Yes, money can buy happiness and our well-being doesn’t plateau as we get richer

Does money buy happiness? The question is a perennial one. From ancient times we have the cautionary tale of King Midas, who, according to Aristotle, starved to death as a result of his “vain prayer” to turn everything he touched into gold.

The quality of life is influenced by many factors other than money, as we see in data published by the Office for National Statistics.

The ONS surveys people under ten separate headings of which only two –  personal finance and the economy – are related directly to money. Others include health, our jobs, where we live, and the environment. The headings themselves are broken down, so there are 44 indicators of well-being.

These are condensed into a single measure of well-being, or happiness. Making this metric the main target of government policy, rather than the purely economic based GDP growth, has attracted support.

But it is this kind of data which gave rise to the so-called Easterlin paradox, named after Richard Easterlin, of the University of Pennsylvania. In a very influential 1974 paper he showed, using post-war American data, that although at a point in time people with more money reported higher happiness levels than those with less, over time the overall level of happiness did not grow even though incomes did. Between 1946 and 1970, after allowing for inflation average incomes grew by no less than 140 per cent. But reported happiness was flat.

The finding, if correct, did indeed have important implications for public policy.

It also seemed to strike at the very heart of economic theory. In the jargon, a key assumption is that of “non-satiation”. In other words, getting more of everything makes people feel better off – without limit. They cannot be satiated.  

Economists recognise that this process is subject to diminishing returns. A household buying its first car derives significant benefit. The second car, albeit useful, doesn’t add quite as much as the first. Incomes follow the same pattern, in theory at least.

Nobel Laureates Angus Deaton and Daniel Kahneman seemed to achieve a partial resolution of the issue, in a paper published in 2010. They split the concept of well-being into two categories. “Emotional”, which refers to the emotional quality of a person’s everyday experience,  and “life evaluation”, which measures the thoughts which people have about their life when they think about it.

They found that life evaluation rises steadily with income. Emotional well-being, however, seemed to plateau at an annual income level of around $75,000. Many interpreted this, wrongly, as showing that incomes above $75,000 did not contribute to happiness at all.

In 2021, Matthew Killingsworth, using a sample of over 1 million experience-sampling reports, was unable to find any plateauing of emotional well-being as incomes rose.

Last month, a joint paper by Kahneman and Killingsworth seems to have resolved the issue: both scientists accept that for most people, higher incomes lead to higher levels of well-being, however the latter is defined. The gains from additional income become less as income rises, but they do not level out.

There is, however, what they term an “unhappy minority”, perhaps 20 per cent of the population whose emotional well-being does indeed plateau.

So, after fifty years of intensive research, it is official. For most people, money can buy happiness.

As published in City AM Wednesday 29th March 2023
Image: Wallpaperflare
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