Does money buy happiness?

Public Interest, Fall, 1993 by Robert E. Lane

TWENTY YEARS ago in this journal, Richard Easterlin argued that richer societies are no happier than poor ones. However, Easterlin argued, within any one country richer people are happier than poorer people. He explained this anomaly as follows: People judge their economic welfare by that of their neighbors. If only national income rises, an individual's status, vis-a-vis his neighbors, remains unchanged.

But since then, new studies have almost completely reversed Easterlin's conclusions. These studies have found that economic growth does materially increase a country's collective sense of well-being and that differences in well-being within a country are not significantly related to income.([dagger])

Why the reversal? First off, we simply have better data. For instance, Gallup's 1976 transnational study concluded that a nation's poverty pervades all aspects of life, for it "adversely colors attitudes and perceptions" as well as feelings. "Although one could probably find isolated places in the world where the inhabitants were very poor but happy," said Gallup, "this study failed to discover any area that met this test." And, in the most probing transnational analysis so far, Alex Inkeles and Larry Diamond found in 1980 "a strong indication ... that personal satisfaction rises with the level of economic development of the nation." Indeed, for national populations taken as a whole, money does buy happiness.

Comparisions within a society tell quite a different story, one that challenges some of our basic, commonsense assumptions. For here, money does not buy happiness. In almost all developed countries there is no substantial relation between income and well-being. In perhaps the best of the many single-country "quality of life" studies, Frank M. Andrews and Stephen B. Withey found in 1976 that "The groupings by socioeconomic status show very meager differences [in sense of well-being] ... and no significant single steps for [stisfaction with] Life-as-a-Whole." Two years later Jonathan Freedman reported in Happy people that: "The rich are not more likely to be happy than those with moderate incomes; the middle class is not more likely to be ... happy than those with lower incomes.... For the majority of Americans, money, whatever else it does, does not bring happiness."

However, Freedman found that the poor are different: "fewer of them say that they are very happy or moderately happy and more of tham say that they are very unhappy than people with higher incomes." Freedman's qualification is crucial: Among the poor money does buy happiness and a greater sense of well-being.

Happiness is ...

As the respected but iconoclastic economist Tibor Scitovsky wrote in his 1977 book The Joyless Economy, many of life's pleasures are not bought and sold. Among these, he said, are work satisfaction, friendship, and the pleasures of solitary thought, reading, and other forms of non-commercial leisure. He was largely right.

Quality of life studies tend to divide the sources of well-being into two categores: external circumstances, such as available community services or family life, and internal dispositions, such as self-esteem or the sense that one controls one's own fate. As regards the first category, most studies agree that a satisfying family life is the most important contributor to well-being. Beyond that, the joys of friendship often rank second. Indeed, according to one study, an individual's number of friends is a better predictor of his well-being than is the size of his income. Satisfying work and leisure often rank third or fourth but, strangely, neither is closely related to actual income. (In contrast, neither church membership and piety nor good government and civic pride make much difference in well-being. Political activity is often last on the list; it is at best a duty and almost never a pleasure.) None of these factors is a market commodity. But the maket is not irrelevant, for even if actual income is not a good predictor of well-being, satisfaction with onehs income or standard of living (which is not itself closely related to level of income) is. It is the subjective rather than objective aspects of income that enter into the hedonic calculus.

Among the internal sources of well-being, self-esteem and sense of effectiveness rank first and second in some studies. Neither is related to level of income. In other studies the belief that one has met life's challenges ranks first. Money might be relevant here, but more as a token of social esteem than for what it buys.

If the things that contribute most to well-being are unrelated to money, we cannot buy them. This is the principle cause of money's curious failure to produce happiness.

Satisfaction vs. income

If income and satifaction are not closely correlated, why do people purse the former? Perhaps people have an instiable desire for money, or for the social esteem that money sometimes buys. People may then adapt to their circumstances so that each increment of money soon creates a new standard against which they measure themselves. There is something to that theory. Still, there is evidence which suggests that the desire for more money tapers off as income increases. Furthermore, as mentioned, there is no evidence at all that money buys self-esteem. In fact, there is evidence to the countrary.