Things donors know: Are the rich happy?

Roni from Jerusalem challenges our generation with an existential question "Are the rich happier?"

"A man will never sell everything he has, even his last piece of cotton, as long as he is rich" says an old Yiddish proverb and indeed the answer is simple: you should be rich. When you check people's level of satisfaction with their lives, it becomes unsurprisingly clear that everywhere and at any time the rich are happier than the poor. But when you try to ask what makes the rich happy, the answer gets complicated.

Money is a means to purchase goods and services and apparently the rich are happier because they can buy more things, while we could also buy a high standard of living when we were as happy as they were. So it's not. Studies measuring the degree of satisfaction of people in the developed countries show that the average degree of happiness reported by the respondents has remained constant over many decades in which the national product per capita has increased and with it the purchasing power of the median salary several times. When the average American is asked to rate on a numerical scale the answer to the question "Overall, how is the situation these days?" Are you very satisfied (3), quite satisfied (2) or not at all satisfied (1)?" It turns out that this "happiness index" stood at 2.4 in 1945 and 5 decades later, when the purchasing power of the citizen increased 4 times, the score was only 2.2. When comparing the level of happiness between different countries, it becomes clear that there is no improvement in the general level of happiness with the increase in per capita income as long as it is above 15.000 dollars per year.   

The paradox of the lack of connection between happiness and purchasing power

The contradiction between the close connection between wealth and happiness in any population and at any time on the one hand and the lack of connection between happiness and actual purchasing power is called the Easterlin paradox after the economist who first presented the problem. Many explanations have been proposed to solve the paradox and they are related to the way we interpret our situation, that is, to the mental mechanism that turns material abundance into happiness.

We all want to be rich, but since we are able to satisfy the basic needs of existence, we have no way to measure wealth except in comparison to others. People want to earn more or at least equal in income to their neighbors and co-workers. A general increase in the standard of living leaves us in the same relative place. The degree of happiness increases as a person advances in the salary scale in relation to other employees in the same organization, meaning that a medium salary in an organization that pays low salaries is preferable to a high salary in a workplace where the other employees will receive an even more generous reward. The problem is even more difficult because when we place ourselves in relation to others, the natural tendency is to look up, that is, to give too much weight to those who are ahead of us in the race.

The increase in happiness from someone earning less than me is smaller than the loss of happiness caused by someone's success in earning more. Money is a means of ranking the status of ourselves and our acquaintances and therefore, even the general abundance does not compensate for the feeling of "loss" of those who earn less. Therefore, we would be more happy with a small increase in salary due to a job promotion than a higher increase due to lowering the income tax rate. Economist SARA J. SOLNICK conducted a study in which respondents were asked to choose between a good but inferior state in relation to the environment and a less good but relatively high state. For example, a question was presented "Would you prefer a 7-room house and neighbors with 10 rooms or 5 rooms in a neighborhood of 3-room apartments." When the questions touched on income, most respondents preferred a higher salary when the amounts were small: two-thirds preferred $100.000 a year to $50,000 even if the choice made them "relatively poor". When the imaginary salaries rose, the desire for status grew stronger: half of the respondents preferred a salary of 200 over 400 if it would make them neighborhood tycoons. It is easy to mock those who prefer to be "head of the foxes" but it turns out that income differences from the neighbors do cause a decrease in the quality of life. Being "relatively poor" in a rich environment means low status, fewer social connections and less ability to influence the environment. In neighborhoods where there is considerable income inequality, residents tend to place less trust in their neighbors and this alienation also affects the quality of life. How would you feel if everyone but you suddenly won the lottery? The answer to this is discovered by people whose neighborhood is undergoing a process of gentrification, meaning the entry of economically established neighbors from outside. Studies show that instead of experiencing a general improvement in the standard of living following the entry of a "quality population", long-time residents experience alienation and a loss of community support.

A second problem that prevents us from enjoying ourselves is the habit: it turns out that satisfaction due to an increase in income wears off quickly and within about a year the new standard of living is no longer seen as a source of joy. An extreme example of the effect of habit is in a study of winners of large lottery prizes: it turns out that the lucky winners are no more satisfied with their lives than they were before winning, nor are they any happier than their neighbors who didn't win. When the newly rich get used to a life of luxury, the joy from them decreases and at the same time the positive effect of "just" happy events that pale in comparison to the big win decreases. A broad survey on salary satisfaction conducted in England revealed that satisfaction is not related to the net salary but only to its change in the previous year. There was also someone who turned these findings into formulas and determined that two-thirds of economic satisfaction is related to the ratio between the employee's income and that of his colleagues, and the remaining third is eroded at a rate of 60% within one to two years due to the effect of habit, therefore from each shekel of an overall salary increase for all employed (one that leaves each in its relative place on the scale) only 13 cents will remain that are significant for the employee's happiness.

It turns out that when referring to happiness instead of indicators such as income or consumption as the purpose of economic activity, some fundamental conventions in the field are undermined. Concepts such as happiness or satisfaction were hardly mentioned in the economic discourse until the last decades and their breakthrough into the consciousness of economists undermines, among other things, the status of its majesty "growth". When you take into account the negligible extent to which an overall increase in per capita income improves satisfaction and the negative impact of growth that widens gaps on happiness and satisfaction, the traditional warning that high taxation "suppresses growth" becomes much less frightening.

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