Tuesday 21 November 2017

Can money buy happiness? The debate rages on

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'More than four decades ago, an economist, Richard Easterlin, published a paper claiming that, on his reading of the data, money doesn't make people more content. Almost immediately, he was challenged. The debate has raged ever since'
Dan O'Brien

Dan O'Brien

Most of us spend most of our energies toiling, from our teens to the time we retire. Who, at least among those who retain some modicum of sanity, has not paused to ask whether it is all worth it?

For those fortunate enough to be decently off, the question arises from time to time: would I be happier with less cash but more time for things such as family, travel or whatever else it is that brings fulfilment and serenity (assuming that work brings too little of either).

Whether money buys happiness is an age-old question. In more recent times scholars have shown a growing interest in the relationship between life satisfaction and incomes, in part because there now exists so much data on both.

More than four decades ago, an economist, Richard Easterlin, published a paper claiming that, on his reading of the data, money doesn't make people more content. Almost immediately, he was challenged. The debate has raged ever since.

It is not hard to see why his view has become known as the 'Easterlin paradox'. Assuming the majority shares in the fruits of economic growth, it is counter-intuitive (hence the paradox) that as a country becomes richer its citizens would not become more content.

That is because, as well as increasing incomes, economic growth gives a state more resources to devote to public services. Furthermore, there is a correlation between life expectancy and a country's GDP. In other words, development doesn't just mean more comfortable lives, it means longer and healthier lives.

A popular interpretation of the paradox is that once people have access to basic goods and services, further increases in income do not matter. It has been argued that if that is indeed the case, economic growth as a policy objective should be downgraded in favour of other goals.

This has all been grist to mill of those who warn of the spirit-sapping horrors of materialism.

A recent challenge to the Easterlin view has come from Betsey Stevenson and Justin Wolfers, two US-based economists. Their 2012 paper* found that there was a strong correlation between reported life satisfaction and GDP per capita across the world. People who live in developed countries are indeed more satisfied with life, they found, than people who live in developing ones.

A notable outlier, however, was the United States. Despite growth in that economy, the happiness of Americans in surveys has been essentially constant since 1972.

A plausible explanation is that the benefits of this growth have gone exclusively to the richest. Median wages (when adjusted for inflation) have been stagnating in America for more than 40 years.

Another important aspect of the debate is whether absolute or relative income matters. The aforementioned study focused on absolute income (GDP per capita). But relative income is how you compare yourself with others, and, as social beings, this is likely to matter to most people.

One argument is that because we are constantly comparing ourselves with others, a pay rise merely raises our benchmark of what income we would like to have. Our overall happiness does not change a lot with better pay as we are constantly raising our expectations.

Technological change also appears to be altering expectations. A partial explanation for lower life satisfaction levels among inhabitants of poorer countries is that, thanks to technology, they know more all the time about higher Western living standards.

As if all that were not enough to bamboozle, there are also a number of questions about how things are measured in 'Happiness Economics'.

An obvious one is the definition of happiness and well-being. A common method is to ask people to rate their lives on a scale of 0 to 10, with 0 representing the worst possible life you can imagine and 10 the best.

This can be criticised not only for being somewhat one dimensional, but also because cultural factors make comparisons difficult - we Irish, for instance, tend to have a more upbeat outlook than most other Europeans when we are asked to self-report on everything from our personal health to the state of the world.

A broader range of questions was included in a paper written by two Nobel laureates, Angus Deaton and Daniel Kahneman**. They divided well-being into two categories: emotional (which included experiences of joy, stress, sadness and anger) and life evaluation (a more subjective measure on what people think about their lives on a 0 to 10 scale). Interestingly, they found a cut-off point of around US$75,000 (approximately €70,000) for improvements in emotional well-being, after which the positive correlation between happiness and higher incomes broke down. On the other hand, no upper limit was found for life evaluation, which continued to rise along with higher income.

By European standards, and as alluded to above, Ireland ranks high on many non-economic measurements of well-being.

In the bi-annual Eurobarometer poll, which has measured life satisfaction since 1973, Ireland has constantly been above-average for the European average, with the single exception of 1988.

Brendan Walsh, an eminence grise of the Irish economics profession, has looked into the link between well-being in this country and a number of economic indicators***.

Unsurprisingly, he found evidence of an inverse correlation between life satisfaction and unemployment, as the chart very clearly shows. In other words, when unemployment rises, life satisfaction falls (and vice-versa). But he found a weak relationship between happiness on one hand and inflation and growth in GDP on the other.

Both here and internationally, there is still plenty more work to do on the subject before definitive conclusions can be drawn. That politicians and policy makers are increasingly taking an interest in the matter should help push more resources into studying the matter.

A number of countries and international organisations now attempt to measure well-being. Last year, the UK set up a National Well-Being Programme, the United Nations now releases a World Happiness Report and the OECD a Better-Life Index.

But even with all the discussion and indices, the debate is far from over. It will rage for some time to come.

Sunday Indo Business

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