Most economists assume that when a system (e.g. a country, or organisation) is generating more income, it has positive consequences for that particular system. With that assumption, it makes perfect sense to strive for optimisation of GDP, or quarterly income. And although research shows that richer countries tend to be (a bit) happier on average, this cannot automatically be assumed to be true for every unique individual. The relationship here is a bit more complex.

Consider the work of economist Richard Easterlin, who became famous for his Easterlin Paradox – stating the paradox that although rich people seem happier in general than poor people, rich countries aren’t much happier than poor countries. So, making a country richer does not really work to improve happiness levels, and GDP growth may not be the ideal route to more ‘real wealth’ for our species. Easterlin discovered that there is indeed a positive correlation between income and satisfaction with life, but only up to a certain point, roughly US$75,000 per year. Above that level, the correlation is only positive when you put income on a logarithmic scale (meaning: you would need to double your income to see a positive impact on life satisfaction). Moreover, he found that social comparison plays an important role; people care about their relative position compared to their peers. The social experience of having money may be more important than the absolute amount in your bank account.

Other evidence for the fact that money doesn’t contribute to our well-being comes from happiness levels over time. A study done by Easterlin, Michalos and Sirgy (2011) shows that people in Japan scored around 6 out of 10 ten on life satisfaction in 1958 and had roughly the same scores 30 years later despite the strong economic growth Japan experienced in that period. Another study showed that the amount of ‘very happy people’ in the US stayed the same over the period 1955-2005, even though the average income soared to levels never seen before (Porrit, 2005, Capitalism as if the world matters). More recent articles show a similar trend; although money is indeed correlated to happiness when you use a logarithmic scale, its effects are not sufficient to justify money as the central contributor to our well-being, especially not in developed countries.

To conclude: money affects our well-being, but the impact is smaller than most people believe, and it mainly affects people who do not have enough of it. Money is, therefore, certainly not the only driver to focus on when we aspire to create more fulfilling lives for people – or better functioning systems. We need a more complete model to measure the progress of whatever system we choose to design.

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