The answer to this question is not very easy. I think it depends on a person’s income or wealth level and state of their mind.
When someone is poor, any additional money they get will bring them a lot of happiness and satisfaction. The value of $100 is much more to a homeless person than to a millionaire.
Happiness Economics
A subfield of economics, known as happiness economics, studies various factors that affect the well-being of a person. In 1974, American economist Richard Easterlin came up with an interesting concept called Easterlin Paradox.
His findings showed that happiness doesn’t increase with an increase in income or wealth after a certain point. This graph shows the Paradox of how the happiness curve rises with income in the initial stages but becomes flat when the income keeps rising.
He based his findings on the belief that money has diminishing returns. What it means is that at a low level of income, you get more happiness and satisfaction with any additional money that you get. However, at higher levels of income, that additional benefit becomes less and less. In fact, after a point, it just does not bring any additional happiness.
We value something when we have less of it, but when we have too much of it, we don’t value it as much. It is as simple as this.
If you study behavioral economics, you will know that the key assumption of conventional economics – human beings are rational, doesn’t always hold true. People do not always choose the option that maximizes their material well-being.
Economics deals with humans and human minds are complex. Various factors, both at the macro and micro level play a role in determining what choices humans make.
So what factors other than income affect your well-being?
There are a lot of factors that affect a person’s happiness than just their income or overall wealth.
The big, macro factors are the things we can’t directly control like:
- good governance
- good healthcare
- clean air and water
- right to good education
- political stability in a country
- availability of jobs for people in the labor market
- good community and social support
- good infrastructure
- woman’s equality in that country
- Corruption free society
- and overall safety.
Yes, I know many of these macro factors are more favorable in rich countries, as a lot of these cost money. Developed countries can provide good infrastructure, healthcare, public safety, and better jobs more easily.
But there are factors beyond individual incomes and the economic development of a country, which affect the happiness of its people.
World Happiness report findings
The survey done by the World happiness report shows that the countries with the highest level of satisfaction in the world are not the ones with the highest GDP per capita.
In 2021, Finland’s GDP per capita was $53,982, and the US GDP was $69,287 according to World Bank data. Even with a lower GDP compared to that of the US, Finland ranks first in the happiness index. The US, which has the 6th highest GDP per capita ranks lower in the happiness index, coming at number 16.
Though the data shows a strong correlation between the countries with high GDP per capita and happiness, it is not perfect.
According to the analysis done by World happiness report 2022, the six variables: GDP per capita, social support, healthy life expectancy, freedom to make life choices, generosity, and freedom from corruption are key in determining overall happiness.
I got this table from their report and it shows their regression analysis. You may skip this section and scroll to the next if this seems very mathematical. But I want to explain their findings so you can understand.
The weird part of economics is that it tries to explain the obvious through data and mathematics
Regression analysis is an Econometrics tool to study how well different “independent factors or variables“ explain a phenomenon or the “dependent variable“.
In their survey report, the six independent variables are the log of GDP per capita, social support, healthy life expectancy, freedom to make life choices, generosity, and perceptions of corruption.
The dependent variable is the average happiness across countries. A total of 156 countries were surveyed using data from the years 2005 to 2021.
In the table below, wherever you see three stars *** next to an independent variable value in paranthesis, it shows that the variable (of the six I mentioned) is statistically significant in explaining the average happiness (dependent variable).
It means the majority of the people surveyed reported that factor to be an important determinant in explaining their happiness level.
If you look at the statistics I circled above, called Adjusted R-squared, you will see a value of 0.753. This means together these six factors explained more than 75% of the variation in national annual average happiness scores.
Thus, as you see real GDP per capita is only one of the indicators for measuring the prosperity of a country. Other variables that are part of the happiness index actually tell a better story of the well-being of a country’s population.
Economist Simon Kuznets, who invented the concept of GDP, in his first report to the US Congress in 1934 said “the welfare of a nation can scarcely be inferred from a measure of national income.” So, we see that GDP per capita, has limitations and I will cover those in a separate post later.
So are there other factors that the report missed?
There could be some internal factors that the report hasn’t covered explicitly. These are the factors that we have more control over.
When we see on social media people vacationing and throwing big parties, we instantly assume that they must be very happy. Because we think this happiness can only come from the extra money they have, to afford that extravagant lifestyle.
People start comparing themselves to their peers and get depressed. They are not unhappy because they have less money, but because their friends or relatives have more. People immediately associate more money with happiness.
But is it always the case?
Increased urbanization has taken away the simplicity of life. The materialistic nature of western countries has engulfed every single country now.
To earn higher incomes, many times people live away from their families and work in jobs that increase their stress levels.
Their progress at work comes at a cost of missing family time because they are overworked. If people don’t have time to focus on their health, then that additional income is not even worth it. There is this huge opportunity cost to having a higher income, which we mostly overlook.
Conclusion
I feel a person’s health and relationships also play a huge role in determining the level of their happiness.
In a true sense, a person’s happiness depends on their state of mind. They should have enough money to lead a fulfilling and healthy life. But we need to be aware that there will be, always, many people above or below us in terms of wealth and income.
People should be able to meet their needs and most of their wants, but not at the price of their health and relationships. Wants are never ending and are different for each income level.
For most people, money, and happiness can go together if they spend their extra money the right way.
If people can pursue a quality life, then they could be actually happy. Worthwhile acts like donating to charities, getting the time to pursue their interests, having a work-life balance, and the ability to spend leisure time with family and friends, all affect the quality of life. In the absence of these, wealth alone may not bring true happiness.
Similarly, people with less means can also lead a happy life. In fact, I notice that many times, people with low levels of income are more satisfied with their life. This could be because they have lower expectations and get content easily compared to relatively wealthy individuals.
On a personal level, it is the state of my mind that influences my ability to find happiness. It could come from small things and moments in my life, and from the big ones, where I worked hard. Having a clean home, good health and a supportive family and friends are the things that make me truly happy.
My ability to follow my interest and passions, share my thoughts about things that matter to me, and do charity give me happiness. Wealth matters, but being content with what I have achieved so far without comparing it with others matters more to me.
What do you people think? Do share your views in the comment section below. It will be nice to know!
