Happiness Economics

A survey (*) conducted by Sara J. Solnick and David Hemenway asked students and faculty at the Harvard School of Public Health whether they would prefer to earn $50,000 a year while everyone else earned $25,000 or if they’d prefer to earn $100,000 a year and everyone else $200,000. The majority chose the first option. What economic truth underlies this intriguing story?

In the 1970s, New York economist Richard Easterlin observed that in wealthy nations, after exceeding a certain level of income, happiness did not increase with higher income – a concept now know as the "Easterlin Paradox." More recently, it was discovered that happiness is linked to activity in the left frontal zone of the brain. With machines now able to measure these brain activities and obtain data from population samples in different circumstances (such as income), economists began to analyse what this data can tell us, and thus creating a new field of academic research. In 2008, professors at Wharton used this new data to demonstrate that income is indeed a powerful factor correlated to happiness, but this school of thought must be qualified with two important warnings:

First, money can be used to make comparisons (rather than buy happiness), which creates a circle of unhappiness. The English economist Richard Layard, professor at Leicester, wrote a passionate book**, which delves deeper into Easterlin's study with a proposition: once a human being covers his or her basic needs (with $15,000), money is increasingly used to compare oneself with others. Thus, the happiness studies undertaken by Layard demonstrate that luxury goods can provide only passing happiness. Take the purchase of a luxuray car, for example. As soon as our neighbour buys a similar car, the happiness we obtained upon buying our own luxury car becomes void – and we are compelled to try to distinguish ourselves anew by purchasing another object of greater value. In order to obtain the necessary economic resources, we work for longer and longer hours, and once we have acquired the new desired object, we are happy again for a time. But this leads us into a vicious circle: by working more and more hours we sacrifice other sources of happiness (discussed below), with the paradoxical result that our final happiness may be less than the happiness we had at the start. As Layard states, “one of the biggest sources of unhappiness is to compare oneself with others.” As we tend to notice the possessions of more affluent people, our permanent dissatisfaction brings us endemic frustration that is difficult to overcome.

Second, a higher income leads a person to become accustom to a higher lifestyle, and this adaption quickly sacrifices the extra happiness achieved – which is why satisfaction at work is more related to changes in salary than to the actual salary level ***.

What are the seven factors that create the most happiness according to the regressions that economists have performed? Money, health, and quality of work are three elements where society as a whole has managed to achieve a certain balance. The other four factors are more intriguing: family relationships (mainly as a couple), social factors (contributing to common good through solidarity), personal values (ethical and/or religious ones), and personal freedom (this factor explains why in Communist dictatorships people are more unhappy than in democracies with a similar level of income). The terrifying question is: would we sacrifice these last four in order to have a bigger income so that we can buy more and compare ourselves more? Unfortunately, the answer in the Western world might be "yes."

Research has demonstrated that Western societies, such as the United States and Japan, have not experienced an increase in happiness since the 1950s, despite an overall improved lifestyle. The reason for this lies in how that improved lifestyle is achieved – at the expense of human relationships.
Something deep down inside us may rebel against these findings and fight to justify our decisions. I would counter that defiance with an Olympic fact that is presented in an excellent book on paradoxes by Manuel Conthe****: sportsmen and women who win bronze medals are happier than those who obtain the silver medal.

If you want to understand this, go right ahead.

Now, at a time when we are reconsidering the future of the world’s financial architecture and the new foundations of capitalism, we may also have a unique opportunity to reconsider the foundations of happiness, thus reconciling capitalism and satisfaction.

* Solnick y Hemenway, 1998, “Is More Always Better?: A Survey on Positional Concerns”, Journal of Economic Behavior and Organization, 37.
** La felicidad, lecciones de una nueva ciencia, Taurus, 2005.
*** See the excellent study by Sarin and Baucells, professors at the UCLA and IESE, “Con más dinero: ¿se puede comprar más felicidad?”, IESE, February 2007,
**** La paradoja del bronce, Crítica, 2007. This paradox was first pointed out by Victoria Medvev.

 

[This research paper has been reproduced with permission of the authors, professors of IE Business School, Spain http://www.ie.edu/]