Does Money Buy Happiness?

“Gross national product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets.”

"Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.”

-Robert F. Kennedy, 1968

While interest in qualitative economic indicators, such as happiness, has grown substantially in recent years, the above quote from over four decades ago suggests a longstanding interest in holistic economic measurements which encompass more than the venerable gross product of a nation, or individual income.

Research on subjective indicators, such as happiness, has lead to new and interesting economic insights. Observing the growth in happiness related research prompts interesting questions in its own right: has the world become more complex, therefore necessitating more sophisticated heuristic techniques in heretofore underexplored economic provinces? Or has the development of modern social science methods, in fields such as statistics, psychology and micro-econometrics, made recent scholarship possible in areas previously rife with challenge?

Happiness and Income

Can money truly buy happiness? Perhaps no other question throughout history is responsible for as much debate. In recent years economists have been able to put this question to actual scientific test. Research has shown that happiness is in fact directly related to income. However, income aspirations increase alongside income growth, thereby undercutting the favourable effect of income growth on happiness. In other words, the concept of diminishing marginal returns appears to apply when measuring happiness derived from income (Easterlin 2001).

In addition, while wealthier individuals appear happier than those less well off at certain points in a life cycle (‘context specific’), over the entire life cycle (‘context free’) actual experienced happiness remains constant on average (Easterlin 2001). In short, the answer to life’s age-old debate is “yes”, but with limitations. Further, happiness derived from money is not absolute, but relative (Duesenberry 1949; Blanchower & Oswald 2001).

Further happiness research has provided a number of interesting, and perhaps surprising insights:

• A high correlation has been shown between income and happiness across countries (Deaton 2008)
• Income and happiness are positively correlated but other institutional factors, such as local autonomy may be a more important determinant than income on happiness (Frey and Stutzer 2000).
• On an individual level, well-being over a life cycle plots a U-shape curve, with the happiness trough occurring in life’s middle years and peak happiness occurring both early and later in life. This pattern suggests a release of aspirations and adaptation to one’s life circumstances (Blanchower & Oswald 2001).

Criticisms

Happiness is a direct but subjective measure, and like all subjective measures it has quantification limitations. For example, Blanchower & Oswald point out that the evolution of a word’s meaning over time may pose challenges (e.g., ‘happy’ may no longer mean exactly the same thing today as it did 40 years ago). This creates significant challenges for the measurement of happiness, particularly across time and space. 

Easterlin goes on to point out that scientists have begun to discover the effects of genetic traits on disposition, which in turn influences (and perhaps ultimately determines) happiness. Contrasting with Deaton’s comparative country findings, individual countries such as Japan have experienced rapid income growth but no material upward or downward change in happiness during the same period (Vennoven 1993).

Blanchower & Oswald studied happiness in modern Great Britain and the United States. In the case of the U.S., over the past 30 years happiness has been declining while per capita income has been rising. However, real wages over this period have largely remained stagnant (Mishel and Bernstein 2007).

There is also some criticism over whether society should invest its scarce resources in the measurement of something as nebulous as happiness? Does a sufficiently precise and agreed upon definition of what happiness is even exist? Without one there will be intractable problems with measurement. 

Finally, there is a fundamental philosophical criticism of whether or not happiness is, or should be, a shared cultural goal. In other words, should everyone adopt Taoism’s motto of “happiness is my duty”? There is no definitive global, or perhaps even national, answer to this question.

Conclusion 

Overall, while there appears to be a correlation between income and happiness, definitively determining causation may prove elusive. Also, the question of whether income is a derivative of happiness or vice versa is unclear. The subjective nature of happiness and the difficulty of measuring it across cultures, time and space places limitations on reaching strong comparative economic conclusions. 

However, while happiness research (and perhaps research into other qualitative measures) carries limitations, it is an important area of research due to the perhaps even more problematic limitations of existing objective measures, such as GDP per capita. Objective measures may also fail to take into account all economic incentives and goals. 

Perhaps the argument for the usefulness of happiness as an economic indicator is strengthened when it is not pitted solely in relation to income, but rather combined with other subjective and objective measures to form a more comprehensive picture. For example, the Prosperity Index was recently launched by the London based Legatum Institute. The index ranks countries across eight different wealth and well-being measures, including a number of subjective measures such as ‘Trust in Others’ and ‘Satisfaction with Health’. The purpose of the index is to “provide new insights into the factors that produce successful countries and fulfilling lives”.

The Legatum Prosperity Index also makes use of other qualitative data sources and indexes, including:

• Global Peace Index
• Global Competitiveness Index (World Economic Forum)
• Governance Indicators (World Bank)
• Index of Economic Freedom (Wall Street Journal/Heritage Foundation)
• Freedom in the World Report (Freedom House)

The Prosperity Index is indicative of growing interest in happiness measures by governments from around the world. For example, the U.K. recently announced that its Office of National Statistics will be surveying the British population in an attempt to measure well-being, along with sustainability measures. The decision to pursue this study follows the recommendation of Nobel Prize winning economists Joseph Stiglitz and Amartya Sen. The U.K.’s announcement follows similar moves by governments in France and Canada (Rumsey 2010). Overall, the measurement of happiness would appear to be on the rise.

The proliferation of subjective economic indicators continues unabated. Looking ahead, the emergence of new qualitative economic lenses through which social scientists may attempt to better understand the world suggests strong interest, and perhaps funding, for further research on the economics of happiness and other subjective measures.