THE ECONOMICS OF HAPPINESS
Synopsis
Today, with economies facing high unemployment, wage cuts, volatile markets, and a growing gap between the haves and the have nots, making money is among the top priorities in everyone’s mind. But how essential is money in achieving happiness?
Sadly, the answer to this question is not that simple. Money has long been studied to see how it impacts happiness and there is currently a considerable body of micro-econometric research that indicate a positive correlation between the two. Studies have also been able to determine the approximate wage that people require in order to be happy. This article examines some of the common reasons why people often tend to associate money with happiness while discussing some of the research work in this area, especially the highly influential Purdue study. It also looks at reasons why money does not make us as happy as we expect it to.
Introduction
How many of you have heard the expression ‘Keeping with the Joneses’?
In today’s world, society has led us to believe that the higher our income and greater our purchasing power, the happier we will be. In pursuit of seeking this so-called happiness, we are pushed to seek a decent income job after we graduate or even before. Soon the focus turns from making a reasonable salary, sufficient to cover the basic needs, to a job that can pay for our luxury wants. And it does not stop there. We then try to achieve the next revenue level and the next as our lifestyles and needs evolve (The World Counts, n.d.).
According to the Maslow’s hierarchy of needs, once you are able to meet the basic survival needs of food and shelter, you seek to satisfy higher needs such as security and self-esteem. But in order to climb up the hierarchy, we require resources, the most important being money (The World Counts, n.d.). However, once we have met the fundamental needs for our survival and existence, how much more income do we need to be happy?
Income and happiness
The relationship between money and well-being is one of the most studied and researched questions (W. Berger, 2021). We have all heard the saying ‘money cannot buy happiness’. A saying which supposedly is meant to encourage us to be content with what we have. However, this has been disproved by researchers, at least to a certain extent (Martin, 2017).
The reason why people often associate happiness to a higher income is due to the obvious fact that money can be used to exchange for goods to meet people's needs and wants. Schnittker conducted a research study and found that the relationship between money and happiness is mostly viewed in terms of income allowing individuals to enjoy their lives and buy goods to meet their wants, thus improving their well-being (Northern Illinois University, n.d.).
In part, it is also because money offers people a greater sense of control over life. The more money you possess, the greater autonomy you possess and the more alternatives you have to live your life with (W. Berger, 2021). For instance, if a person living paycheck to paycheck has lost his/her employment status, he/she may have to take up the first job that is offered to them even if it is not one that they like; while a person who has more wealth under their control can wait for one that’s a better fit for them. In major and minor decisions, having more money provides people a larger array of choices and a stronger sense of self-sufficiency (W. Berger, 2021).
Richard Easterlin is known to be the first modern economist who explored the link between happiness and income. He did extensive study on this topic and through his research he showed that there was a statistically positive bivariate relationship between the two in each of the representative national surveys done (Northern Illinois University, n.d.).
Mechanisms explaining the impact of income to one’s happiness
There are two major mechanisms that explain the impact of income to our happiness (The World Counts, n.d.).
The first one is adaptation. This mechanism says that if you get a one-off increase in your income, your happiness increases for a brief period. This is until you become used to it, after which you begin to desire more. When you earn a meager level of income, the focus is primarily on being able to afford the basic needs (The World Counts, n.d.). Once your income increases, your standard of living also goes up. You start wanting higher quality products and services - a more luxurious car, a bigger house, etc. When you see that better items are available and your level of income permits their acquisition, you are driven to buy them, never being satisfied with what you have (The World Counts, n.d.). And you will blame the disparity and discontent on your income.
The second one is social comparison. This mechanism makes people assess their income by comparing it with others. It is here that the mindset of the Joneses follows. We compare our resources with that of our friends, peers and relatives (The World Counts, n.d.). Even if you already have a great house, a working car, or the latest technologies, you will never truly be satisfied with what you have if your neighbor or your distant relative has better stuff. You convince yourself that you have to earn more (The World Counts, n.d.).
The Purdue Study
Psychologists from Purdue University and the University of Virginia analyzed World Gallup Poll data in order to determine whether one’s income had a role in their lives in terms of two aspects – their life satisfaction and emotional well-being. Life satisfaction is a comprehensive evaluation of how a person is doing in general, whereas emotional well-being relates to a person’s everyday emotions like happiness, sorrow, excitement, anger, etc.
