Humanity has been asking what is happiness and how to achieve it since the dawn of time, but still without a definitive resolution. The divergence of views on this subject is enormous, although it may be a good thing, because each individual can pursue happiness in their own way, which—according to the Declaration of Independence—is an inalienable right.
For the stereotypical homo economicus–believing economist, the question is trivial: What can generate happiness if not money? Although no one jumps for joy observing growing GDP, its growth is correlated with better health and longer life and translates into higher income. And higher income means a better standard of living. And indeed, research shows that wealthier people within a country admit to feeling more fortunate.
However, the puzzle of happiness is far from solved. Actually, it is only at this point that it starts to get interesting. Professor Richard Easterlin in his seminal article from 1974 showed that the inhabitants of richer countries are not happier than the citizens of less prosperous countries. Moreover, even within a given country, the average level of reported happiness does not increase systematically with the passage of time and economic growth. In other words, richer people are happier than the poorer at the moment, but an increase in income over time does not lead to an increase in happiness. This phenomenon has been called the Easterlin paradox.
Later research on this issue by Nobel Prize winners Daniel Kahneman and Angus Deaton showed that, of course, money matters, but only to a certain point. Income growth translates into greater happiness among Americans—but only up to an annual income of around $75,000.
On this basis, some economists and publicists negate economic policies aimed at economic growth. They argue that since the increase in income does not translate into greater happiness, we should focus on other problems, such as income inequality or the environment.
This approach, however, confuses different notions of welfare. Economists generally understand welfare as the utility derived from the consumption of goods and services. However, the researchers of happiness consider this approach too narrow—which is why they extend prosperity to nonincome dimensions such as health, education, or even happiness. So, to measure welfare understood as happiness, they develop surveys and questionnaires to fill out. For example, people are asked about emotional well-being, i.e., feelings and emotions felt the day before the study.
What people have to say about their feelings is, of course, important, but we should be aware of the potential problems of survey research, such as the problem of interpreting the answers given by people from different cultures or the possible distortions created by people’s ability to adapt to bad conditions.
But let’s return to Kahneman and Deaton. In their study, they only showed that emotional well-being does not improve after reaching a certain level of income. But at the same time they showed—which is often neglected—that life satisfaction rises steadily as income increases.
Which aspects of well-being are more important? Well, let’s give voice to Deaton himself. In The Great Escape (p. 61) he writes that happiness is a poor measure of overall well-being, “because there are many places in the world where people manage to find happiness even in the midst of poor health and material poverty; life evaluation measures are much better measures of overall wellbeing.”
And people who earn more value their lives more highly, even if they do not feel happier. Of course, this is not a simple relationship, but generally, “the residents of richer countries systematically value their lives more highly than those of poorer countries” and “economic growth within countries improves life evaluation in exactly the way that we would expect from the differences in life evaluation between rich and poor countries” (p. 57).
What is important is that this relationship applies to the percentage changes in income. So, although the same nominal increases in income affect the life satisfaction of a wealthy person less than that of a poor person, the same percentage increases in income cause a similar improvement in life satisfaction. The very mistaken focus on absolute values led to the formulation of the Easterlin paradox!
The key thing is that the fact that wealth does not automatically generate happiness does not mean that a higher standard of living is not worth seeking. Actually, we should be glad that wealth does not automatically generate happiness—because it means that poverty does not necessarily mean a lack of happiness. However, just because people can adapt to every situation and can enjoy life even if they earn little does not mean that it is not worth improving the quality of life.
For example, a person can get used to walking a dozen miles everywhere, but it does not change the fact that owning a bicycle would improve that person’s situation. The level of happiness may return eventually to status quo, after a short spike generated by the purchase of a bike, but the new-old psychological balance will coexist with a higher standard of living. Subjective well-being could be similar, but transportation will take less time.
So, does the increase in income lead to happiness? It all depends on the definition. Studies show that an increase in income has a limited effect on subjective, emotional well-being, in line with the observation of hedonistic adaptation. However, growth of income positive affects life valuation and expands the people’s opportunities to live a good life (the number of objective life options). Therefore, it seems that it is better to constantly strive for fast economic growth (rather than focusing on inequality or environmental issues). After the current recession, this task will be more urgent than ever.
