Gross Domestic Happiness: What Is the Relationship between Money and Well-being?
Most of us have seen the bumper sticker: "Anyone who says money can't buy happiness just doesn't know where to shop." It's an amusing sentiment, but it provokes an important question: What exactly is the relationship between money and happiness?
On one hand, there is an unquestionable link. Certainly no one would deny that having enough money to cover basic needs -- to provide food, clothing and shelter -- makes you happy, or at least relieves stress which leads to greater contentment. And the more money you have, the more stuff you can buy that makes you happy: that sleek iPhone 4, that fancy new car or that luxurious cashmere wrap. On the other hand, those material objects tend not to bring us the same joy as say, spending a morning with your children at the beach, or having a good conversation with an old friend.
"The relationship between money and happiness is a complicated one," says Ed Diener, emeritus professor of psychology at the University of Illinois, who conducts research on the measurement of happiness. "All things being equal, having more money is always going to be a good thing. But while money may make you happier, there are things that [lend complexity to] that correlation."
So while more money may make us happier, other considerations -- such as whether you live in an economically advanced country, how you spend your money, how you compare your wealth to others and how you think about your time -- also play into the equation.
Back in the 1970s, only a handful of people were studying the subject of human happiness, and very little reliable data measuring individual or national well-being existed. At the time, research on the topic suggested that beyond some minimum, income had only a modest effect on happiness. In a society, rich people were happier than poor people, but citizens of rich countries were not remarkably happier than citizens of middle-income, or even poor countries. This finding, known as the Easterlin Paradox, after Richard Easterlin, the economist who first observed it, suggested that relative income, rather than absolute income, most parallels happiness. In other words, what matters is keeping up with the Joneses.
But happiness research has come a long way since then. Today, much better data and many more representative samples help measure both national and personal levels of happiness. Also, many more people are working in the field -- from economists to sociologists to psychologists -- and most now agree that there is a strong link between a country's level of economic development and the happiness of its people.
Indeed, political leaders including British Prime Minister David Cameron and French President Nicholas Sarkozy have said happiness may be the key to improving measures of how we gauge rising living standards in nations. Rather than simply looking at gross domestic product, or the amount of goods and services produced in a country, they say elements such as peoples' life satisfaction should be considered.
The connection between money and happiness, or even a simple, universal definition of happiness, is difficult to pin down, however. And critics note that coming up with a definitive way of determining a nation's success through well-being would be equally tough.
Originally published January 19, 2011, in Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania. Republished with permission.