Thursday, June 19, 2008

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?


Anonymous said...

Very interesting chart. As a New Zealander, the first thing I ask about this type of chart was, Did we beat the Aussies? I'm *doubly* happy to see that they didn't even get a label on this chart, haha.

My second thought: What would Ayn Rand followers make of the fact that the happiest nation (with high- and low-income people nearly equally satisfied, no mean feat) is taxed at 50%?

Great post.

Anonymous said...

The Freakonomics blog had an interesting series of posts about the Easterlin paradox (their verdict: it doesn't exist) and happiness in general:

Part 1

Part 2

Part 3

Part 4

Part 5

Part 6

Whew, that's a lot of posts! Can you tell that they're academics over there?

Anonymous said...

My husband and I look at income and time together and base our choice on the two. Like you said, there's probably a middle ground in those theories. We wanted someone (it's me) to stay home with the kids, so we based our budget within his income and made our lifestyle choices based on that. So we have a lot of family time and enough money for the basics and a little smidge beyond them!

Katy said...

I really like the point you made about the Demark being the happiest country with their large saftey net. The thing that drives me to work and eran a living is security more than anything else. I want to know that I have a roof over my head, access to good health care, and that my daughter can go to good schools. I could live in a cheaper appartment, but the schools there aren't good. I was offered a job that offered my ideal office enviroment, but I turned it down because they don't have good health benefits. If our country would invest in social services as much as we do in wars I think we would be happier.

Joyce said...

I agree that security, so that you don't have to worry, is what helps people feel content. More stuff in my house will not make me content, but knowing my family could get the education they need, the medical care they need, the quality care in old age they need, takes a lot off your mind.

The operative word is "content", though. When the Danes were interviewed, it was noted that they are content because they don't culturally demand perfection. I'm not sure we're that culture. We whine endlessly if things aren't just right. Learning how to let go of perfection might do as much for our happiness as a nation as a social safety net.

hmd said...

I'd rather give up the money for universal health coverage, for extra time off, for flex time, etc.

As far as happiness, I think that, at least from what I've experienced, once basic needs are met, happiness becomes a choice; it becomes a matter of how you look at your world. Let me explain.

I've had money and I've been poor, and I've been unhappy in both places. My health failed a little over 2 years ago (I have had issues for 17 years, but it was just 2 years ago it got significantly worse). I was in bed 16-18 hours a day (those other 4-6 hours were spent at work). I was in pain and it looked like I was going to have to quit my job. None of the doctors could help me and I was seriously depressed.

Then one day I made a decision. I can't control the pain, but I can control how I look at it. You hear about people dying or losing limbs and being happy people. I could allow this illness to make me a completely horrible person, or I could let it make me a softer, more compassionate person. It has been a long hard road, and I still struggle with pain on a daily basis, but I have to say, I'm happier than I've ever been in my life. But it was my choice, not my circumstance.

Mad Hatter said...

Great post! And I agree with all the commenters above who pointed to security as a major reason people want money, and the lack of security as a source of unhappiness.

I would definitely sacrifice some of my income for more social safety nets. But I don't feel I can count on our current safety net system to see me through loss of income, healthcare expenses, retirement, etc. without my having a significant amount of savings of my own.

Anonymous said...

I'd much rather have flex time and more vacation then a raise. I'd also love it if we have universal health care and overall security for ourselves and our children. I feel like the health care thing is always hanging over our heads whether you have it or not. I can have it one day but if I lose my job the next there goes my health care. I know our country can make this happen - we have done so many amazing things in this country this should be a speed bump for us not an Everest.

Chile said...

We observed this phenomenon in our own lives and finally figured out that income did not equal happiness. Nor does living in the perfect place. Happiness comes from within.

We've lived at opposite extremes ranging from a very good income with a big house and a bigger mortgage to living with no income for a year and, in another phase, living in a 250 square foot RV for over two years with moderate income. We'd rather have more time than money now. My sweetie would love to get to work from home.

EcoBurban said...

I chose part time / flex time for less money and fame... :o) And, I wouldn't give it up for the world. The ability to throw in a load of laundry while working and to be there for my kids when they get off the bus is worth it. Every penny lost = sanity gained!

Crunchy Chicken said...

I took a $30k cut in pay to work for the government so that I could work a shorter work week with a flexible schedule and better benefits.

Now I telecommute 2 days a week from home and have a split shift schedule so that I'm not gone all day from the kids on the days I am working downtown.

Oh yeah, and did I mention the awesome healthcare benefits and free ridership on all public transportation in the Seattle area?

Do I miss having jumped off the high profile job treadmill? I did at first and sometimes still do, but the alternatives this employment provides more than makes up for it.

