Money affects your happiness, but it’s complicated


We are often told that money cannot buy happiness. In fact, economists’ focus on income rather than happiness is one of the reasons some people hate us.

But if you think there’s no connection between money and happiness, think again.

Traditional microeconomic policy advice has focused on keeping markets running in a competitive manner, with low barriers to market entry, lots of information available to all actual or potential market participants, and other subtle features that theoretically allow society to make the biggest bang to draw from the pursuit of individuals their own greedy interests.

This is the famous mechanism of the philosopher and economist Adam Smith’s “invisible hand”: make markets free and competitive, and let that competition fuel the prosperity of society.

But what if Smith’s invisible hand leads everyone to the wrong destination?

As Russell Crowe’s character in A Beautiful Mind asks: Is Smith’s theory “incomplete”?

Testing the Easterlin Paradox

It turns out that not only hippies but even some economists today think we might be barking up the wrong tree.

After all, money is a materialistic goal that probably won’t get us what we really want in the long run – which is happiness for most of us anyway.

Even “consumer surplus,” that hidden delight in things we’ve bought that is part of what the invisible hand is aiming at, isn’t really synonymous with “happiness” in most people’s books.

How lucky does money really bring you?(Supplied: AMC Networks)

Happiness is deeper, healthier, even more spiritual than money or the fleeting pleasures we get from materialistic consumption. Right?

Economist Betsey Stevenson, who advised former US President Barack Obama, says money has something more to offer.

She and economist Justin Wolfers set out to test the theory that income and happiness are not linked in any country, something reported by Richard Easterlin in an article so famous that his findings were dubbed the Easterlin Paradox.

The alleged paradox was that while richer people were shown to be happier than poorer people within the same country, richer countries – or so it seemed – did not report higher average levels of happiness than poorer countries.

Professor Stevenson and Professor Wolfers just didn’t think this could be true, so they embarked on an econometric mission to test the evidence for Easterlin’s paradox.

Using new data and paying careful attention to measurement, the research team ran the analysis again – thankfully assisted by a graduate student who provided accurate translations of Japanese statistical manuals – and found that the link between income and happiness is as strong across countries as it is in them.

Not only that, but according to their analysis, per capita income is the single strongest predictor of happiness levels across all countries.

The “Robin Hood” policy could only increase happiness

Where are the economic policy advisors?

The first implication is that the goal of economic development (growth of per capita income) that most of the world’s countries implicitly aspire to is a worthy goal of achieving what most people want – happiness.

This means a thumbs up for traditional microeconomic policy advice to facilitate the seamless purring of surplus-maximizing markets (lowering information barriers, creating more competition, etc.) and also for efforts helping other countries to develop.

A home auction in Norwood
The inability to buy property is affecting the happiness of many Australians.(ABC News: Michael Coggan)

Since the relationship between income and happiness is not linear, Professor Stevenson points out, another implication is that the progressive Robin Hood-style policies that economists usually recommend take from the rich (in the form of higher taxes) and giving to the poor (in the form of increased government support) should increase a nation’s overall happiness.

Her team’s results also beg the question – what exactly makes this income so happy?

Professor Stevenson suggests some likely contenders, including better health care and greater choice in different areas of life.

Do the hippies still have a leg to stand on?

Professor Stevenson points out that despite the strong relationship between money and happiness documented in her work, there are still some things related to happiness that are not related to money.

She suggests that our level of involvement in our communities and relationships will likely top that list.

Black and white image of a woman smiling and holding a wad of money.
There is a difference between the happiness of men and women.(Getty Images: Debrocke)

In an article entitled “The Paradox of Declining Female Happiness”, Professor Stevenson and Professor Wolfers examined whether the much-deplored decline in the strength of local communities in modern times may actually be a reason why female happiness rates in developed countries have declined.

In the 1970s, women in such countries were statistically happier than men, and more female happiness during this period “came from their happiness in their marriages,” says Professor Stevenson.

Paradoxically, despite women’s massive economic gains over men since that time, women’s advantage over men in happiness has eroded.

A microeconomic happiness model

Today, according to Professor Stevenson’s research, marital satisfaction is less strongly associated with overall life satisfaction, and “job satisfaction and other aspects of personal happiness are more important for women”.

Some governments seem to be beginning to see the sources of happiness that lie beyond money.

In the UK, for example, economists are building the world’s first microeconomic model of happiness.

They posit that by learning more about how happiness (not just goods and services) is produced, they can propose large-scale policy interventions that have a chance of increasing the happiness of the entire nation.

Early conversations suggest that policy goals emerging from this work might include supporting adult mental health, promoting good parenting behavior, or minimizing adult loneliness.

Ever since Smith’s time, the profession of economist has had as its ultimate goal the promotion of overall well-being. The advice we provide to policymakers has historically focused on this goal.

If money isn’t the only route to well-being (even if it’s a big player), we may be on the verge of seeing a broader role for economic advisors – one in which they aim directly at happiness rather than just focusing on management of the markets to focus .

It seems that the science of economics is not so murky after all.

dr Gigi Foster is one of Australia’s leading economic communicators and an Associate Professor in the School of Economics at the University of New South Wales. She is co-host The economists.

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