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Too Much of a Good Thing: The Relationship between Money and Happiness in a Post-Industrial Society

March 7, 2010 Research, Volume One No Comments

By Alison Dalton Smith

Happiness is considered a universal human aspiration, but the means to achieving happiness has become inexorably entangled with gaining material possessions.  In common paradigms of economic development, Gross Domestic Product is used as a proxy for measuring the well-being of a nation’s citizens.  While this is often true in impoverished nations where basic needs are not met, there is a threshold point past which increasing economic gains no longer necessarily deliver increases in human well-being.  Beyond this threshold, economic measures are no longer adequate for accurate measurement of a nation’s human well-being. In fact, this myopic focus on economic growth has created an unsustainable way of life that is increasingly unfulfilling for those that are engaged in the cycles of consumption.  In this paper, I will address both recent patterns in human well-being in industrialized nations and more comprehensive indexes that quantify human well-being.

Sustainability is the interaction of three aspects of life: environmental, economic, and social. Citizens and researchers alike accept there are causal effects of increasing economic activity and resulting environmental degradation. The link between the social aspect of life and economic activity was long thought to be a positive one;  I contend that this assumption only holds up to a certain point.  I will not try to pinpoint the threshold in this paper, but will only bring together different sources of information to show that increasing economic growth does not bring positive social returns in all cases.  The growth of literature on this topic began with psychology and has recently been developed by economists.  I will explain the terminology used and data sources in the first part of the paper, examine the data trends in the next part, and finally make recommendations for how we can address the issues presented in the paper.

The concepts of happiness, well-being, and life satisfaction have been used interchangeably in the literature addressing connections between economic growth and social returns, although recent studies show that there are significant differences between happiness and life satisfaction (Veenhoven, 1991; Diener & Biswas-Diener, 2002). Peggy Schyns (1998) found the correlation between life satisfaction and happiness to be .90, which supports this interchangeable use.  However, as quality of life studies have progressed, some researchers have begun to separate the two.  Happiness has been defined as affective (influenced or resulting from emotion), and life satisfaction as cognitive (the process of thought) (Diener, 2004).  Happiness research has generally been based on surveys that ask just one question.  Subjective well-being (SWB) is a term often used to indicate a more comprehensive approach to life satisfaction that incorporates happiness and other judgments of the overall quality of life (Hoorn & André, 2007).

The national accounts of well-being, created by the New Economic Foundation, is a completely different approach to well-being assessment.  People are asked not one, but 50 questions about well-being from personal and social aspects of their lives.  This approach is especially important because it can be used across socio-political scales, from tribal to national levels. (New Economics Foundation, 2009).

Amartya Sen’s capabilities approach is another atypical approach to human well-being assessment.  This approach, developed in the 1980s, is different from the data analysis approach. The freedoms of individuals are the building blocks and, “attention is thus paid particularly to the expansion of the ‘capabilities’ of persons to lead the kind of lives they value and have reason to value,” (Sen, 1999, p. 18).  The benefit of using this paradigm is that it can be applied across values systems, cultures, languages, and scales because it allows the user to define the values intrinsic to the evaluation (Sen, 1999).

Richard Easterlin challenged the perception that economic growth would lead to increases in happiness in his seminal paper, Does Economic Growth Improve the Human Lot? (1974). The findings of his paper are known as the Easterlin Paradox.  He made three conclusions that led to debate and research for the next thirty years.  The first was that people with higher incomes are happier than those with lower incomes within the same country. He claims causality from these findings from income to happiness (Easterlin, 1974).

Second, he concludes that his findings for individuals does not hold up for countries; “…if there is a positive association among countries between income and happiness it is not very clear,” Easterlin, 108, 1974).  His third conclusion is that as a country’s GNP increases, its population does not get happier.  He only has data from the United States, as there were no other countries with time-series data on this issue.  These last two findings have not held up over time. In-depth analysis on this topic can be found in Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox (Stevensen & Wolfers, 2008) and Subjective Well-Being: Three Decades of Progress (Diener, Suh, Lucas, & Smith, 1999).

