Does money make us more happier?

An assumption in Economics is that consumers prefer more, and that one’s utility can be increased through the consumption of more goods and services. In other words, the more money we have as individuals, the more satisfied we are with our life. But does greater income and consumption really translate into greater happiness? Three main research studies are examined, with offer similiar yet different answers.

In one study, an ordinal scale for happiness was derived from answering the question: “taken all together, how would you say things are these days – would you say that you are very happy (score of 3), pretty happy (2), or not too happy (3)?” (Davis, Smith & Marsden, 2001) For 1994-1996, the mean happiness score was 1.92 for those in the lowest 10% of the income distribution, and 2.36 for those in the highest 10% income distribution. This study showed that there is a positive relationship between utility and income.

In the World Values Survey, cross-country comparisons were made to view this relationship on a global scale. In this case, income was measured by each 51 country’s per-capita gross national product (GNP) as measured in US Dollars. The question asked to all respondents: “all things considered, how satisfied are you with your life as a whole these days?” the scale was 1 representing most dissatisfied and 10 most satisfied (ICPSR 2000). Graphical analysis showed that countries with higher GNP per capita on average, experience higher satisfaction. However this satisfaction increases at a lower rate, reflecting diminishing utility as material well being increases (Davis, Smith & Marsden, 2001).

The researchers concluded that there are other factors which affect satisfaction levels, such as health, the political environment, freedom etc. For example individuals with high income levels, but poor health were less happy, then those with better health. Countries with high incomes, yet strict government control had less happier individuals then those countries with less control (People in North Korea can testify to this!) Although researchers still agree that greater happiness results from greater utility, on average that is.

However, Princeton University Researchers have found that the link between income and happiness is “greatly exaggerated and mostly an illusion” (Quinones 2006). Their new fndings build on efforts to develp alternative methods of gauging the well being of individuals and of society, as it became apparent that people surveyed in a new study about their own happiness were overstating the impact of income on their wellbeing.

Although income is a good measure of well being, its role is low and less important then first thought. People with greater incomes do not necessarily spend a greater amount of time doing enjoyable activities (Quinones 2006) In economics it is assumed that the rational consumer will increase their level of consumption for luxury goods and services, due to their higher level of disposable income and will be more satisfied. But in reality, higher income individuals are “barely happier than others in moment-to-moment experience” and tend to be tenser.

New measures adopted are based on individuals ratings of their actual experiences, instead of a judgement of their lives as a whole. The Day Reconstruction Method (DRM) measures peoples quality of daily life. This creates an “enjoyment scale” by requiring people to record the previous days activities and describe their feelings about the experiences. The method has proved effective.

For example, when people were asked to describe their general happines and then asked how many dates they had in the past month, their answers showed little correlation. But when the order of the questions was the opposite for another group, the link between their love lives and general happiness became much greater. This is in line with the finding from the World Values Surveys.

So far three studies have been examined. The first study concluded that there is a positive relationship between income and happiness, the second looked at this relationship on a global scale, still indicating a positive relationship, but discovering the presence of diminishing utility with income, and concludes that there are other factors at play. The last study makes a revision of past research then it conducts its own study. The researchers concluded that this positive relationship has been very much exaggerated and criticize the integrity of past surveys. Whilst they acknowledge that there is a positive relationship, there are still many other factors at play and only to a small extent, is income positively related to happiness, thus agreeing with the other two studies.