Who says money cannot buy happiness?

• Author: Lee, Dwight R.

Economists have discovered, or so they think, that money doesn't buy happiness. This idea, however, is hardly a new discovery, even for economists. Adam Smith discussed people's limited ability to achieve happiness by acquiring material wealth in his 1759 book The Theory of Moral Sentiments. The real discovery by some economists and other social scientists in recent years is that the money-doesn't-buy-happiness claim can be used to justify higher taxes and more government spending.

Although most people have long expressed agreement with the proposition that obtaining more money doesn't lead to more happiness, that admission has had no noticeable effect on their behavior. Economists recently have provided empirical backing for the proposition. Surveys asking people how happy they are indicate that the average level of happiness has not increased over several decades, despite large increases in income per capita. For example, in the United States, real income per capita has more than doubled since 1950, yet the percentage of respondents who say they are "very happy" has not increased, and the percentage who say they are "not very happy" has not declined significantly. Similar disconnects between happiness and income have been found in Japan, the United Kingdom, and continental Europe. (1) Two explanations are 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 becomes addictive and reduces the time available for family and friends, community service, intellectual pursuits, exercise, and other activities that result in "genuine" happiness and, it is claimed, do not reduce the happiness of others.

In this article, I argue that the proposition that money and happiness are not positively related is problematic; among other things, it is wrong. More real purchasing power (or wealth, which is what must be meant by "more money") brings about a tremendous amount of human happiness, despite what empirical studies and an incomplete reading of Adam Smith suggest. The claim that money doesn't buy happiness is being used to make bizarre arguments for higher taxes and more government spending by exaggerating the costs of acquiring wealth and completely ignoring the personal and social benefits of additional wealth. Otherwise respectable economists have concluded that earning income is--I'm not making this up--a form of pollution, a negative externality that should be taxed to internalize the externality and to improve the allocation ofresources by transferring more wealth to government. These economists consider the production of wealth as, at best, a zero-sum activity, and they recommend increasing taxes and government spending as a positive-sum activity that can improve our happiness.

The Mexican Fisherman and Adana Smith

Adam Smith can be interpreted as sympathetic to the proposition that acquiring more wealth is ultimately a futile way of achieving happiness, but even a casual reading of Smith quickly dispels any notion that he did not favor the pursuit of wealth. Consider how he would have responded to a story that I was told recently by a student who was critical of what he perceived as economists' belief that more money means more happiness. The story goes as follows:

While visiting a small Mexican fishing village, an American saw a fisherman dock his boat and complimented him on the quality of his fish. When the American asked how long he fished every day, the Mexican answered, "Not very long." He went on to explain that a small catch was sufficient for the needs of his family. "But what do you do with the rest of your time?" asked the American. "I sleep late, fish a little, play with my children, and take a siesta with my wife. In the evenings, I go into the village to see my friends, have a few drinks, play the guitar, and sing a few songs. I have a full life." Rather impatiently the American responded, "Look, I have an MBA from Harvard and I can help you! You should fish longer every day and sell the extra fish you catch. With the extra revenue, you can buy a bigger boat. With the extra money the larger boat will bring, you can buy a second one and a third one and so on until you have an entire fleet of trawlers. Instead of selling your fish to a middleman, you can negotiate directly with the processing plants and maybe even open your own plant. You can then leave this little village and move to Mexico City, Los Angeles, or even New York City! From there you can direct your huge enterprise." "How long would that take?" asked the Mexican. "Twenty, perhaps twenty-five years," replied the American. "And then when your business gets really big, you can start selling stocks and make millions!" "Millions? Really? And after that?" asked the fisherman. "Well," responded the American, "After that you'll be able to retire, live in a tiny village near the coast, sleep late, play with your grandchildren, catch a few fish, take a siesta, and spend your evenings drinking and enjoying visiting with your friends." Adam Smith probably would have enjoyed this story and, up to a point, agreed with it. After all, in The Theory of Moral Sentiments he tells a similar story of "a poor man's son, whom heaven in its anger has visited with ambition." The son notices the luxuries of the wealthy and "thinks that if he had attained all these, he would sit still contentedly, and be quiet, enjoying himself in the thought of the happiness and tranquility of his situation." So "he devotes himself for ever to the pursuit of wealth and greatness. To obtain the conveniences which these afford, he submits in the first year, nay in the first month of his application, to more fatigue of body and more uneasiness of mind than he could have suffered through the whole of his life for the want of them" ([1759] 1982, 181). In his pursuit of wealth,

he serves those whom he hates, and is obsequious to those whom he despises. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquility that is at all times in his power, and which, if in the extremity of old age 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 is then ... that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquility of mind than the tweezer-cases of the lover of toys. (181) Smith continues, "In his heart he curses ambition, and vainly regrets the ease and the indolence of youth, pleasures which are fled for ever, and which he has foolishly sacrificed for what, when he has got it, can afford him no real satisfaction" (182).

If Smith had stopped here, we could draw the same conclusion from him that most people take from the story of the Mexican fisherman and the Harvard MBA--that there is no advantage in striving for wealth. Yet 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 we are well served because nature deceives us with this ambition, prompting 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; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth" (183-84). The person who spends his life pursuing money does little to improve his happiness, but the rich, despite "their natural selfishness and rapacity" and their desire to benefit only themselves, end up dividing "with the poor the produce of all their improvements" (184). At this point, Smith makes the first use of his most famous metaphor by stating that the rich "are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society and afford means to the multiplication of the species" (184-85).

In other words, the advantage Smith sees in nature's deceiving some with ambition is that it moderates the unfortunate effects of a full-scale prisoner's dilemma. Consider what conditions would prevail if no one possessed the ambition to work hard to achieve an illusory (or, as I argue shortly, a temporary) happiness. In such a world, everyone would choose to occupy the slow lane, to catch a few fish or grow a few vegetables or raise a few chickens, spending most of their day enjoying their family and friends. In this case, however, the easy life would not be nearly as attractive as the one available to the Mexican fisherman. The fisherman's life would not sound so idyllic unless some people followed the general advice of the Harvard MBA by constantly striving to do a better job improving quality, lowering costs, and beating back the competition in growing and distributing food; developing and distributing medicines; generating and distributing electricity; producing and distributing beer, wine, and whiskey; making and distributing guitars; and so forth. Such efforts have increased the general abundance of wealth so that people can afford more of all desirable things, including leisure. The ambition for wealth makes it possible for everyone, including those who reject the pursuit of material success as unworthy, to live longer with more leisure and material comforts than would be...