TCS Daily

Who Says Money Can't Buy Happiness?

By Dwight R. Lee & Eugene Miller - May 1, 2006 12:00 AM

Economists have discovered that money doesn't buy happiness, and some of them see this as yet another justification for higher taxes and more government spending.

Survey-based studies from several countries find that large increases in per-capita incomes have not increased the average level of happiness. A two-fold explanation is typically offered. First, any additional happiness from more income results primarily from increasing our relative income. But we can increase our relative income only by reducing the relative income of others, which reduces their happiness. Second, the pursuit of money reduces the time available for family and friends, community service, exercising, and other activities that result in genuine happiness and which, it is claimed, don't reduce the happiness of others.

Fortunately, we are told, we can increase our happiness by making better use of our money and time -- a path that requires higher taxes and more government spending.

By this account, people fail to consider the harm they inflict on others by increasing their earnings, and consequently they earn more income than is socially desirable. Increased earnings are thus a form of pollution that should be discouraged by higher taxes on income or consumption. We are not making this up. Richard Layard, a British Lord and an economist at the London School of Economics, informs us in his book, Happiness, "If a person works harder and earns more, he may himself gain by increasing his income compared with other people. ... He does not care [that by doing so] he is polluting other people..., so we must provide him with an automatic incentive to do so. Taxation provides exactly this incentive" (emphasis added).

Higher taxes not only discourage the pursuit of income and its "polluting" effects, they yield more government revenue to be used for things that, we are told, really do improve human happiness. Cornell University economist Robert Frank argues in his book Luxury Fever that "A steeply progressive consumption tax can help free us from the grip of luxury fever ... What is more, it is a step that would free up literally trillions of dollars of resources that could be put to better uses." These better uses include more spending on inner-city schools (no mention of vouchers), public-service jobs recycling newspapers and aluminum cans, tougher air-quality standards, high-speed mass transit, beef inspectors, federally funded health insurance for everyone, public libraries, municipal swimming pools, and police.

Money probably doesn't buy as much happiness as many people striving for financial success think it will. And surely some, maybe most, of us occasionally suffer from envy when a colleague receives a bigger raise than we do. Yet these are not new insights, and they hardly justify higher taxes and more government spending. Adam Smith pointed out in his 1759 book, The Theory of Moral Sentiments, that beyond some minimum amount, more money is unlikely to mean more happiness. But he also pointed out that while those who pursue money may not do much for themselves, they do a lot for others.

Smith tells the story of a poor man's son who, because "heaven in its anger has visited with ambition," struggles his entire life for wealth which, if "he should at last attain it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it." But Smith rejects the notion (fashionable in his day as well as in ours) that the ambition for material riches is an unworthy one. He insists that it is well that nature deceives some with this ambition, since this deception has prompted mankind "to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life."

Any costs those who pursue wealth in the marketplace impose on others are swamped by the benefits they provide others by contributing to the general wealth. As a country's wealth goes up, infant mortality goes down; death from childbirth goes down; death and injuries at work go down; traffic deaths go down; life expectancy goes up; health at all ages improves; poverty, as measured by what people are consuming, goes down; leisure time goes up; educational opportunities go up; environmental quality goes up; and communication and travel improve; to mention but a few measures of human well-being that improve with wealth. Government's contribution to some of these improvements depended on the wealth created by people pursuing money. Furthermore, the best way to continue making these improvements is by maintaining the incentive to pursue money, not by increasing tax burdens on that pursuit.

In noting the unintended benefits to others -- and to society at large -- that flow from the pursuit of one's own gain, Smith by no means overlooked private benevolence, where the giver has an active intent to help those in need. Individuals may expend their wealth on trinkets and baubles, but they can also use it intentionally to relieve distress and to help others improve their lives. In a well-known sermon on "The Use of Money," Smith's contemporary, John Wesley, exhorted his followers to "gain all you can" by honest means, to "save all you can," and to "give all you can." For most persons in 18th century Britain or America, giving "all you can" amounted only to pennies. Since that time, economic growth there has produced astonishing wealth and -- because of the moral admonitions of Smith, Wesley, and many others -- charitable or philanthropic giving has flourished.

We mention these things only to underscore the vital contribution that private philanthropy makes to the happiness or well-being of persons in a free society -- to recipients and givers alike. Proponents of high taxation and expansive government, such as Layard and Frank, presume that government has primary responsibility for meeting people's needs and promoting happiness, but they fail to appreciate the great contribution not only of markets, but also of private philanthropy. Obviously the high taxation of wealth reduces opportunities for philanthropic giving, but this effect is discounted by writers on the left who prefer (forcibly extracted) government aid to private charity. They regard the satisfaction of a broad range of needs as an entitlement or right, to be guaranteed by government. In effect, they would supplant the Jeffersonian formula -- the individual's right to pursue happiness -- by one that demands of the state "a right to happiness."

Maybe it is in the nature of things for us to adapt to improvements in our lives, with the happiness they provide being temporary. But we would surely add to our happiness by spending more time appreciating how blessed we are compared to those of a few generations ago. A good way to begin is by considering how much the pursuit of wealth has added to the length, health, comfort, beauty, and meaning of our lives and the lives of those we love. If that doesn't make you happier, then don't expect more government spending on mass transit and recycling newspapers to do so either.

Eugene Miller is professor emeritus at the University of Georgia. Dwight Lee is professor at the Terry College of Business, University of Georgia. Dwight Lee would like to thank the Earhart Foundation for supporting a research project of his that helped in the preparation of this column.


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