J said...

Good post. This reminds me of when I read the book "The Paradox of Choice" by Barry Schwartz. He noted that as Americans chased more wealth and stuff, our happiness declined even as the number of choices each of us individually have has drastically increased.

I would take the time in a heartbeat over the money. It's not even a question I have to ponder. I am lucky to have a flexible job, where I get paid decently, have plenty of sick/personal/vacation time, and I can adjust my schedule if needbe. I could most definitely make double what I make now if I were to do my job in the private sector as opposed to the educational field, but a life is more important to me.

I feel bad everytime I hear someone talk about all the things they miss out on because they work to make enough money to fill on oversized house with crap. I think that beyond our basic necessities, which as you noted, the specifics as to what constitutes these could be debated, happiness does not increase with wealth. Essentially, once your basic responsibilities are met, along with a minimal amount of 'non-essential' things, such as a computer for those of us in the West, anything additional isn't going to add to our happiness. And the likelihood is, the extra work we have to do to make that money, is not worth the money made. How could it be when one doesn't have time to enjoy the expensive things they worked their life away for.

ruchi said...

Jo, another thing to note is that New Zealand's per capita GDP is considerably lower than that of the United States, yet New Zealand still has a slightly higher happiness index. I do wonder where Australia would fall. I'm guessing they're not on the chart because there's not enough data.

Will, thanks for pointing out the series. Did you notice it is written by Justin Wolfers, who is the co-author of the new study? I still think the truth is somewhere between Easterlin's beliefs and Wolfers' and Stevenson's. While I do think rich countries are happier than poor nations, among the rich countries, ie the Western European nations plus Canada and the United States, there doesn't seem to me to be a strong correlation between happiness and per capita GDP. The US has one of the highest GDPs in the world, yet Americans are less happy than the Danes, Finnish, Canadians, New Zealanders, etc. From a first world policy perspective, I think it's important to establish why that is.

Jsmidian, you make an excellent point. If money was the most important factor, we wouldn't have such a large chunk of women opting to stay at home with their children. So obviously money isn't everything.

Katy, I agree with you. I think that Americans would be much happier if they didn't have to rely on their job to maintain health benefits.

Joyce, you bring up a very important point. There are very different cultural expectations in various societies regarding happiness. Some cultures expect less, and thus are happy with less, while others want EVERYTHING and thus are constantly disappointed.

Heather, that's very interesting. I think you make a very compelling argument that once basic necessities are met, happiness becomes a choice.

MH, you're right. Our current social safety net is inadequate and fragile. How could you trust it to see you through a difficult patch? But if it were stronger and more comprehensive, it would be a huge load off, for me.

Gsgranola, I like your attitude! You're right. Our country has done so many amazing things, we SHOULD be able to make universal health care happen. Here's hoping!

Chile, you're right. Happiness is a state of mind. And I think perhaps, the reason money and happiness are so strongly correlated is because we live in a consumeristic world. If we all focused less on acquiring things, would the society shift? Would money cease to be as important? I think it's possible.

EBM, I think many mothers would agree with you that they would rather make less money and have more time with the kids.

Crunchy, free public transport!! That's an awesome benefit especially with gas prices going up the wazoo!!

Jennifer, thanks for the book rec. I'll have to add it to my list!

Green Bean said...

Interesting post. I gave up a high profile job with a big paycheck when I had my kids and I never looked back. We adjusted to life on a single income without much to-do.

I would trade a percentage of my husband's income for him to work less and he might. Though I'm not sure.

There is the issue, unfortunately, of how much can you reduce your income. My son will go to a great public school, our health insurance is subsidized by my husband's work so it is not that significant of a chunk of our income. Reducing income another 20% though and I'm not sure we could afford our 1700 square foot home here in the Bay Area.

I love the idea of the a social safety net and would be all for it but more would have to change with out society than just adding health care and free universities. As Joyce pointed out, I think we'd all have to readjust our expectations and, I'm not sure America is that society.

ruchi said...

Well, GB, to be fair, you ARE paying for your health insurance. It's part of your husband's income. So if your husband's company didn't have to provide health insurance, they would very likely have to offer higher pay to stay competitive.

Cath@VWXYNot? said...

I'd take higher taxes and universal health care over the US system any day of the week.

I'd also take an extra week's vacation over a pay rise - depending on the % rise of course!

However I'd take a Dr Pepper over either a coke or a pepsi, so maybe I'm just strange.

Sam said...

I took a pay cut of 20K about 2 years ago from a job I really enjoyed (the day to day parts), but hated the people I worked with. The real reason was however an ethical issue. I was working for the stereotypical bad guys who were screwing over people who didn't know any better.