Easterlin’s first finding that rich people tend to be much happier than poor people was corroborated by subsequent research (Diener & Biswas-Diener, 2002).  While rich people tend to be happier, this is only part of the picture.  Rich people do not get any happier with more money (Scitovsky, 1992). In fact, from 1946- 1970, per capita real income rose by 62 per cent in the US, but reported happiness did not change substantially (Scitovsky, 1992).  In the rest of the paper, I will address this occurrence.

Between 1946 and 1996, per-capita real income rose by a factor of 2.5, but average happiness has remained the same (Frey & Stutzer, 2002). Figure 1 shows a perplexing trend that has occurred in the United States.  Since the mid-1960s, the percentage of very happy people in the United States has actually decreased slightly while GDP per capita has skyrocketed. Figure 2 shows that a similar trend has occurred in Japan.

income_and_happiness

Figure 1: Income and Happiness in the USA (Frey & Stutzer, 2002)

satisfaction

Figure 2: Satisfaction with Life and Income per Capita in Japan between 1958 and 1991 (Frey & Stutzer, 2002)

Figure 3 shows cross-national data of a nation’s GDP per capita and SWB Index.  From the graph, we can see that GDP is not the most significant determinant of a country’s SWB.  Countries with similar cultural patterns and political states tend to cluster together.  While high SWB does not rely solely on high per capita GDP (there are both rich and poor countries with high SWB), it does appear true that low SWB does not occur in countries with high per capita GDP. In countries where large numbers of the population are extremely poor, people have too little to eat, or are homeless, happiness measures do increase when everyone’s income rises (Frank, 2007).

“]Figure 3: GDP per capita vs. Subjective Well-Being for the Different Societies (Inglehart, R. Foa, C. Peterson & C. Welzel (2008).)[A1]

Figure 3: GDP per capita vs. Subjective Well-Being for the Different Societies (Inglehart, R. Foa, C. Peterson & C. Welzel (2008)).

In developed countries, Richard Layard found a peculiar occurrence: as people gained more income, their perceived income requirement rose.  People base their satisfaction on their current income based on what they have and what they want to have.  As the gap between their wants and needs widen, their current incomes become insufficient.  Because of this phenomenon, Layard concludes, it is difficult for economic growth to improve happiness (Layard, 2005).

Ruut Veenhoven suggests that wealth is subject to the law of diminishing returns after a country surpasses industrialization (Veenhoven, 1991).  This finding was repeated in Ed Denier’s international study.  He showed that happiness rose sharply as GDP per capita increased when GDP was at a basic subsistence level, but after a nation industrialized, happiness rose at a slower rate (Diener & Biswas-Diener, 2002).

In addition to the diminishing returns on income, people tend to adapt to their circumstances, thereby negating the gains in happiness that they initially experienced (Myers, 2000). Figure 4 shows how people adapt to an increase in income and form new aspirations based on their income level.  An increase in income brings about a downward shift in the aspiration curve, which neutralizes increases in happiness (Frey & Stutzer, 2002). This may lead one to believe that any policy aimed to improved people’s happiness is futile. However, Brickman and Campbell contrarily show that after people experience an initial uptick in their happiness due to life circumstances, they do not go all the way back to a point of neutrality, but to a point slightly higher than they were before (Brickman & Campbell, 1971).

Figure 4: Happiness and Aspiration Shifts (Frey & Stutzer, 2002)

Figure 4: Happiness and Aspiration Shifts (Frey & Stutzer, 2002)

The following explains the scenario above:

“Initially, people have a certain aspiration level A1 so that income Y1 produces happiness H1. Raising income, say from Y1 to Y2, raises happiness from H1 to H2… However, over time, aspiration adjusts to the higher income level.  The aspiration level curve A1 shifts downward to Am. Ex post, the rise in income from Y1 to Y2 does not produce any increase in happiness…” (Frey & Stutzer, 2002).

Income inequality within a society can lead to unhappiness through failure to meet aspirations.  Juliet Schor noted that in the late 1980’s income inequality grew and people were feeling deprived in comparison to those at the top.  Even people who made $100,000 a year felt poor because they were comparing themselves to the nuevo riche of the day (Schor J. , 1998).

