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Can Money Buy Happiness?

From the May/June 2008 Issue

Money doesn’t buy happiness, but success does. Capitalism, moored in values of hard work, honesty, and fairness, is key.

On July 23, 2000, a forty-two-year-old forklift operator in Corbin, Kentucky, named Mack Metcalf was working a 12-hour nightshift. On his last break, he halfheartedly checked the Sunday paper for the winning Kentucky lottery numbers. He didn’t expect to be a winner, of course—but hey, you never know. 

Mack Metcalf’s ticket, it turned out, was the winner of the $65 million Powerball jackpot, and it changed his life forever. What did he do first? He quit his job. “I clocked out right then, and I haven’t been back,” he later recounted. In fact, his first impulse was to quit everything, after a life characterized by problem drinking, dysfunctional family life, and poorly paid work. “I’m moving to Australia. I’m going to totally get away. I’m going to buy several houses there, including one on the beach,” he told Kentucky lottery officials.

Metcalf never worked again. But he never moved to Australia. Instead he bought a 43-acre estate with an ostentatious, plantation-style home in southern Kentucky for more than $1 million. There, he spent his days pursuing pastimes like collecting expensive cars and exotic pets, including tarantulas and snakes.

Trouble started for Metcalf as soon as he won the lottery. Seeing him on television, a social worker recognized him as delinquent for child support from a past marriage, resulting in a settlement that cost him half a million dollars. A former girlfriend bilked him out of another half million while he was drunk. He fell deeper and deeper into alcoholism and became paranoid that those around him wanted to kill him. Racked with cirrhosis of the liver and hepatitis, he died in December 2003 at the age of forty-five, only about three years after his lottery dream had finally come true. His tombstone reads, “Loving father and brother, finally at rest.” 

Did millions of dollars bring enduring happiness to Mack Metcalf? Obviously not. On the contrary, those who knew him blame the money for his demise. “If he hadn’t won,” Metcalf’s former wife told a New York Times reporter, “he would have worked like regular people and maybe had 20 years left. But when you put that kind of money in the hands of somebody with problems, it just helps them kill themselves.” 

So what’s the moral of the story? Is money destined to make us miserable? Of course not. Mack Metcalf’s sad case is surely an aberration. If you hit the lottery, it would be different. You would give philanthropically and do all kinds of fulfilling things. Similarly, if your career suddenly took off in a fantastic way and you earned a great deal of money, you would get much happier. And what is true for the parts must also be true for the whole: When America experiences high rates of economic growth, it gets happier. America is not a nation of Mack Metcalfs, and money is a smart first strategy for attaining a higher gross national happiness. 

Right?

You’ve heard the axiom a thousand times: Money doesn’t buy happiness. Your parents told you this, and so did your priest. Still, if you’re like me, you would just as soon see for yourself if money buys happiness. People throughout history have insisted on striving to get ahead in spite of the well-worn axiom. America as a nation has struggled and striven all the way to the top of the world economic pyramid. Are we suffering from some sort of collective delusion, or is it possible that money truly does buy at least a certain amount of happiness?

Americans have on average gotten much richer over the past several decades than they were in previous generations. The inconvenient truth, however, is that there has been no meaningful rise in the average level of happiness.

In 1972, 30 percent of Americans said they were very happy, and the average American enjoyed about $25,000 (in today’s dollars) of our national income. By 2004, the percentage of very happy Americans stayed virtually unchanged at 31 percent, while the share of national income skyrocketed to $38,000 (a 50 percent real increase in average income). 

You've heard the axiom a thousand times: Money doesn't buy happiness. Still, if you're like me, you would just as soon see for yourself if money buys happiness.

The story is the same in other developed countries. In Japan, real average income was six times higher in 1991 than it was in 1958. During the post–World War II period, Japan was transformed at unprecedented speed from a poor nation into one of the world’s richest countries. But the average happiness of a Japanese citizen, measured on a scale of 1–4, stayed exactly the same at 2.7. 

