Picture this: the whole population of your country in one classroom. A population of 10 people called something like Society 1. Not the largest country, I know, but we will stick with it. There is a bag of cash on a table in the middle of the room. Nobody knows how much money is in the bag, but this is all the money in the economy, measured in… Berkhamsted Dollars or BD. One person is selected at random to take a handful of notes and give them out to everyone in the room. To keep it simple, everybody starts with nothing, an equal playing field.
It comes round to your turn, and the chief economist, the money-grabber-dealer, gives you 100 BD. Suddenly you have money! Going from having no money to 100 BD is a nice way to start the day and you are probably reasonably happy with yourself.
The chief economist has finally finished going round the room, giving himself the remaining final value of BD. Everyone is smiling, happy and planning what they will do with their newfound fortune. Walking around the room you find a man who has only 50 BD, so you already have twice as much as him. Another lady has 80 BD, closer to your wealth but not quite as rich. You were satisfied before with your 100 BD, but now life is looking even better after comparing your wealth to that of others!
However, it is not looking quite so rosy when the next three people you find have 150 BD each, another two have 250 BD, whilst the remaining two members of the population (including the chief economist) now have 400 and 500 BD respectively. Suddenly you are no longer as happy as you once were, since you compare yourself to the rest of society and can see that, in the population of 10 in this imaginary country, you are not doing so well, finding yourself towards the bottom rung of the social ladder.
In a different classroom, a similar experiment also takes place for Society 2. However, this time there is less money in the bag overall and the population does not know the outcome of the experiment in the original room. Imagine you are instead involved in this experiment and end up with 80 BD, whilst everyone else has only 50-60 BD. First of all, you are going to be fairly happy, you are the richest person in Society 2 after all! However, perhaps more importantly, the other members of the population are not going to be too upset either. Although the society is poorer in terms of nominal wealth, because in relative terms the society is more equal, it is likely that more people will be satisfied with their initial endowment of money.
This unusual analogy demonstrates the ideas behind the Easterlin Paradox, a piece of critical economic thinking outlined in Tim Harford’s The Undercover Economist Strikes Back. This is the idea that, whilst rich people tend to be happier than poorer people, richer societies are not always as happy as poorer ones. As a result, this would suggest that money may not make people happy.
Happiness is highly subjective, which makes it very hard to measure. However, as the previous experiment shows, ultimately what people are really interested in is social hierarchy, and their economic position within this pecking order. In modern society, status is commonly linked to income, which is why people might presume that it is the money gained from employment alone that makes them happy. Alternatively, it could be that your relatively high income, compared to a less well-off neighbour, forms the roots of your happiness.
One often sees documentaries of tribal villagers who have no contact with the outside world, and mostly they appear very content with their lives. Unaware of the wealth of Bill Gates or Roman Abramovich, they benefit from this lack of knowledge through their increased happiness – ignorance is bliss.
Original image by Elizabeth Timoshchenko