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CHAPTER 4 Income
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Chapter 4 INCOME 4.1 The Conventional View and Other Views Most economists take it as a matter of course that higher income leads to higher happiness. And why not? A higher income expands individuals’ and countries’ opportunity set; that is, more goods and services can be consumed. The few people not interested in more commodities need not consume them; they have the freedom to dispose of any unwanted surplus free of charge. It therefore seems obvious that income and happiness go together (provided, of course, that the two are correctly measured). Consequently, economics textbooks do not even make an effort to come up with a reason, but simply state that utility U is raised by income Y U = UY , with U′ > 0. Psychologists are more subtle in this respect. They are not so confident that higher income always leads to more satisfaction. They may be influenced by studies such as those made on the winners of large sums of money in the state lottery (Brickman et al. 1978). The winners had won within the previous year and reported only slightly higher levels of life satisfaction than a control group (4.0 versus 3.8 on a five-point scale), and were significantly less pleased with everyday events. Smith and Razzell (1975) found that the increased wealth also entailed significant costs for winners of the British football pools. A large percentage of the winners quit their jobs, thereby losing relationships and a sense of accomplishment. Moreover, tensions with other people tended to increase because the winners were often expected to provide financial assistance to relatives and friends. The analysis of lottery winners therefore finds that, after a period of adaptation, the winners’ average utility is not significantly higher than it was before the event. But some economists do not subscribe to the idea that higher income produces higher happiness. One of them is John Kenneth 74 CHAPTER 4 Galbraith who, in his famous book, The Affluent Society (1958), pointed out the limited use of higher private income while the public sector is starving. The first economist to seriously study the data on happiness, Richard Easterlin (1974), concluded that “money does not buy happiness .” Another author claiming that the most cherished values cannot be bought in markets is Tibor Scitovsky with his Joyless Economy: The Psychology of Human Satisfaction (1976). Scitovsky even argues that a high level of wealth brings continuous comforts and thereby prevents the pleasure that results from incomplete and intermittent satisfaction of desires. More recently, Robert Frank in Luxury Fever (1999) emphasizes that ever-increasing income and consumption have nothing to do with happiness. In the following, three different aspects of the relationship between income and happiness are discussed: Are persons in rich countries happier than those in poor countries ? (Section 4.2) Does an increase in income over time raise happiness? (Section 4.3) Are the people with high income in a country happier than those with low income? (Section 4.4). Section 4.4 also provides our own estimates of the relationship between income and happiness for data for Switzerland. The chapter ends with conclusions drawn from the large amount of available evidence. 4.2 Income and Happiness between Countries Various studies provide convincing evidence that, on average, persons living in rich countries are happier than those living in poor countries . This result, which conforms to conventional economic beliefs, has, for instance, been established in an extensive study covering 55 nations (Diener, Diener, and Diener 1995). The differences in income between the countries was measured by using exchange rates as well as purchasing power parities in order to control for the international differences in the cost of living. The data on happiness are from the World Value Survey, which is the best source for international comparisons of life satisfaction over such a large number of countries . Veenhoven (1991a) and Inglehart (1990) found the same positive association between income and happiness comparing a somewhat [34.230.68.214] Project MUSE (2024-03-28 23:28 GMT) INCOME 75 different set of countries. An examination of eight cross-national studies , employing 10 indicators of happiness (and controlling for different occupations), concludes that there is “a strong indication that personal satisfaction rises with the level of economic development of the nation” (Inkeles and Diamond 1986, p. 94). Figure 1.4 in chapter 1 graphically illustrates the relationship between average per capita income in a country (on the horizontal axis) and average life...