I then headed into the non-profit world thinking it would be all shiny happy. And yes the experience was limited but it was same as the corporate sector with very little pay.
I quit that to work for government. The agency that hired me isn't in any of my friends' good books...but I thought and thought and thought and decided that there were no good guys. The work is so-so. But my co-workers are nice and considerate. The pay isn't terrible and I have a flexible schedule and an environment that is making huge efforts to glue the work life balance to an optimal amount. The salary I make now is actually perfect for my husband and me especially considering our lifestyle.

I don't mind paying higher taxes but I'd like to decide where those taxes go. If there was some way I could pick like I do with my 401(k) it would be perfect. I would like to really work from my home and am working toward that goal.

I don't know about health insurance. We're incredibly healthy so I don't know if I'd be willing to give up health insurance so easily if I had some chronic problem. But I've kinda bought into how things work here (must have the job the health insurance, etc).

After discovering the simple living movement earlier this decade I had a huge shift in thinking. I was brought up to believe that money did bring happiness and to a large degree it certainly does. But I think after awhile it comes at a cost.

I have regrets that it took me so long to figure this out though. I really wish I had dropped out of 8th grade like I had wanted to. I would have not had to deal with so much stress if I did...and I would be ahead financially.

Chile said...

Beany brought up a really good point: unethical bosses. The last part-time job I had was only occasional work. Pretty easy, but lousy pay. I gradually realized my boss was pretty unethical and finally gave notice. He was upset enough at losing someone who had a brain (rare these days, I think) that he offered to double my hourly pay. The money would have been nice, but I just couldn't do it.

Jennifer said...

I started thinking about this while reading Affluenza... it's very relevant to our lives right now.

I currently make very little money working somewhat part time (especially during the summer)... but it's doing what I love. I worked for 3 years at a job that I was ambivalent about... 45 hours a week, not so great pay, but more than I make now. I was miserable... no sex life or drive, depressed all the time, etc. Now I'm very happy and fufilled... and have made fixing up our house part of my work (which earns us money indirectly).

but we are starting to worry a little about money after 2 years of me working less for less. It's so tempting to just go back and work more... I can't easily find more work of the sort that is highly fufilling, though... but if I had paid for benefits and education and such, it would be a no brainer.

ruchi said...

CAE, I like Dr Pepper too! Though I'm trying to limit any soda drinking to those that don't contain HFCS, occasionally I succumb to the Dr Pepper goodness.

Beany, it would be so cool if you could choose where your taxes went! Like if there was a little menu selection. It would be interesting to see what people would fund and what wouldn't get funded. You should try playing Budget Hero. I bet you'd enjoy it.

Chile, eesh that sucks. Sorry you had to go through that experience.

Jennifer, you bring up an excellent point. I think a lot of people would trade work fulfillment for money. Or else no one would work in non-profits. So again, an instance of people choosing less money because they believe it brings them greater happiness.

EcoGeoFemme said...

I think being happy with paying hig taxes for a government safety net is contigent on trusting the government. I saw somewhere that the happy places have low perceived corruption. So like,you have to believe that the government is using the tax money wisely and how they say they do in order to feel good with giving so much of your income to them.

Also, I wonder if some of the commenters feel happy with their lower paid jobs in some small part because they have a choice -- they could choose to make more money if they wanted to. I think part of happiness is feeling in control (although it sounds nicer to say "secure").

Poliwop said...

Good post, but there was one thing missed. GDP reflects only the total income of a country, it in no way reflects how evenly the income is distributed.

So yes, one possible reason that other countries with lower GDP per capita are happier than the U.S. could be that the social security net is stronger. But another possible reason that I'm guessing would also stand up to academic scrutiny is that the income itself is more equitably distributed in those other countries. The gap between the middle class and the upper class in the United States is gaping already and widening still, while countries with more social services tend to have more equitably distributed resources.

In answer to the more personal part of the question, I am a student, and was brought up in a non-consumerist household, and put perhaps too little value on money. I, for one, certainly do not equate money with happiness.

ruchi said...

EGF, you're absolutely right re: corruption. Fareed Zakaria writes a lot about that in "The Future of Freedom." In fact, the corruption factor is a huge stumbling block for developing countries. Because of corruption (or perceived corruption) a lot of people in these nascent democracies simply refuse to pay taxes. One of the reasons Americans probably shy away from universal health care and such is because, more than Western Europeans and Canadians, we perceive our government to be corrupt. You can look at the data here.