In some countries, there is even some evidence that economic growth can create unhappiness. This is generally the case for nations experiencing rapid and chaotic development and thus opportunities for great wealth for the first time. Post-Soviet Russia is an example of this phenomenon. In the 1990s, after the fall of the Soviet Empire, a few entrepreneurs made vast fortunes in markets for oil and other primary resources. Yet post-Soviet Russia is a miserable place in which only about one in five citizens say they are very happy about their lives. Some development economists believe that cases of a few lucky entrepreneurs suddenly amassing large fortunes raised unreasonable expectations among ordinary Russians, creating a sense of extreme unfairness and leaving them deeply dissatisfied with their meager lot. And in this way, money created unhappiness.

So individual countries don’t seem to get much happier as they get richer. But are rich countries happier than poor countries? 

The answer to this question depends on how poor a “poor country” is. People in poor countries where much of the population lives below subsistence level are much unhappier than people in rich countries, on average. International comparative studies of happiness consistently place the poorest nations of the world—especially the countries of sub-Saharan Africa—at the very bottom.

In 2006, one study ranking countries in terms of happiness found that Zimbabwe and Burundi were the unhappiest places on earth. And this makes sense, of course: It is ridiculous to imagine that illiteracy, high child mortality, and the threat of starvation are any more pleasant or bearable to a Burundian than they would be to an American. But once countries get past the prosperity level that solves large-scale health and nutrition problems, income disparity pales in comparison with other factors in predicting happiness, such as culture and faith. 

For example, compare Mexico and France. The cost-of-living difference between the two nations is vast, so economists don’t compare raw income; rather, they compare the “purchasing power” of citizens. In Mexico—a nation in which most people live above the level of subsistence but still are much poorer than residents of the United States or Europe—the average purchasing power was about a third what it was in France in 2004. And yet Mexicans, in aggregate, are happier than the French. In Mexico, 63 percent of adults said they were very happy or completely happy. In France, only 35 percent gave one of these responses.

America as a nation has struggled and striven all the way to the top of the world economic pyramid. Are we suffering from some sort of collective delusion, or is it possible that money does buy at least a certain amount of happiness?

It might be tempting to dismiss the happiness of Mexicans as delusional or a reflection of the fact that most Mexicans have no idea what life with material wealth is like. But this would be a mistake: There is simply no evidence that Mexicans lack an understanding of true happiness compared to the French. A more reasonable conclusion is that Mexican happiness—and French unhappiness—are caused in large measure by forces other than money.

American communities are like countries when it comes to happiness. Like happy Mexico and unhappy France, the happiness of American communities—all of which are above the level of subsistence—depends very little on their comparative prosperity. There are abundant examples of unhappy high-income communities and happy low-income communities. Take eastern Tennessee (which includes the cities of Chattanooga and Knoxville, but is mostly rural), where people are 25 percent likelier than people living in tony San Francisco to say they are very happy, despite earning a third less money on average. Obviously, it is more expensive to live in San Francisco than it is to live in Tennessee, but San Franciscans still enjoy more than 30 percent more disposable income.

Like nations and communities, as long as they don’t start out dangerously impoverished,  individuals get little or no extra happiness as they get richer—even massively richer. In a classic 1978 study, two psychologists interviewed 22 major lottery winners and found that the joy of sudden wealth wore off in a few months. Further, lottery winners have a harder time than the rest of us enjoying life’s prosaic pleasures: watching television, shopping, talking with friends, and so forth. It’s as if the overwhelming experience of winning the lottery dulls the enjoyable flavors of ordinary life. 

This story opened with the sad tale of Mack Metcalf. In truth, it doesn’t necessarily destroy your life to win the lottery, as it evidently did his, but it won’t make your life better either.

So it’s true: Money doesn’t bring enduring happiness for countries, communities, or individuals, except perhaps when people start out in abject poverty. Why not? The answer has to do with what psychologists call “adaptation.” Humans tend to adapt psychologically to their circumstances—including their monetary circumstances—and do so very quickly. 

