Money Can Buy You Happiness

Many years ago, some friends of mine who were taking a class from popular Swarthmore economics professor Bernard Saffran thought that it would be amusing to ask him if money could buy happiness. Bernie's answer was, "Yes, to a first approximation." This is not a frivolous issue. Many people instinctively distrust or dislike economics. However, once you concede that people with higher incomes are better off than people with lower incomes, you have conceded home field advantage to the economists. To the socialists, we can demonstrate that free markets, capital accumulation, strong property rights, and governments that serve the people rather than oppress them are factors that lead to higher incomes. To the environmentalists, we can show that the keys to environmental sustainability are substitution and technological change, not anti-capitalist primitivism. A Basic Challenge Recently, the Co-Director of the Centre for Economic Performance at the London School of Economics Richard Layard spelled out a fundamental challenge to mainstream economics. He argues that higher incomes do not lead to greater happiness. This in turn threatens much of the conventional wisdom among economists concerning policy issues. To an economist, it is literally axiomatic that if people pursue higher incomes, then higher incomes make them happier. We do not believe that people do things that are contrary to their interests. Layard argues instead that people pursue higher incomes even though collectively it is not in their interest to do so. He says that people are deluded into pursuing higher incomes by distortions in perception