Arnold Kling  

Income Vs. Happiness

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A short article by Don Peck and Ross Douthat in The Atlantic Monthly summarizes some research on the relationship between income and happiness by Dutch sociologist Ruut Veenhoven. Peck and Douthat interpret the results as suggesting that

Above about $20,000 per capita, increases in wealth yield at best minimal increases in happiness.

They must mean "income," not "wealth."
More important, economists are automatically skeptical about this sort of research. The fact that people choose to earn more than $20,000 in income strongly suggests that higher income produces more happiness. When what people do in the market contradicts what they say in a survey, economic empiricists tend to view the market decision as more indicative. The formal term we use is revealed preference.

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CATEGORIES: Revealed Preference

COMMENTS (6 to date)
Randy writes:

For another point of view, check out Larry Samuelson's work on relative preferences. In brief, he suggests that utility functions are "hard-wired" in by "nature", and that (for survival reasons in humanity's past) utility is a function of both past consumption and the consumption of one's neighbors. "The happiness bar" gets raised once our own consumption, or that of our neighbors, rises (and vice versa if they fall). Implication: one has to have a continually rising standard of living in order to maintain a particular level of happiness. Thus, a person earning $120,000 a year is no more likely to be happy than one earning $20,000 a year. It all depends on their recent circumstances, and their neighbors.

David Thomson writes:

"Thus, a person earning $120,000 a year is no more likely to be happy than one earning $20,000 a year. It all depends on their recent circumstances, and their neighbors."

Someone who earns $120,000 annually should be happier because of the added financial security. Let's face it, $20,000 a year means that one is living a precarious existence---and that can't be psychologically satisfactory. There's indeed a point where earning more money is merely adding some zeros to your bank account. But it's just imprudent in pushing that point too far.

I hope this point doesn't seem overly pedantic, but economic choice theory has nothing whatever to say about “happiness” in the ordinary language sense (which is presumably what the sociologists are trying to measure). Revealed preference theory is about preference, not about happiness. "I prefer x" is not synonymous for "x makes me happier". Unlike happiness, preference is not about how events make you feel ex post.
Preference is only about how you rank your perceived options ex ante. Economic theory doesn't speak to the psychological or hedonic results of choices.

Thus, people choosing to earn more income reveal only that they prefer more income, not that more income makes them happier.

I share Arnold Kling's skepticism about the sociologists' research on income and happiness, but for a different reason. Surveys at best measure what people say about their happiness, not their actual happiness. What they say depends on the question they are asked. If the question is "Are you happier now then you were ten years ago?" (when your income was lower but you were younger), that will elicit a very different answer from "Are you happier now than you would be now if your income were $20,000 less?" To put it in econ-speak, I worry that the sociologists are not holding ceteris paribus.

David Thomson writes:

The study of economics covers so many areas that one is compelled to specialize. I take it for granted that the macroeconomist needs to focus on the big picture. Yet, the overall economy is made up of a lot of small picture needs and perspectives. An academic economist may not have the time to figure out what motivates people to buy, or not to buy a particular product or service---but somebody has got to do It! This is true whether the scholar is a per se sociologist or an economist. Both disciplines need each other. I’m skeptical of the initial sociological work because I know how difficult it is to reach a legitimate conclusion. But I’m not skeptical of them at least giving it a good shot.

JT writes:

Lawrence: not pedantic at all but very interesting. Thanks.

zizka writes:

I don't doubt at all that economists ignore what non-economists say. But taking "revealed preference" as proof of happiness essentially ignores the question. It probably is true that happiness is not rigorously measurable. Nonetheless, many of us know people who are making lots of money who are miserable, and people making less money who are happy. The fact that economists are unwilling or unable to express that concept says more about economics than about reality.

$20,000 per capita for a family of four = $80,000. This is upper-middle-class. Sounds about right to me.

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