Perhaps you’ve walked into a chain-smoker’s home and wondered how on earth he could stand to live with such a stench. The answer, of course, is that he is used to it. For the most part, the same is true of economic gains and losses in our lives: They give us pleasure or pain when they happen, but the effect wears off very quickly. Adaptation makes money unsatisfying per se because we get used to it quickly. Almost immediately, an increased income becomes the new “normal.”

For individuals, communities, and nations, economic growth is like being on a treadmill, and getting richer is like speeding up the treadmill: We never get any closer to bliss.

According to the great economist Adam Smith, an early proponent of the benefits of pursuing personal economic interests for the common good, “the mind of every man, in a longer or shorter time, returns to its natural and usual state of tranquility. In prosperity, after a certain time, it falls back to that state; in adversity, after a certain time, it rises up to it.”

Indeed, economists even refer to our tendency to adapt as the “hedonic treadmill.” They have found ingenious ways to illustrate how it works. In 1978, for example, researchers presented a sample of adults with a list of 24 big-ticket consumer items (a car, a house, international travel, a swimming pool, and so on). They were asked how many of these items they currently possessed; they were also asked, “When you think of the good life—the life you’d like to have—which of the things on this list, if any, are part of the good life as far as you are personally concerned?” 

Inevitably, people felt that the “good life” required more things than they currently possessed. Among the people between 30 and 44 years old, the average number of items owned was 2.5, while the ideal number was 4.3. The same people were interviewed 16 years later, in 1994, and presented with the same list. Naturally, most people had more items; the ones formerly in their 30s and early 40s (now in the next age category, 45 to 59 years old) had 3.2 items, on average. They were closer to the good life, right? Wrong. Their requirements for the good life had now shifted, to 5.4 items. In other words, after 16 years and lots of work, the “good life” deficit had stayed almost exactly the same. The more stuff you have, the more you want. 

Lottery winners have a harder time than the rest of us enjoying life's prosaic pleasures: watching television, shopping, talking with friends, and so forth.

Money may not buy happiness, but there is one important way in which money and happiness are related: At any given moment, richer individuals within a country tend to be happier than poorer folks. In 2004, Americans earning more than $75,000 per year were more than twice as likely to say they were very happy than those earning less than $25,000. One study found that when happiness was measured on a 1–3 scale (where 3 was happiest), Americans in the bottom 10 percent of earners in the mid-1990s had an average happiness score of 1.94; those in the middle of the income distribution had a score of 2.19; and those in the top 10 percent scored 2.36. 

This is strange, because we know that money by itself doesn’t bring much happiness. Many economists look at these facts and conclude that though we really don’t care about having money for its own sake, we do care about having more money than others. In other words, my money only makes me happy when I notice that I am richer than you. Or that you are poorer than I, of course. (Like the old saying goes, “It’s not enough to succeed—your friends have to fail, too.”) 

Some studies appear to back up this idea. For example, in one experiment from the early 1990s, human subjects were presented with two job options, both at magazines. At Magazine A, they would earn $35,000 while their colleagues earned $38,000. At Magazine B, they would earn $33,000 while their colleagues earned $30,000. Most of the participants chose the higher-paying job at Magazine A—the rational choice. However, two-thirds said that, notwithstanding their choice, they would be happier at Magazine B. 

In another study involving faculty, staff, and students at Harvard University, participants were asked to choose between earning $50,000 per year while everyone else earned $25,000, or earning $100,000 per year while others made $200,000. The researchers stipulated that prices of goods and services would be the same in both cases, so a higher salary really meant being able to own a nicer home, buy a nicer car, or do whatever else they wanted with the extra money. But those materialistic perquisites mattered little to most people: 56 percent chose the first option, hypothetically forgoing $50,000 per year simply to maintain a position of relative affluence. 

Could it be that what we care most about is not material comforts, but one-upsmanship? Perhaps out of our primeval past comes the urge to demonstrate that we are better than others. A hundred thousand years ago, it would have given us happiness to have more animal skins than the troglodyte in the next cave; this would help ensure mating prospects, which would keep our genetic lines going. Still programmed in this way, we get unexplainable pleasure from having a better office than our coworkers and a bigger house than the guy next door, even if we don’t “need” the space. 

