indeed make us happy, but that we chose to spend it on things that didn't, such as bigger houses and bigger cars. They made us feel good when we got them – because we were keeping up with the Joneses or getting ahead of the pack – but when everyone else got them we felt no better off than before.


Now for the shock. Easterlin's evidence was wrong. He can't be blamed for it. Happiness surveys were young at the time. After several decades of better surveys and better statistical techniques an Australian economist living in the US Justin Wolfers and a colleague this month published a persuasive demolition of the “paradox” and demonstrated that for every country - even Japan – more money did buy more happiness.

The problem with Japan was that question used in the surveys had changed over time, something they only discovered digging though old files.



In the United States, 90 percent of people in households earning more than US$250,000 say they are “very happy”. Only 42 percent of people in households earning less than $30,000 say so.



A few years back the London Financial Times published a headline about money and happiness saying that “The Hippies were Right”.

It looks as if they were wrong, after all.


References:

Richard A Easterlin (1974) "
Does Economic Growth Improve the Human Lot?" in Paul A. David and Melvin W. Reder, eds., Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, New York: Academic Press, Inc.

Richard A Easterlin,
Diminishing Marginal Utility of Income? Caveat Emptor,” Social Indicators Research, 2005, 70, 243-255

Robert H Frank (2004). "
How Not to Buy Happiness" Daedalus 133(2): 69-79

Robert H. Frank, Does Absolute Income Matter? Paper prepared for “The Paradoxes of Happiness in Economics” conference, Milan, Italy March 21, 2003

Robert H Frank, Has rising inequality hurt the middle class? Options Politiques, Mars 2001

Luigino Bruni, Pier Luigi Porta, Economics and Happiness: Framing the Analysis, Oxford University Press, 2005

Robert H Frank, Falling Behind: How Rising Inequality Harms the Middle Class, University Of California Press 2007

Peter Martin,
Money can Buy Happiness. Here's How. Sydney Morning Herald, September 1,2004

Andrew Oswald, "
The Hippies Were Right all Along about Happiness", Financial Times, January 19, 2006.

Andrew Leigh and Justin Wolfers, "
Happiness and the Human Development Index: Australia Is Not a Paradox", The Australian Economic Review, vol. 39, no. 2, pp. 176–84

Betsey Stevenson Justin Wolfers, Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox, NBER
April 15, 2008

David Leonhardt,
Maybe Money Does Buy Happiness After All, New York Times, April 16, 2008

Justing Wolfers,
The economics of happiness, various posts, Freakonomics Blog, April 2008

2 comments:

Vee said...

Despite what Andrew Norton might say I always thought Money could buy happiness. Keeping up with the Joneses is one way to destroy that immediate happiness.

You need x amount money to live life ultimately the way you want to. Some do this by keeping up with the Joneses. Others do it by investing in other hobbies.

I don't currently own many assets but once I own the assets I would like. Say like a house in a suitable neighbourhood (including furniture and utilities) and a car or some other means of transport.

Barring the need for more money based on rate rises (all sorts) I could live quite contentedly on around $20-30K a year.

Colin Campbell said...

Money probably doesn't buy happiness, but not having any will make you sad.

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