Wise Uncle Ben

I have resisted blogging about every interesting topic discussed at the Freakonomics blog, but I could not let this topic pass by. I am a big fan of Levitt and Dubner. Their book Freakonomics has been instrumental in making economics, my undergraduate major, into a cultural phenomenon.

Relative or Absolute Wealth?

Recently Justin Wolfers started a series of thought-provoking posts about the correlation between wealth and happiness. The conventional wisdom, known as the Easterlin paradox, has been that only relative wealth matters. In other words, as long as you have more than the people that you compare yourself to, you will be happier. Even though Easterlin studied populations, many self-help books apply the same reasoning to individuals.

Wolfers and Betsey Stevenson have reexamined the idea that more wealth makes you happier using more recent, more complete data. Not surprisingly they found that in general the richer you are, the happier you are. It is true for people with higher incomes too, but the correlation was slightly lower. Despite what many people tell themselves, more money may make us happier even if admitting it makes us appear less enlightened.

Happiness seems to require a modicum of external prosperity. — Aristotle

Studying population data is never going to give us a formula for happiness in life, but clearly it is easier to be happier with the added freedom that wealth provides. Whether it is because life is less stressful without having to dodge bill collectors, there is a sense of well-being from not being dependent on your next paycheck to cover the mortgage payment or it just feels good to be able to provide support to causes you care about, having more money and the independence it brings should make you happier.

What would be even more interesting to me is a study of the differences in happiness between entrepreneurs and high income earning employees. Both wealth and income positively correlate with happiness, but income slightly less so. I think that the added autonomy of being self-employed would add to most people’s satisfaction, but then again having to make payroll during a downturn can also be a great stressor. What do you think? Does having your own business make you happier?

To read the series, read: New York Times: The Economics of Happiness

To read an article about the research, read: New York Times: Maybe Money Does Buy Happiness After All