This theory may sound good, and it is quite common to hear, but it is not the explanation best supported by the evidence. Rather, what the data tell us is that richer people are happier than poorer people because their relative prosperity makes them feel successful. Think for a moment about your last big pay raise. Why did you feel such joy over it? Most likely, it was because of what your higher pay represented to you—evidence that you had succeeded, that you had created value. That’s why you enjoyed the raise more when you first were offered it than when you started spending it. It is success (not money) that we really crave. 

Imagine two people who are the same in income as well as in education, age, sex, race, religion, politics, and family status. One feels very successful and the other does not. The one who feels successful is about twice as likely to be very happy about his or her life than the one who does not feel successful. And if they are the same in perceived success but one earns more than the other, there will be no happiness difference at all between the two.

The upshot: If you and I feel equally successful but you make four times as much as I do, we will be equally happy about our lives. Of course, successful people make more money than unsuccessful people, on average. But it is the success—not the money per se—that is giving them the happiness. I have no doubt that some people do get pleasure from lording their higher incomes over others. But the evidence says this is not the biggest reason that having more than others gives us happiness. 

Financial status is the way we demonstrate to others (and ourselves) that we are successful—hence the fancy watches, the expensive cars, and the bespoke suits. We use these things to show other people not just that we are prosperous, but that we are prosperous because we create value. 

There is nothing strange about measuring our success with money; we measure things indirectly all the time. I require my students to take exams not because I believe their scores have any inherent value, but because I know these scores correlate extremely well with how much they have studied and how well they understand the material. Your doctor draws your blood to check your cholesterol not because blood cholesterol is interesting in and of itself, but because it measures your risk of having a heart attack or a stroke. In the same way, we measure our professional success with green pieces of paper called “dollars.” 

What scholars often portray as an ignoble tendency—wanting to have more than others—is really evidence that we are driven to create value. Wanting to create value is a virtue, not a vice. The fact that it also brings us happiness is a tremendous blessing. 

Have you ever wondered why rich entrepreneurs continue to work so hard? Perhaps you’ve said, “If I had a billion dollars, I’d retire.” This is what Mack Metcalf actually did when he won the lottery. But if he had earned that money doing something creative and productive, things would almost certainly have gone differently for him. People who succeed at what they do tend to keep doing it. The drive to succeed, as opposed to just having more money than others, explains why the  super-rich—who already have so much more than virtually everybody—continue to work.

Americans have on average gotten much richer over the past several decades than they were in previous generations. But there has been no meaningful rise in the average level of happiness.

If there is a downside to success, it is that it appears to set the bar high and keep it there. For a star quarterback who throws twice as many touchdowns each season as the league average, it is a letdown for him and his fans when he has a year that is only a little above average. The more you succeed, the more you need to succeed to feel happy. 

Take the case of billionaire Larry Ellison, founder of Oracle. The world’s 14th-richest man, he would need to spend more than $30 million per week, or $183,000 per hour, just to avoid increasing his wealth. Further, he would have to spend it on items with no investment qualities, meaning that, unless he sets his money on fire, or (better yet) gives it away, he simple cannot not be filthy rich. Yet he continues to slave away, earning billion after billion. Being rich, and having more than the average Joe, simply cannot be driving Larry Ellison. It is the will to succeed and create value at greater and greater heights. 

Who enjoys the benefits created from the slaving of Bill Gates (worth $58 billion and counting), Warren Buffett ($62 billion), and all of America’s other success-addicted, ultra-rich entrepreneurs? We all do: As long as fortunes are earned—as opposed to stolen, squeezed from governments, or otherwise extorted from citizens—this is good for all of us. 

Oracle has not made Larry Ellison a rich man without any benefit to society. The firm currently has tens of thousands of employees, people with well-paying jobs to support their families. The company has introduced technology that has benefited all parts of the economy, and it has paid billions to its shareholders. And we can’t forget that Oracle has rendered generously unto Caesar, year after year: In 2007 alone, it paid $1.2 billion in corporate taxes, totally apart from the personal taxes paid by Ellison and his employees. 