Other factors have also contributed to stagnation or decrease in overall happiness in developed countries.  Both men and women have increased their working hours since the 1950s.  From 1969 – 1987 women have increased their hours yearly by 305 hours and men’s hours have increased by 98.  In addition, Americans are working more overtime, and paid time off has been decreasing since the 1980s (Schor J. B., 1991).  The time spent to get to these jobs has also increased.  Commuting is often a solitary and stress-inducing activity (Baker, 2004).

Perhaps the strongest explanation to the paradox of money and happiness lies in how GDP is calculated. GDP analysis shows that the United States has gotten much wealthier as a whole over the past thirty years.  However, by aggregating incomes across classes, GDP masks income distribution.  At the same time that happiness began to stagnate in the US, so did real household wages among the working classes.  Figures 5 and 6 show that prior to 1979 all income brackets were growing relativly equally, but since the 1980s incomes at the top have increased incredibly, while the bottom and middle classes have seen much lower growth rates.   So, while GDP steadily increased, most Americans were not getting significantly richer.

Figure 5: Changes in before-tax household incomes, 1949-1979 (Frank, 2007)

Figure 5: Changes in before-tax household incomes, 1949-1979 (Frank, 2007)

Figure 6: Changes in before-tax incomes, 1979-2003 (Frank, 2007)

Figure 6: Changes in before-tax incomes, 1979-2003 (Frank, 2007)

Indexes other than GDP may be more suited to capturing life as most humans experience it. Below I will briefly describe a few alternative indicators: the General Progress Indicator, the Happy Planet Index, and the National Accounts of Well-Being.  I have intentionally left out the much-cited Human Development Index.  While the index does indeed provide another perspective on development progress, it uses GDP as an indicator, which does not get us to a new paradigm of progress or development.

Each of these indicators has been accused of being biased towards one policy agenda or another–that they each incorporate value judgments.  Cobb, Halstead, and Rowe point out in If the GDP is up, Why is America so Down? that GDP is also not value-free; in fact, it values the social and environmental aspects of life at zero. It also fails to differentiate between money spent on negative circumstances–such as the revenue from a divorce and the cleanup and restoration efforts after a natural disaster–and money spent positive events (Cobb, Halstead, & Rowe, 1995).

The General Progress Indicator begins with personal consumption expenditures, weighted by an index of inequality in the distribution of income.  Additions to production are made for non-market benefits associated with volunteer work, housework, parenting, and other socially productive efforts as well as services from both household capital and public infrastructure (Talberth, Cobb, & Slattery, 2007).

The Happy Planet Index (HPI) is another more comprehensive index.  It focuses more on the ecological cost of development.  The indicators used are ecological footprint, life-satisfaction and life expectancy (New Economics Foundation, 2009).  The HPI was created by the same organization responsible for the National Accounts of Well-Being and can be used a policy tools in tandem with them.

Development directly affects human well-being. Studies have shown that increasing wealth, whether measured in income growth, GDP, or GDP per capita, does lead to increases in well-being when basic needs are not met.  However, that link has led our policy makers, politicians, and academics to ignore an equally obvious occurrence that after a threshold point in industrial development, that relationship no longer holds up; increasing wealth then has diminishing returns to human well-being.

An increasing awareness of a growing global environmental crisis has prompted worldwide movements to change destructive behaviors. However, the idea of “cutting back” is often falsely associated with reducing one’s happiness or well-being.   Human well-being is at the forefront of development policy and incredibly important to governments around the world, as shown by the Millennium Development Goals.   Development policies need to expand to address the whole spectrum of development—both in developed and developing nations.  By recognizing that increased consumption may not increase human well-being in developed nations, policies may be designed that not only benefit people, but reduce their impact on the planet that sustains them.

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Contributor’s Biography:

Alison Dalton Smith works in international higher education development at the University Design Consortium at ASU.  Her interest in international development results from having lived in Latin America, Asia, and Europe.  She is particularly interested in the link between consumption and standards of living.

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