Happiness is a relative concept. Specifically, how happy you are depends on what your aspirations are, or how high you set the bar. For instance, if you are a blue-collar worker with a relatively low salary, and your current goal is to go on a camping trip to the Rockies, and you can do it, then, ceteris paribus, you are probably happier than a rich investment banker whose goal is to buy a private island but cannot do it because his bonus wasn’t as high as expected.
Of course an economist might ask, does the probability that one’s aspirations are fulfilled vary with income? One would expect that the answer is yes. But actually, it is not always the case. Indeed, if you assume aspirations don’t differ much by socioeconomic status, then of course higher income individuals should be in a better position to fulfill them.
The question is: what happens when different people have different aspirations. I.e. when wants differ among people. This might happen if one country does not observe another (e.g. in the pre-TV/internet era). Or if one era does not observe another (i.e. people in the 1970’s didn’t observe 21st century consumption habits). In general, if two groups of people have different sources from which they draw aspirations, relative happiness of the two groups should be independent of the relative income of the two groups.
This is indeed the case. Easterlin (1974) showed that while US GDP grew substantially from the 1970s to the 2000s, happiness stagnated. Probably because people in the 1970s had no idea of the amenities people in the 2000s would have, so why would they have been unhappy not to have had them? And there is also evidence that more educated/higher income people have different aspirations from less educated/poorer people, which dampens the positive effect of money on happiness (e.g. our opening blue collar vs. investment banker example).
If this theory is true, we should also expect to see that in our modern inter-connected world where poorer countries can readily observe richer countries’ consumption habits (via TV or the internet), GDP will be a driver of happiness. This is because people’s aspirations are sort of being standardized all over the world. And the rich can simply afford more of those aspirations. Indeed a positive pattern between GDP and happiness has been found over and over again.
This doesn’t necessarily contradict the fact that some relatively closed and underdeveloped countries like Cuba are some of the happiest on Earth. They simply have no United States to compare themselves to on material terms, because they have little to no access to (American) TV, internet, etc.
If we assume that poorer people can readily observe richer people’s consumption habits within a country, then this theory would also predict that money brings happiness within a country as well. I.e. within a country, richer individuals tend to be happier. This is also supported by a plethora of evidence: happiness is increasing in income at a decreasing rate.
Some recent research, however, suggests that the picture is a bit more complicated. The researchers here find a hump-shaped relationship between income and happiness in a cross-country setting. I.e. happiness initially grows with GDP, then tops off around $35,000, then starts to slowly decrease.
The reason for this according to the authors is that when one is rich, one can fulfill most of one’s aspirations. So there are fewer aspirations left. Poorer people have more aspirations. If you have more aspirations, you will have a higher chance of fulfilling one of them. Of course, if you have a higher income you will have a higher chance as well. But since the number of aspirations is generally decreasing in income (because you will have fewer unfulfilled aspirations left), at some point the negative effect of aspirations will overshadow the positive effect of larger income, and boom your happiness becomes decreasing in income.
So what have we learned about happiness? Basically, with the simple theoretical framework presented here we can explain a variety of empirical observations such as
- why U.S. happiness has not increased since the 70s,
- why richer countries are still happier than poorer countries,
- why certain poorer countries are not unhappy,
- why richer people tend to be happier,
- why the very richest people/countries may actually be less happy.
So does money bring happiness? Not directly, no. Specifically, it appears that to a large extent “ignorance is bliss”. The less you see what people richer than you do, the fewer unachievable aspirations you’ll have. In a sense, Buddhist philosophy is pretty much backed up by modern research on happiness.
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