Money Doesn’t Buy Happiness – or Does It? a Reassessment Based on the Combined Effects of Wealth, Income and Consumption*

The accepted view among psychologists and economists alike is that economic well-being has a statistically significant but only weak effect on happiness/subjective well-being (SWB). This view is based almost entirely on weak relationships between household income and SWB. But income is clearly an imperfect measure of economic well-being. Also needed are measures of wealth (net worth) and consumption. Wealth provides economic security as well as income, and consumption expenditure is the most valid measure of current living standards. The paper uses household economic panel data from five countries – Australia, Britain, Germany, Hungary and The Netherlands – to provide a reconsideration of the impact of economic well-being on happiness. The main conclusion is that happiness is considerably more affected by economic circumstances than previously believed. In all five countries wealth affects life satisfaction more than income. In the countries for which consumption data are available (Britain and Hungary), non-durable consumption expenditures also prove at least as important to happiness as income. In the latter part of the paper, we undertake longitudinal analyses of the effects of changes in economic well-being on changes in satisfaction levels. The aim is to reassess psychological adaptation theory, which has been invoked to explain very weak and even non-significant relationships between change measures. Results from panel regression fixed effects models indicate that changes in wealth, income and consumption all produce significant though not large changes in satisfaction levels. The accepted view in psychology is that objective economic circumstances have only a small though statistically significant effect on happiness (Andrews and Withey, 1976; Argyle, 1987; Campbell, Converse and Rodgers, 1976; Diener et al 1999; Diener and Biswas-Diener, 2002; Headey & Wearing, 1992). This view has sometimes been echoed by economists, usually referring to Easterlin's famous 1974 paper, 'Does economic growth improve the human lot?' However the claim that money, and by extension economic growth, have little effect on happiness is almost entirely based on weak relationships between survey measures of happiness and measures of household income. The single exception appears to be a paper by Mullis (1992), which was based on a sample of 55-69 year old American men, and showed that, for this age group, income and