Here is an excerpt from a book I am writing on welfare economics. This bit concerns whether money, above a certain income level, makes people much happier...
"A growing body of literature suggests that additional riches do not make citizens in wealthy countries any happier, at least not above a certain level. Using information taken from questionnaires, once a country has a per capita income of roughly $10,000 a year or more, the aggregate income-happiness link appears weak. Helliwell (2002, p.28) argues that the curve flattens out at about half of current American per capita income, or roughly the standard of living in contemporary Greece. These results might lead us to wonder whether economic growth is so important after all.
Despite this important body of evidence, I nonetheless wish to treat wealth and happiness as comoving in the broad sense. Questionnaire evidence should not distract our attention from our primary institutional means of improving human well-being, namely economic growth.
The flat-lining of the happiness-wealth relationship may in part reflect a framing effect. The literature usually focuses on aspiration or treadmill effects, whereby the wealthy expect more. Their greater wealth therefore translates into less happiness than might have been expected. But this is not the only adjustment occasioned by growing wealth. The wealthy also recalibrate how they should respond to questions about our happiness. If happiness itself is subject to framing effects, surely talk about happiness is subject to framing effects as well. The wealthy develop higher standards for reporting when they are “happy” or “very happy.”
So let us assume that both framing effects – concerning both happiness and talk about happiness – operate at the same time. This will imply that even a constant measured level of reported happiness implies growing real happiness over time. Life improvements do usually make us happier, while both our expectations and our reporting standards adjust upwardly. This is the most likely interpretation of the aggregate data. Most individuals strive to earn higher incomes, even after they have experienced the strength of “aspiration” and “treadmill” effects.
Note that within a country wealthier people report unambiguously higher levels of happiness, on average, than do poorer people (Dieter 1984). This result has not been challenged seriously. Now to some extent this result may reflect a zero-sum relative status effect. The wealthier people feel better at the expense of the poorer people, because they stand above them. Nonetheless it is unlikely that the entire effect boils down to a zero-sum game; wealthier lives are easier and happier in absolute terms in numerous ways, as discussed above. Even if my neighbor does not like the fact that I own a new car, the gainer’s gain exceeds the loser’s loss in many of these cases. Again, some of the apparent “zero-sum” element will be a framing effect for “talk about happiness,” rather than happiness itself. If a buy a Mercedes, my polled neighbor may express greater dissatisfaction with his Volkswagen. That same neighbor, if he had a Lada in Moscow, circa 1978, might express greater satisfaction on the questionnaire. Nonetheless in absolute terms he still prefers the Volkswagen in contemporary America.
It is also an open question whether the flattening point for the happiness-wealth relationship changes over time. If the world as a whole became much wealthier, for instance, might the “point of flattening” shift out to a higher income level? In this hypothetical future, people without access to limb regeneration and daily supersonic transport would feel deprived and thus less happy. Most likely, this would mean that we had produced a way of shifting up the whole curve. The standard of living found in contemporary Greece would not make people as happy as in the wealthier society of the future. At any point in time the curve may have a large flat range, but over time the absolute level of the curve, and thus human welfare, increases nonetheless.
The happiness literature also takes a limited view of what well-being, interpreted as broadly as possible, consists of. The contemporary empirical literature on happiness starts with the operational definition of whether an honest, self-aware person would report himself or herself as being happy, if so asked. Even if this accurately captures one notion of happiness, it is not the only relevant notion.
For instance a wealthier economy probably gives us more “fleeting” happiness experiences, or at least greater chances to trade-off long and short-term sources of happiness. Recent research (Kahneman, et.al. 2004) looks at the allocation of time during the day and classifies events according to how much (temporary) happiness they produce. It turns out that intimate relations, time spent with friends, and television, all appear to make people happier in this sense. Working and commuting make people less happy. A wealthier economy will offer greater options for structuring these choices, again noting that there may be trade-offs between long- and short-term happiness. Wealthier economies, on average, are associated with higher levels of leisure time, although they accommodate workaholic preferences as well.
Often context effects matter for temporary happiness. An individual will admit to being happier if he has recently found a dime, or if his soccer team won rather than lost (Schwarz and Strack 1999). These sources of happiness will likely be systematically larger over time in the wealthier society. A diverse commercial economy offers more sources of temporary stimulations and more short-term turns of good fortune.
Most generally, we must ask which institutional structures give people the greatest opportunities to structure their lives to achieve their preferred forms of happiness or well-being. Some persons may seek temporary stimulations, others may want to feel fulfilled at the end of their lives, and others may seek to maximize the quality of their modal day. Some will seek happiness through out-competing their peers for status, while others will look inward. Again, greater opportunities and freedoms will likely favor the wealthier society in these regards. Well-being is not a single variable to be maximized; rather individuals prefer to structure the kinds of well-being or happiness they can achieve.
Finally, even if we accept the “flat-line” empirical result as valid, the questions are posed to individuals in normal life circumstances. The answers will not pick up the ability of wealthier economies to postpone or mitigate extreme tragedies, whether in the wealthier or poorer parts of our world. For instance the happiness measures, by their nature, do not pick up the benefits of greater life expectancy. The dead and incapacitated cannot complain about their situation, at least not in questionnaire form. If an immigrant, or a child of immigrants, fills out the form, there is no comparison with a pre-immigration state of affairs. By its very nature, happiness research draws upon a fixed pool of people in relatively normal circumstances. This will limit its ability to measure some of the largest welfare changes brought by economic growth. Happiness research, whatever its positive uses, is poorly suited to underpin a welfare economics of tragedy.
The happiness literature at most shows that many more changes are irrelevant than we had previously thought. This result would not, however, eliminate the major benefits of economic growth, as experienced over longer periods of time. It might turn out that (if we believe the happiness literature) many “small” changes are irrelevant or nearly irrelevant for happiness. Yet sufficiently large changes still can boost or harm our welfare by significant amounts. If the small changes do not much matter, that is all the more reason to focus on the large changes and thus reason to elevate the importance of infra-marginal welfare economics.
People cope least successfully when the catastrophe or malady is ongoing and involves an ongoing deterioration of condition. Most of the counterintuitive results come when the bad event has a “once and for all” nature, such as a one-time physical handicap. In these cases many people recover their initial level of self-reported happiness. But individuals remain subjectively badly off when they suffer from progressive or degenerative problems. So to the extent that a poorer society brings an ongoing worsening of conditions for many individuals, the associated human suffering will be greater. Once again, we are led back to significant benefits from ongoing economic growth."
Read also Will Wilkinson on the topic. And if the above remarks appear to differ from my previous remarks on these topics, it is because I am still changing my mind.