Money is a measure of success, and a handy one at that. But there is a dark side to this fact: People tend to forget that money is only a measure. Some people focus on money for its own sake, forgetting what really brings the happiness. 

This is not really a shocking idea, to be sure: We often mistake indirect measures for the actual phenomena we care about. Take, for example, standardized tests in public schools. The purpose of administering them, at least originally, was to see whether schools were providing an adequate education to the majority of their students. When the students at a particular school perform poorly, on average, the school faces sanctions—thus the teachers have incentives to “teach to the test,” focusing on preparing students to take the test instead of teaching the content the test is supposed to measure. There is evidence that this is really taking place. Obviously, it is problematic and ironic if, in order to score higher on the measure of success, we degrade true education. 

Just as teaching to the test leads to inferior education, working only for the money can lead to an unhappy life. No doubt you have met people who appear to be trapped in an unsatisfying cycle of materialism and unhappiness. These people confuse money for what it is supposed to measure, and thereby maximize the wrong thing. Among other things, they leave out of the equation all of the kinds of success—in our family lives, in our spiritual lives, in our friendships—that money does not measure. And even their work choices reflect the sad mistake of forgoing what they love doing for what brings in the most monetary compensation. The evidence on happiness is clear that we should avoid the measurement error of materialism. 

In some countries, there is even some evidence that economic growth can create unhappiness.

So why do so many people fall prey to this error? One explanation—a timeless hit for critics of American-style capitalism—is that our commercial culture fosters it. Relying as it does on an unending stream of cash, it creates a cleavage for us between true value creation and the  symbols of it: cash, and the stuff it can buy. 

But before singling out the American freemarket system for creating this confusion, note that capitalism is not the only culprit— far from it. Governments encourage this measurement error even more egregiously. Remember Mack Metcalf: There is no doubt that he played the lottery—the government-monopoly-controlled lottery—in the belief that it would enhance his happiness if he won. Almost everyone believes this: How many times in your life have you been asked what you would do if you won the lottery? Have you ever said, “I would start by being exploited by manipulative friends and family, and then maybe go into an alcoholic spiral—and then I’d probably die an untimely and tragic death”? No, you list things you imagine you would like to do: go back to school, take vacations, buy homes in warm places, and so on. 

What is going on here? On the one hand, you possess anecdotal evidence about cases like Metcalf’s. On the other hand, you are being told by those who are ethically and constitutionally bound to represent your interests—politicians and bureaucrats—that easy money will give you happiness. The New Jersey State Lottery’s slogan is “Give Your Dreams a Chance.” My own state of New York drew in gamblers for years with, “All you need is a dollar and a dream.” No doubt your state makes a similar claim. 

But easy money will not bring you happiness—earned success will (and in many cases that earned success will also bring you money). It is simply inconceivable that your state lottery commissioner does not understand this fact at some level. Yet for the sheer sake of raising money for its own purposes, your government perpetuates this cognitive error.  President Franklin Roosevelt once said, “Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.” How things have changed! Today, government officials eviscerate the very ideal of achievement while exploiting our citizens. 

I am not advocating an end to legal gambling here. While I personally have no use for it, I understand that gambling is an enjoyable diversion for some. Furthermore, I believe there is a lot of benefit to protecting our freedom to make our own decisions about our resources, even including the freedom to confuse money and success. But it is astonishing that the government—for no other reason than monopolistically vacuuming money out of its own citizens—should abet this confusion and lower our happiness. 

Mexican happiness—and French unhappiness—are caused in large measure by forces other than money.

How could the government make things better for us instead of worse? Here’s an idea: It could tax away our incomes at very high rates so that money and success were no longer so highly correlated. Then, that money (if we still bothered to earn it) could be spent on public goods and services instead of what we would have spent it on, such as big houses and other ostentatious displays of our success. We would be happier if we were forced out of the consumers’ arms race that we have (literally) bought into. And as a bonus, we could enjoy all the good things the government would buy. According to one prominent economist, “We could spend roughly one-third less on consumption—roughly $2 trillion per year—and suffer no significant reduction in satisfaction. Savings of that magnitude could help pay for restoring our infrastructure, for cleaner air and water, and a variety of other things.” It’s so simple! 

