Income & Happiness
Richard Layard argues that higher incomes do not lead to greater happiness, that people are deluded into pursuing higher incomes by distortions in perception:
“First, I compare what I have with what I have become used to (through a process of habituation). As I ratchet up my standards, this reduces the enjoyment I get from any given standard of living. Second, I compare what I have with what other people have (through a process of rivalry). If others get better off, I need more in order to feel as good as before. So, we have two mechanisms which help to explain why all our efforts to become richer are so largely self-defeating in terms of the overall happiness of society.”
Layard’s theories are supported by survey evidence. When asked questions such as “would you rather earn $50,000 in a world where others earn half that or earn $100,000 in a world where others earn double that?,” most people indicate that they would prefer higher relative income to higher absolute income.
Economists believe that people indicate their desires by how they behave (”revealed preference”). Affluent people rarely move into poor neighborhoods in order to enjoy higher relative incomes. Most immigrants move from poor to rich countries knowing that they will become relatively poorer. Their behavior appears to suggest that people value absolute, rather than relative, income. Given a conflict between surveys and behavior, economists tend to view the survey results as unreliable.
Layard defends survey research on happiness, arguing that people have shown an ability to self-report happiness accurately. He reports on results showing that people’s answers to questions about whether they are feeling happy are correlated with increased activity in certain parts of the brain. Therefore, something “real” is going on when people say that they are happy.
However, the fact that people can report their own happiness correctly does not mean that they can correctly articulate what makes them happy.