By Sanuj Shah

You are travelling in the luxury of your car and you halt at a red-light crossing. There is a boy around 6 years old who desperately knocks on your window asking for some coins. Since you wouldn’t mind making your heavy wallet lighter by a mere 5 rupee coin, you decide to donate the same to that begging child. He looks up at you, smiles and runs away as if he was the happiest person on this planet at that point of time.

Driven by the culture of consumerism, we believe that money is a pre-requisite to a happy life. It is believed that money can fulfill all your needs in life. In India you’ll find that a girl’s parents will consider the financial stability of a prospective groom before anything else. People in Delhi will carry an expensive iPhone not because they consider it as a good investment but because it becomes a status symbol. It makes them feel secure in the race for financial growth and supremacy. In today’s world happiness is money and money is happiness.

The positive correlation of happiness and satisfaction to our income has shaped up our beliefs in a manner that we have become money minded individuals. We believe that if you are poor you are in misery but if you are Bill Gates you are the happiest person to have walked on this earth. In short, the more money you have the more satisfied you are. The irony, however, being that a man has never been satisfied with the amount he earns. So can money really buy you happiness? Are rich societies happier than poorer societies? In other words, Pakistan has a higher per capita GDP than India, so does that render the people of Pakistan happier than the citizens of India? (ALERT! We are excluding moments when Pakistan somehow manages to scrape a win over M.S Dhoni’s men in blue.)

Happiness in economics is the degree of well-being. It is a measure of satisfaction one derives due to a multiplicity of qualitative and quantitative factors including the consumption of economic goods. The basis behind it being that the greater amount of goods you consume, the greater is the addition of utility derived and happier you are. And the only way to be able to consume more goods is when you have more money to spend. In short, the more you earn the happier you are.

Suppose a child has a list of five things he wants to buy – a remote controlled helicopter toy, a ticket to the amusement park, a bar of chocolate, a small Domino’s pizza and a Tom & Jerry t-shirt (in order of preference). If, let’s say, the total cost of all the above items is Rs.1000 and he is given only half that amount what would he buy first? The remote controlled helicopter right? Simply because that toy gives him the greatest utility, or in other words, makes him the happiest as compared to all the other items on his list. Further on if he has more money left he will purchase items in the descending order of utility derived. This means that every human being spends his income first on those items which give him or her maximum utility and then on commodities which provide lesser utility. In a nutshell, the consumption of your most preferred item makes you the happiest as compared to your second, third and fourth preferred items.

We need to keep two concepts in mind. First that as consumption increases, the marginal propensity to consume increases at a diminishing rate. This means that with the increase in the level of income every additional good you buy increases your utility but at a decreasing rate. Relating this to the amount you save, it means that your consumption has saturated and you do not want to utilize your remaining money to increase your utility or satisfaction. The second concept is the one already discussed that you purchase your most preferred goods first so as to maximise your satisfaction or happiness.

Clearly the increasing level of income shows an inverse relationship with the level of utility or happiness. The Easterlin paradox states that in the long run the level of income has no correlation with the level of happiness of an individual. In accordance with the law of diminishing marginal utility, the marginal utility of income decreases as the level of income increases. This seems to put an end to the common perception of correlating happiness with income.

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We also cannot negate the fact that happiness is subjective. It can never be measured in quantitative terms and therefore to say that rich people are happier is a common misnomer. Though it is true that individuals who can obtain their basic necessities of life are more satisfied than those who are poverty stricken, yet one cannot affirm that higher the income the happier you are. Suicides are an accurate indicator of the state of satisfaction, well-being and ‘happiness’ of individuals. One would be flabbergasted to know that the suicide rate per 100,000 persons in the United States of America is 12.0 compared to India’s average of 10.5. This is in stark contrast to the USA’s per capita GDP of $51749 when compared to India’s per capita GDP of $1489 (2012 figures). Another determinant of happiness is the amount of leisure time one has. It is observed that leisure pursuits increases happiness. However, the statistics for high income groups have a different story to tell. According to the US government statistics men making more than $100,000 per year spend 19.9% of their time on passive leisure, compared to 34.7% for men making less than $20,000. Women making more than $100,000 spend 19.6% of their time on passive leisure, compared with 33.5% of those making less than $20,000.

If money could buy you happiness, why do Warren Buffet and Mark Zukerberg sacrifice on their happiness to donate a large chunk of their hard earned money for philanthropic activities? Why does a call centre employee feel happier to be with his family everyday than an investment banker who can hardly spare time for himself? Does the marginal utility of happiness due to an increase in your income reach a saturation point? Is happiness only felt when you earn and spend? If not then where does happiness exist? Try gifting a set of clothes to a poor child shivering in the cold outside, maybe you’ll see it in his smile.

Sanuj Shah is an undergraduate student at the Shri Ram College of Commerce. An avid cricket fan and health freak, he fell in love with writing at an early age. He is currently associated with the Research and Editorial wing of the Economics Society at SRCC and a volunteer at Teach India. His areas of interest include political economics, psychology and philosophy. His dream is to travel the world, try different cuisines and meet new people. A true Aries, he can spend hours arguing with people, even at times when he knows he could possibly be wrong.

Posted by The Indian Economist | For the Curious Mind