Unfortunately, this idea is misguided. Although consumerism does not buy happiness, government spending does not either. On the contrary, more government spending makes us less happy in general. Over the past 30 years, Americans have had increasing levels of money taxed away and spent—at least ostensibly—on them. In 1972, the federal government devoted about $4,300 to each American (in 2002 prices). By 2002, the level of spending had risen to $6,900 per person. Yet we have not gotten any happier. In 1972, 30.3 percent of Americans said they were very happy. In 2002, that percentage was still exactly 30.3 percent. 

Even worse, when we correct for changing household income levels and the passage of time, higher government spending turns out to be pushing average happiness down, not up. Consider that, while a $1,000 increase in per-capita income is associated with a 1.24 percent drop in the percentage of Americans saying they are not too happy, a $1,000 increase in federal government revenues per person is associated with a 2.91 percent increase in the percentage saying this. 

In other words, private prosperity brings us up, but government spending brings us back down. For every dollar in increased GDP that the government taxes away and spends, there is a higher net unhappiness level among the population than if that money had never been earned at all. Why does government spending diminish our happiness so significantly? There are a number of possible explanations. First, in some cases the spending goes to things that make us miserable, such as the Internal Revenue Service. Second, government spending reminds us of how our economic freedoms are abridged, being paid for as they are with taxes. Third, government spending, for some—the nonworking poor, in particular—creates misery, because the people who are supposed to benefit t become dependent on government programs. 

Our market system, which often rewards success with dollars, can create the tendency to confuse success itself with money. But giving more money to the government will not fix this; on the contrary, our government tends to exacerbate the   problem with its money-making schemes (like the lottery), and it would only make things worse for us if it tried to adjust our values through taxation and redistributive spending. The moral confusion of materialism is one best left to ourselves, our families, our communities, and our faiths to resolve. 

Although consumerism does not buy happiness, government spending does not either. On the contrary, more government spending makes us less happy in general.

This is hardly an original observation on my part. Alexis de Tocqueville wrote in his 1835 classic Democracy in America about the tendency toward “excessive individualism” in an atomistic American society. Tocqueville noted, however, that the remedy lay not in reordering the American system, but in the institutions of civil society: families, churches, charities, and friendships, which are the connective tissue between people that help us to avoid errors in our values. In other words, markets are not enough—we need morality as well, and the institutions that make it possible to express this morality. 

Free markets allow us to live the way we want to live—giving most people maximum buying power, and allowing citizens to find jobs that match their skills and passions.

How we use this power and freedom is up to us, and depends on our values: We can make decisions that lead to happiness, or we can make decisions that make us miserable. But to throw out free markets because capitalism does not bring happiness directly would be senseless: It would be like trashing your computer because it didn’t make your coffee. 

What about the losers in a capitalistic economy? Doesn’t a competitive market system make it harder for people unable to participate effectively in the market system to pursue happiness like the rest of us? The answer might be yes, but only if we are bereft of our core values of charity and caring for others. The fact that some sick or handicapped or otherwise-challenged people are miserable because they cannot provide for themselves in a free-market system does not mean there is something wrong with our system—it means there is something wrong with our morals. In a moral society, these people should be aided by the rest of us in a way that preserves dignity and avoids dependence. 

The fact that money doesn’t buy happiness is no indictment of capitalism. On the contrary, capitalism is the best system to allow people to succeed on their merits in the economy—and we know that it is success that truly does bring happiness. Capitalism, moored in proper values of honesty and fairness, is a key to our gross national happiness, and we should defend it vigorously. 

Arthur C. Brooks is a visiting scholar at the American Enterprise Institute and a professor at Syracuse University. This is adapted from “Gross National Happiness” (Basic Books).

Illustration by Aaron Staples, with images by istockphoto.

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