Can Money Buy Happiness after All? New Research Suggests an Old Paradox Might Not Be True

By Bailey, Ronald | Reason, February 2013 | Go to article overview

Can Money Buy Happiness after All? New Research Suggests an Old Paradox Might Not Be True


Bailey, Ronald, Reason


"EVERYBODY WANTS more cash!" declares Capital One bankcard TV pitchman Jimmy Fallon. Everyone except for one cute baby, that is, who rejects Fallon's offer of 50 percent more cash back by throwing Cheerios at him. Perhaps the Capital One baby is a devotee of the Easterlin Paradox?

In his seminal 1974 article, "Does Economic Growth Improve the Human Lot? Some Empirical Evidence" the economist Richard Easterlin noted that while incomes in various countries had increased, reported well-being and life satisfaction on surveys had not. In other words, more money didn't make people happier.

In the four decades since, the Easterlin Paradox has more or less become established as the conventional wisdom. Later researchers argued that what really matters for a person's overall life satisfaction is relative income. The implication is that if relative socioeconomic positions don't change when everyone gets richer together, a country's average happiness doesn't increase. Getting ahead of the Joneses makes a person happier, but merely keeping up with them does not.

Other researchers argued that rising incomes put people on a hedonic treadmill. When incomes increase, people gain a short-term boost in happiness, but once they get used to the new riches and their aspirations grow, their level of happiness drops back to where it was before the raise.

Looking over cross-country comparisons of income and happiness in 2003, the British economist Richard Layard concluded, "Above $15,000 per head, higher average income is no guarantee of greater happiness" The upshot was that fostering economic growth is futile: When everyone becomes richer, no one becomes happier. Indeed, your competition with the Joneses is a negative externality, because the Joneses' success lowers your relative income, making you feel less happy. As the novelist Gore Vidal quipped, "Every time a friend succeeds, I die a little."

If the Easterlin Paradox is real, the Capital One baby is right to reject more cash, since it likely won't produce more happiness. But in recent years, additional research has cast doubt on the concept. Maybe more cash makes people happier after all.

The most salient work has been done by the University of Pennsylvania's Daniel Sacks and two other economists, Betsey Stevenson and Justin Wolfers, both at the University of Michigan. In a 2008 study updated in 2010 for the National Bureau of Economic Research (NBER), they compare survey data on subjective well-being with income and economic growth rates in 140 countries. Within individual countries, they found, richer people are happier than poorer people; people in richer countries are happier than people in poorer countries; and over time, increased economic growth leads to increased happiness. "These results together suggest that measured subjective well-being grows hand in hand with material living standards," they conclude.

Interestingly, the researchers find that "a 20 percent increase in income has the same impact on well-being, regardless of the initial level of income: going from $500 to $600 of income per year yields the same impact on well-being as going from $50,000 to $60,000 per year." So at higher levels of income it takes more money to buy an extra bit of happiness. …

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Can Money Buy Happiness after All? New Research Suggests an Old Paradox Might Not Be True
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