I think the control aspect is a valid point. But that would suggest that it's not money per se that makes people happy but marketable skills and education. For example, a registered nurse might choose to work part time, making less money, but she would feel in control because her skills and education gave her more security. So in that case, we would be arguing that skills and education lead to happiness, not money.

ruchi said...

Poliwop nox, you make an excellent point, but it also further emphasizes that Easterlin was correct to question measuring per capita GDP as a signifier of happiness. In fact, Wolfers and Stevenson do believe that you are correct, and that part of the reason happiness in Americans hasn't risen in the past 30 years is because wages for most Americans have not risen. It's Part 5 of the series Will links to.

Anonymous said...

arduous: Oops, yeah, I meant to make that clear!

Also, there's one bottling plant in Texas that sells Dr. Pepper with cane sugar instead of HFCS! I've been tempted to try it, but haven't gone through with it yet.

ruchi said...

Will, AWESOME!! I am very tempted to order some now. :)

Natalie said...

I often entertain this question, especially when the kids are driving me nuts. Would I sacrifice some of Hubby's pay in order to have him around more? The quick answer is Yes! But the weightier question is how much time would I be willing to "buy back".

I'd love it if we had more of a safety net a la Denmark here in the US. But like EcoGeoFemme mentioned, I'm not sure I trust our government to handle the responsibility properly - not so much corruption, more plain ol' ineptitude.

Does money buy happiness? It *can* - paticularly (but not necessarily) in the absence of a Socialist state, it can. I don't know if happiness can ever actually be achieved through shopping. However, I see how saving money "buys" a measure of happiness in the form of security and autonomy. The feelings of safety and freedom make me feel happy, as in grounded and free of worry. But happier than I feel when Hubby's around to spend time with us? I don't know exactly where that line is. There's a diminishing marginal utility in saving money, too.

ruchi said...

Natalie, you bring up some very good points. Having say six months of savings can make you feel secure. Does seven months of savings make you more secure? At some point, it just feels like money you're afraid to touch. (At least for me.)

nemo said...

Biological organisms adapt at all levels. When you first get a new computer or a cell phone you may not know what to do with it, but a short while later you have adapted to it and soon enough you feel you can no longer live without it. But you aren't necessarily any happier having it.

Furthermore, the new gadget may even make your life harder, but now you have adjusted to having it and you organized your life around it, so you would need to cross a threshold to do away with it. That threshold maybe higher than you want to go, even if it hides a better solution once you clear it.

The same happens to all toys we buy. Before we buy we imagine how happy we will be when we possess the coveted item, but once we have it, we adapt and our happiness returns to its set point. Psychologists have a term for this, "impact bias."

Our consumer oriented society constantly reinforces the idea that we need more money to be happy. It prays on our fears, our insecurities, and our desires to be loved to reinforce the notion that we need more money and more things.

In the process we spend all our valuable time pursuing money and goodies bought with money. Yet we are no happier or even less happy than we would be if we just distanced ourselves from this constant barrage of advertising. Time to turn off the TV.

Anonymous said...

I choose to work only 3 days per week so I can devote myself to activities that I love. We don't own a car, and we don't want to. We don't own a house, and although we always think we'll buy one someday, it's not something we worry about on a daily basis.

Pretty much, the only things we spend money on are rent, food, and movies here and there. What we would have spent on car payments and gas and new clothes or furniture goes into savings. I could work more hours and make more money, but what for?

Yes, I do have a computer and a cell phone, which I kind of consider necessities. And we do have a very nice TV that we bought before I became aware of my impact on the environment. But if any of these things were destroyed or stolen, I'd have no problem replacing them with second-hand equipment rather than new.

In our culture, some luxuries have become necessities for many of us. But I don't believe that having the newest model every year will increase our happiness.

ruchi said...

Fhe, you make a good point about human beings being adaptable. I believe you're totally right. We adapt to what we have. If it's less, we adapt to less. It it's more, we adapt to more. But adapting doesn't make us more or less happy.

Beth, working 3 days a week sounds amazing. I agree with you. Why make more money. Time is way more valuable.

Anonymous said...

I'm originally from Spain, I lived in the U.S. for 3 years, but I currently live in Denmark. So, to answer your questions, yes, I don't mind to "share" my income.

I think there is a special feeling that Danes have, than Americans and Spaniards don't. That is: there are not poor among them.
The taxes are a 45%, but there are so many benefits you can get, besides the ones you already named, that it seems quite convenient to be part of their system.
Having said that, of course, I agree that Denmark is not a perfect country and that sometimes I miss Spain or the U.S. But, my and my wife are quite happy here to start our family.

ruchi said...

Carlos, thanks for your comment. It's nice to have someone from Denmark weigh in!