One of the first rules taught in any introduction to microeconomics class is that an increase in consumption ability, otherwise known as income, increases utility, and utility is a measure of satisfaction. In English, more money equals more happiness.
While this premise is perhaps simple-minded and even a caricature (imagine Scrooge or Mr. Burns nodding with pleasure), don’t judge economists too harshly. The idea demonstrates what motivates individuals in the marketplace and the labor force. The principle reflects attitudes in much of the developing world, where satisfying everyday needs is not guaranteed, and also in the developed world, where money can be used to purchase goods or services that provide enjoyment or fulfillment — not just Ferraris and trophy wives but less superficial joys such as traveling, the weekly yoga class or gym membership, and the next round of brewskis.
Psychologists argue back and forth over the extent of money’s effect on happiness. While many psychologists have concluded that past a point money does not bring significant gains in happiness once our basic needs are achieved, others point at data that suggest the wealthy have notably higher levels of happiness than the poor.
Recent research bolsters the idea that both sides have got it wrong.
Chris Boyce, a research psychologist at the University of Warwick, suggests that how much you have relative to someone else brings happiness, not the income itself. Building on research that finds greater happiness among the wealthy, Boyce and his team claim that this correlation has been misinterpreted, and that that extra joy doesn’t come from greater consumption but by the elevated status relative to others.
It’s not the first time someone’s suggested that what we have relative to others matters more than what we have, period. It’s been shown before that relative income is more important than absolute income, that employees’ income rank affects well-being as does neighborhood rank in terms of wealth. Humans prefer to be the big fish in a small pond as opposed to an ordinary fish in a large one.
Boyce’s ranked-income hypothesis is different than the prevailing reference-income hypothesis (aka the relative-income hypothesis), which holds that individuals are concerned with how their income stacks up not against the Joneses but against an abstract, socially constructed norm. This norm does not take into account age, geographic factors or other variables from your neighborhood. This hypothesis maintains that increased income will cause increased utility (satisfaction, remember) if all else is constant. Utility rises or falls for an individual as his income rises or falls compared to the norm. Though some research supports this thesis, Boyce believes the idea is incomplete.
His ranked-income hypothesis, on the other hand, suggests that utility is based on an individual’s rank among peers. As he describes it, “People might care about whether they are the second-most highly paid person, or the eighth-most highly paid person, in their comparison set.” Gender, age and other factors become very relevant in comparing income, and when an increase in income does not change standing, an increase in income likely won’t increase happiness.
Boyce’s results were conclusive. Drawing from more than 80,000 observations, the relative rank of an individual’s income indicated the individual’s general life satisfaction and the effect of absolute income was insignificant. With that in mind, he suggests overall increases in wealth in a society have no effect on aggregate well-being.
“Pursuing economic growth, although it remains a key political goal, might not make people any happier,” he writes. “The rank-income hypothesis may explain why increasing the incomes of all may not raise the happiness of all.” Does this mean modern countries shouldn’t be looking to increase national wealth if it has no further effect on happiness and direct their efforts elsewhere? Is simply maintaining wealth and focusing on other social goals even a realistic option since everyone has a rank-based, personal incentive to become richer?
Boyce concludes that an increase in income at a lower income level leads to a greater change in well-being, not because the poor obtain more creature comforts but because “an increasing income at the lower end of the income distribution will increase rank faster.”
While it might make many people uncomfortable to know money might have a role in shaping our happiness, Boyce’s findings suggest an even bleaker image than the cold consumption-increases-happiness adage first mentioned. As Boyce describes, “income rank may act as a proxy for more general social rank, with the analyses then showing that social rank is key to well-being.”