They collected data from 1.7 million people in 164 countries and performed a cross-reference of their earnings and life satisfaction. Despite variations in the cost and living standards across nations, they were able to conclude that $95,000 is the ideal income that a person must earn in a year for life-satisfaction and between $60,000 and $75,000 for emotional well-being. The income however increases for families with kids (Fottrell, 2018).
The more the income falls below these levels, the unhappier the person feels. On the other hand, individuals earning more than these income levels did not report being any happier with their increased income (Martin, 2017). The study even found that once a person earned an income greater than $75,000, they were reported to have lowered life satisfaction levels and a poorer degree of well-being. This can be because money is necessary to satisfy basic requirements but only to a certain extent. Once the ideal point of need is fulfilled, one might be motivated to make material or monetary gains and may engage in social comparisons that can paradoxically reduce well-being (Purdue News Service, 2018).
What is the Reality?
The fact is that we are never satisfied. We constantly tell ourselves the lie that if we had just a little more money, we would be way happier. But once we get there, it may not turn out to be so. As a matter of fact, we begin to desire for even more income or money. To state the truth, the more you have, the less effective it will be in bringing you happiness. This paradox has long troubled economists and researchers (Futrelle, 2016).
We have a tendency to overestimate the joy that we can get from receiving more. We humans are adaptive animals, and this ability has got us through various periods of ice ages, plagues, and wars. But this very nature of ours is also the reason why we will never be satisfied for a long time when good fortunes come our way (Futrelle, 2016). In the short-term, earning more can bring us more joy and happiness, but it does not take long for us to adjust to the new wealth and the additional things it will be able to get us. We quickly become accustomed to it and eventually get trapped in what economists call the “hedonic treadmill” (Futrelle, 2016).
Conclusion
Most people confuse happiness with pleasure. They think of the pleasure of eating an ice cream or of going to the movies as an equivalent to happiness. However, the happiness derived from such activities is more like a square wave. During the event, you believe you are happy and content. but an hour later it has barely any effect on your current level of happiness (Martin, 2017).
To a certain degree, money has the ability to appease your financial fear and in this sense, may enable you to live life in a more satisfied manner (Martin, 2017). However, studies show that despite your income being able to give you a comfortable life, it doesn’t always guarantee happiness. There is actually data showing the contrary, where people with high income usually have dysfunctional relationships, as their jobs require them to spend more time working than spending it with their family or loved ones (The World Counts, n.d.).
Each person requires varying amounts of money depending on a number of factors. Happiness is determined by how much money is necessary to meet your basic requirements and what personally gives you joy (Liles, 2021). For one it might be a hearty meal at your favorite fast-food place. For another it might be a new pair of shoes or a concert ticket to your favorite singer or a weekend getaway to some tropical island. In the end, money can increase the potential for life satisfaction, based on how you spend it (Liles, 2021).
The key thing to bear in mind is that money is only one of the many means to make you happy and not the end in itself. You can use it to spend a holiday with your special ones or enroll in a class you have always wanted to attend or engage in other activities that can enrich your life and help you grow. The happiness we obtain from acquiring material possessions is short-lived. Often what actually makes us happy and satisfied with our lives are the things that cannot necessarily be bought from money (The World Counts, n.d.).
Key Takeaways
The reason why money makes us happy is speculative and is likely to alter with changes in our needs, values and priorities over time.
We become stuck in a cycle of trying to fulfill our material wants and wishes, and in the process, get thrust into a cycle of unhappiness. We work, earn, buy and hope that our life will automatically be filled with joy and happiness.
The reality is that regardless of your position on the income scale, with a little knowledge and practice any of us can use money to bring more happiness.
We must learn to fight against unnecessary materialistic inclinations and spend our money on buying experiences instead of things or even better, spending money on other people in need.
According to Martin Seligman, a prominent psychologist, as much as 90% of your long-term happiness is determined by how you think, not by how much money you have or where you live. And according to Harvard University, around 40% of happiness comes from the decisions and choices they make.