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Money ≠ Happiness

By Nathanael Costa
web posted November 12, 2018

It is an age-old saying that money cannot buy happiness, but why do people say this?  If no one believed that money could buy happiness, then this saying would be useless.  Unfortunately, everyone believes this, at least to some extent.  It can be seen when a little child gets a new toy.  They love whatever toy they receive and play with it constantly…until they brake it the next day or simply got bored of it.   Philosophically, this ultimately comes down to ingratitude, but can we see the effects of this belief in economics?  Paul Krugman, the 2008 Nobel Prize winner in Economics, sought to answer this question in his article “Money Can't Buy Happiness. Er, Can It?”.

He begins the article with an example of how he and his wife “gave into the pressures of modern life” and purchased a cell phone (give them a break…this was 1999).  Obviously, this was a big purchase, but they had several questions that they wanted answered about using the device.  Unfortunately, there were so many other people who had similar questions that Customer Service was too busy to help them.  It turns out this is a broader problem.  Most Americans who are prosperous complain about their wealth and the problems it brings.  Krugman gives the examples of people struggling with traffic, housing prices, and bad service.  This is what we could call a first-world problem, and it is one indication that money cannot purchase any lasting happiness.  In response to a question about how much money would satisfy him, John D. Rockefeller famously responded, “just a little bit more”.

But is there an economic reason that so many Americans are both wealthy and unsatisfied?  Krugman points out that (at the time of his writing) the economy had been expanding for eight years.  He points out that consumers tend to spend less when the economy is doing well so they can save for a rainy day.  However, between 1998 and 1999, the economy expanded by 4% while consumer spending increased by 5.5%.  Much of this is due to something Krugman refers to called luxury fever.  Consumers try to spend as much as people who have a higher income to feel like they are wealthier.  This is really where we can draw inferences about human behavior – humans more often compare themselves to each other, rather than to an absolute standard.  This caused people in 1999 to spend more than was wise, even though many people were also worried that the economic boom wouldn’t last.

The last point Krugman makes is perhaps the most interesting.  While he agrees that money cannot buy happiness, he points out that there are economic benefits for producers when consumers compare themselves unfavorably with others.  This makes logical sense – in an attempt to appear as wealthy as others, consumers give producers more business.  Of course, up to a certain point, this is beneficial to the whole economy.  Krugman does not argue that people shouldn’t be wise with their money (he did receive a Nobel prize after all).  Rather, this comes back to the economic principle that people act selfishly, which can benefit the economy as a whole.

Thus, the saying that money cannot buy happiness holds true.  As Krugman points out, consumers are rarely fully satisfied with the products they purchase and tend to compare themselves with others.  The effect is that consumers are willing to spend more than they should to feel better about themselves.  For the individual consumers, this is not economically wise.  For the economy as a whole, increased spending is beneficial for producers.  Krugman, then, correctly identifies the economic implications of consumers’ ingratitude. ESR

Nathanael Costa is currently studying AP Macroeconomics in high school. © 2018 Nathanael Costa

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