Can Money Buy Happiness?

Recently, there have been some interesting discussions on the blogosphere regarding the Easterlin Paradox. (Be sure to read the comments.) For those of you who have never heard of the Easterlin Paradox, I'll give you a quick run down. Devised by economist Richard Easterlin over 30 years ago, the Easterlin Paradox argues that, "contrary to expectation, happiness at a national level does not increase with wealth once basic needs are fulfilled."

This paradox is used by economists and environmentalists alike to demonstrate that money isn't everything, and that GDP is merely an indicator of a nation's financial well-being, and not an indicator of its citizens general well-being. As such, more and more economists and environmentalists favor a metric like the Genuine Progress Indicator or the Gross National Happiness to determine a nation's well-being.

But does the Easterlin Paradox really hold up to scrutiny? A new study by Betsey Stevenson and Justin Wolfers of the University of Pennsylvania suggests otherwise. Stevenson tells the New York Times, “The central message is that income does matter.” 

So what does this all mean? I only ever minored in economics, and I was a reluctant economics student at best. However, I suspect the truth lies somewhere in the middle. To me, the problem with the Easterlin Paradox resides in this pernicious little phrase, "once basic needs are fulfilled." 

If there is one thing I've learnt during my non-consumerist journey, it is that it is not easy for me to distinguish a want from a need. Take my laptop. Is it a basic need? Strictly speaking, of course it's not. Plenty of people do without a computer just fine. And yet, if I'm being honest, I do consider my computer a necessity. If I couldn't afford a computer, I would consider myself worse off than I am now. 

And there's the rub. In a first world society, basic needs such as food and shelter are being met for the vast majority of the populace. And not only are they being met, but for many people there's never any real question of those needs not being met. As such, I would posit that those basic needs become what I would term "sub-basic," and, in turn, non-basic needs like a computer or a car become basic needs. In essence, when one set of needs are fulfilled, human beings begin to aim to fulfill another higher set of needs.

The question is, does money continue to help us as we aim to fulfill higher and higher sets of needs? Stevenson and Wolfers argue yes. But the chart they offer to the New York Times paints a slightly different picture. If you look at the chart, you see a pretty reasonable correlation in income and happiness up until you hit the $25,000 per capita GDP mark. After that things become much less clear. For example, the United States has a higher per capita GDP than Canada, yet Canada has a higher happiness index. Similarly, Norway's per capita GDP is about the same as the United States, yet Norway boasts the higher happiness index. And apparently Denmark, not Disneyland, is the happiest place on Earth, even though several countries have a higher per capita GDP than Denmark.

So it appears it's not as simple as saying that more money results in greater happiness. Denmark may have a lower per capita GDP than the United States, but the country has a much stronger social safety net, which is very likely why the Danes tend to be happier than Americans. So while the Danes might make a little less than their American counterparts, they make up for it in social services such as subsidized child care, universal health care, and free university education. 

To me, that seems like a pretty sweet deal. I would gladly trade a chunk of my income for the security that comes with such a social safety net. So while money can buy happiness to a point, ultimately, security of well being is more important to me than income. Furthermore, in my personal experience, once I hit a certain level of income, time became a much more valuable commodity than money. For example, for a while, in addition to my regular job, I would tutor on the weekends. I quit tutoring, even though it was quite lucrative, because I realized that my time was more important than the extra $150 a week. In this case, more money wasn't making me happier.

What do you think? Would you rather receive a 10% raise, or would you prefer to be offered flex-time or the ability to work from home instead? Would you rather an extra week's pay or an extra week's vacation? Would you rather pay 33% in taxes as we do in America or would you prefer the Danish system where one pays 50% in taxes, but receives subsidized child care, universal health care, and free university schooling in return? Do you believe that increase in wealth results in an increase in happiness?