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Money and happiness

By Alok Ray, Sep 13, 2012

One can postulate that a person feels happier after he gets a rise in income, but once he gets used to that, his level of happiness goes down.

The other day, waiting at the bank, I overheard an argument between two elderly gentlemen. The first person said: “See, money is at the root of all evil. There is so much fighting even among brothers – it is all because of money.” The second person disputed: “No, money is freedom. Because I have money, I don’t have to depend on my children. I can live my life the way I want to. I am so happy for that.” Who is right? I guess, both of them are right, in their specific contexts.

This takes us to the age-old question: Does money bring happiness?  Basically, money  gives access to  more options in life. One can go for the kind of education, career, hobbies, food, housing, health care, life style that one wants to have. But does having more choices makes a person happier? That may not be the case for everybody. Some people get confused/indecisive when they have more options and regret all their lives that they chose the wrong option, even though one is never certain what would have happened if he had chosen a different path. It is possible that they would have been less unhappy if they did not have the freedom to choose among so many alternatives.


In primitive societies, a farmer’s son used to be a farmer, a priest’s son a priest. Society did not give them any other choice. This lack of social and economic mobility can be rightly criticised for producing many ill effects. But that does not mean that everyone was less happy in those days compared to now when they have more career options. One can argue that in primitive societies (almost) no one had the choice. Everyone was ordained to follow family profession and lifestyle. However, in today’s society when some people have more choices because they have more money, others with less resources and hence less options would generally be unhappy and resentful.

One major reason why more money does not bring more happiness is because a person’s perceived needs, ambitions and the reference group (relative to whom he judges his well-being) change as one moves up the income ladder. A millionaire is not happy to remain so, he wants to be a member of the billionaire club. The siblings of super-rich business families fight tooth and nail to get a larger share of the family business empire. A person starting with a small house and a car next wants a have a more prestigious car, a bigger house and a vacation in Europe (since some of his neighbours are having these) and then later a private jet and vacation homes in several continents (following his mates in the billionaire club). The peer group, relative to whom he evaluates his achievements and material success, constantly changes.

Additional satisfaction

In economists’ terminology, there is the law of diminishing marginal utility which says that the additional satisfaction that a person gets from an extra unit of the same good (say, having an extra cup of tea) goes down as one consumes more of the same. But this law does not apply to money. More money enables a person to access not just more of the same good but newer types of goods. Hence, the marginal utility of money (the utility that a person gets from an extra thousand or million), instead of going down, goes up for some people. That induces them to work longer hours even with advancing age to pursue their rising ambitions, sometimes ruining their health and family life. In this unrelenting pursuit of more material wealth, some even go into illegal activities (like insider trading, bribing, tax evasion and outright fraud). Many of them have to take sleeping pills every night to calm their nerves and sense of insecurity. Certainly, this is not a happy life.

To capture this point, analytically, one can postulate that a person feels happier immediately after he gets a rise in income but once he gets used to that, his happiness goes down to earlier level. In other words, the level of happiness depends on incremental income, not on the level of income. So, a person has to earn more and more to remain at the same level of happiness. It is like running to stay at the same place.

Some people discover, after they have earned a lot, that money (alone) does not bring happiness. They realise that happiness is more a state of mind – the ability to remain contented with what that have got. When told that the billionaire businessman earns more in a day than what he does over his whole life, one famous writer said: “I have got one thing which he has not got -- Enough.”
 
Does this mean that being poor is a virtue because it brings more happiness? Not necessarily. First, in order to realise that money is not everything in life, first one has to earn enough. That is why, if you ask any poor man whether he would like to be rich (and unhappy) instead of remaining poor (and happy), almost all poor people would opt to be rich and miserable.

In any case, if, after earning a lot, one feels miserable, one always has the option of giving away one’s wealth to someone else and make him richer (and happier or unhappier?)

(The writer is a former professor of economics, IIM, Calcutta)

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