The Economics of Happiness

The underlying assumption of modern economics has always been the notion that having more things makes people better off. Economists of all ideologies - from Adam Smith to Karl Marx, from John Maynard Keynes to Milton Friedman - have implicitly accepted this assumption, even while arguing with one another over the best way to optimize the production or distribution of things. In the last few years, an emerging field of economic theory, Happiness Economics, is finally challenging that assumption. By asking people in many different nations, economic conditions, and social groups if they are happy with their lives, economists are yielding some very interesting results.

Can money buy happiness? It turns out that it can, but only up to a point. In the United States, the poor are far less happy than everyone else, but there is no significant difference in self-reported happiness between the middle-class and the wealthy. Although the American economy is vastly larger today than it was immediately after World War II, self-reported happiness levels have remained stagnant. This pattern is observed on a global scale as well. The least happy places on earth are typically impoverished, war-torn nations, but the wealthiest nations are not necessarily any happier than middle-income nations. Once a nation is economically developed enough to meet the basic needs of its citizens, the relationship between national income and national happiness ceases to exist. (EDIT: Some researchers disagree, claiming that more income does indeed tend to result in more happiness.)

The happiest nation in the world is Costa Rica, which has a GDP per capita that is less than one-fourth that of the United States, and an average life expectancy that is roughly the same as the United States’. This pattern is widespread in Latin America. Although most Latin American nations are middle-income nations, the region as a whole is extremely happy. The opposite pattern manifests itself in Eastern Europe and Russia. These nations are upper-middle income, but report extremely low levels of subjective happiness.

So if money can’t buy happiness, what causes people to be happy or unhappy? Research indicates that married people are happier than single people, religious people are happier than non-religious people, and those with more leisure time are happier than workaholics. People who donate their time and money to charity are happier than those who don’t.

On the national level, there does not appear to be any relationship between political freedom and happiness, once income is controlled for. Some of the happiest nations – such as Venezuela and Saudi Arabia – are hardly poster children for democracy and human rights. National happiness seems to be driven primarily by the same factors that drive individual happiness: Happy marriages, active religions, workers who have leisure time, a culture of charity, and enough income to avoid poverty.

In 1972, the King of Bhutan coined the term “Gross National Happiness” as his preferred metric for judging his nation’s progress. Although it was ridiculed at the time, tiny Bhutan is now one of the happiest nations on earth: an enclave of happiness nestled between much less happy nations like China, India, and Bangladesh. Many other nations are now investigating “Gross National Happiness” metrics of their own, including Brazil, Italy, and Canada. Maybe the economics of happiness is an idea whose time has finally come. Perhaps future economists can focus less on what maximizes our wealth, and more on what maximizes our well-being.

The Satisfaction with Life Index. Blue countries are the happiest, red countries are the least happy.