Over the course of the last century or so, the world has enjoyed substantial and constant economic growth, due to better production methods, as well as significant technological progress.
Consequently, we have seen increases in the level of per capita GDP, albeit some countries have seen theirs increase exponentially compared to others.
Amidst this progress, a debate as to whether higher incomes are synonymous with higher levels of subjective well-being has brewed.
Empirical evidence suggests that, on average, people in wealthier countries show higher levels of subjective well-being, compared to those in poorer countries.
Likewise, those who are wealthier in these richer countries, on average, also record higher levels of subjective well-being than their poorer counterparts.
Yet, this does not necessarily mean more income invariably makes one happier.
This is known as the Easterlin paradox, named after Prof. Richard Easterlin, who found the paradox in his study of happiness economics in the 20th century.
Of course, income is a significant determinant of one's subjective well-being, especially in our current economic paradigm, due to the simple fact that abject poverty, coupled by a lack of basic needs for sustenance, is detrimental to happiness.
Thus, it remains true that, income, to some extent, aids happiness as it enables people to maintain an adequate standard of living above the scantiness of subsistence.
Furthermore, the Easterlin paradox demonstrates that income and happiness have a relationship that is, graphically, an inverted U-curve.
That is, they are positively correlated; as one increases, so does the other.
Yet, it reaches a point where it starts to plateau, and then it adopts a negative correlation.
Thus, more and more income will make us happier for a period of time, but it'll reach a point of satiation, where it'll cease to make a difference as the marginal difference it makes on our happiness diminishes.
At the point where the effect of income on happiness plateaus, other factors then come into play, including relationships, family, fulfillment from work, etc.
Additionally, after this point, more and more money might even start to have a negative effect on our subjective well-being, alluding to the proverbial “more money, more problems.”
Perhaps, the reason why the richer show higher levels of subjective well-being might be because they are richer in comparison to others within their society.
This, in turn, can be explained through what social psychologists call "relative deprivation," which states that how people feel about themselves is a result of how they compare themselves against their peers and the society they inhabit.
As a result, the richer people in a society may show higher levels of subjective well-being because, from a monetary perspective, they feel they are doing better.
Indeed, this thesis is echoed by economist Richard Layard, stating,
“People are concerned about their relative income and not simply about its absolute level. They want to keep up with the Joneses or if possible to outdo them” (Layard, 2005a, p. 45).
On the other hand, poorer people may feel lower levels of subjective well-being because in comparison to their peers, they may not be doing as well.
People tend to compare themselves vertically and not-horizontally, meaning people will often compare themselves with those who are on higher social standings, instead of those on the same level as them.
Relative deprivation can also go a long way in helping us to explain why people in poor countries still maintain high levels of happiness, regardless of their low levels of income.
This may be because poor people in poorer countries are likely to feel happier than the poor in richer countries.
When they compare themselves to their peers, they see other people who have relatively little as well.
Consequently, they do not feel as bad about being poor.
On the contrary, poor people in rich countries will feel worse than their counterparts in poor countries because, relative to their peers who are richer, there's a bigger disparity.
As the aspiration theory teaches us, our desires and aspirations are shaped by those around us, as well the society we occupy. Therefore, when we see those around us with more, we feel we need more to be happier as well.
The reason we now believe higher incomes are synonymous with higher levels of happiness may be due the current state of our economic culture.
Nowadays, everywhere we look, it is suggested to us that those with more money are happier.
For example, in the media, happiness is now usually packaged to us in conjunction with the “baller lifestyle,” those who live luxuriously and spend money recklessly.
Thus, we have somewhat accepted the dream Hollywood has sold us, now believing that if we get more money, we, too, can be as happy as those we see in movies.
Maybe, this is the reason recent generations have been so obsessed with the celebrity, so much so that we now try to live our lives in their image.
We break the bank trying to keep up with people in different tax brackets to us.
Therefore, this may be the sole reason why we now consider money to be the elixir of happiness, as there seems to be an unspoken convention where happiness, in the first world, is attached to the consumption of material goods.
This is unsurprising, as it is direct result of the efforts of the mass media and large investments by firms to get us to walk into their shops and buy their products.
As we now relentlessly align our happiness with consumption, which is made possible by money, we now need more and more of it to sustain our cyclical consumption, which is spiraling out of control.
Therefore, we have come to view money as the producer of happiness. But, it is only until one gets a lot of it that one realizes there is more to life and happiness than money.
Citations: Maslow's Hierarchy of Needs, Happiness and Health Care Coverage, Unemployment and Happiness, Inequality and Happiness: Are Europeans and Americans Different?, NBER Working Papers 6795 (Social Mobility and the Demand for Redistribution: The POUM Hypothesis), Journal of Socio-Economics (Well Being and Unemployment in Russia in the 1990's: Can Society's Suffering Be Individuals' Solace?), Do Economic Reforms Alleviate Subjective Well-Being Losses of Economic Crises?