The argument that money cannot buy happiness is old and broadly accepted. Economists assume people make decisions so as to get the greatest possible satisfaction of their needs and wants. Moreover, they assume that — all other things being equal — more money means more satisfaction.
Is there a conflict between these two arguments? If so, who is right?
The Associated Press reported recently that an Illinois psychology professor and a British economist conducted research and independently concluded people with higher incomes experience greater happiness than those with lower incomes.
Daniel Kahneman, the Princeton economist who won a Nobel Prize in 2002, does not agree completely. His research indicates the link between money and happiness is somewhat mixed. He found that people earning more than $90,000 a year are more than twice as likely to describe themselves as happy than those earning under $20,000. But the high-income group reports only slightly greater happiness than those earning $50,000 to $90,000.
None of these findings really conflicts with popular adages or economic assumptions. Money alone is not sufficient to make us happy. Having money is not even necessary to be happy. But higher incomes can make life easier in many ways.
People like being able to eat any food they want rather than subsisting on beans and rice. They prefer driving a newer, more dependable car than an old beater that might leave them stranded at any minute. Adequate housing makes for a more comfortable life than does a slum tenement. Going on vacation can be enjoyable and restful.
So it is not any surprise that people with incomes higher than $50,000 on average report higher levels of happiness than those with incomes under $20,000. Life can be a struggle when you are poor.
But neither is it a surprise that those with incomes higher than $90,000 are not much happier than those with middle incomes. No economist ever argued that the link between money and satisfaction of needs or wants is a linear one. Indeed, economics assumes that there are diminishing marginal returns to having more of anything.
The second hamburger does not add to your satisfaction as much as the first. A 4,000-square-foot house does not make you exactly twice as satisfied as a 2,000-square-foot house did. A third car is not as useful for most households as the second one was.
So once you have enough money to live comfortably, as many households in the $50,000 to $90,000 bracket do, moving up into a higher income range does not necessarily add much to satisfaction.
Moreover, happiness depends on many other factors than meeting physical needs. A low-income worker with good friends and a loving family might be happier than another person who earns more but is terribly lonely. A person who has an enjoyable, psychologically rewarding yet low-paying job might be happier than the high-income person who hates to go to work each morning.
Such is life.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.