Does happiness cause income? By Scott Sumner

Bryan Caplan has a post that discusses the research of Daniel Sacks, Betsey Stevenson, and Justin Wolfers, on the correlation between income and happiness. I’m no expert on this subject, but it seems to me that researchers seem to assume that any correlation reflects causality going from income to happiness. But isn’t the reverse causation just as plausible?

Have you ever woken up in the morning depressed, feeling to yourself “what’s the point of even getting out of bed?” I’d guess that Bill Gates has very rarely had that feeling. If he had, I doubt he would have made as much money as he did. So why not assume that happy people are more productive?

I recall reading about a study that showed lottery winners saw a temporary boost to happiness, but then reverted to their original set point. That’s what I would expect if the correlation between happiness and income went from a happy personality to a higher income.

Now let’s suppose that culture has an impact on happiness. It seems to me that people who care a lot about the welfare of others tend to be happier. But if they care about the welfare of others, then they are more likely to implement efficient economic policies, and engage in less corruption, or stealing benefits that they don’t deserve. All these things will make a country richer. Consider the following facts:

1. Denmark has arguably the highest level of civic virtue in the world. (Based on a composite of survey questions and ranking of corruption by outsiders.)

2. Denmark has the most free market economy in the world, if you exclude the two “size of government” categories from the 10 categories used by the Heritage Foundation in their economic freedom rankings. In other words Denmark is a country with lots of social insurance, but in other respects an exceedingly free market policy regime. Not much (selfish) rent seeking. Perhaps happy people aren’t as selfish.

3. Denmark leads the world in many happiness rankings.

I think there is some evidence going in the other direction, so I would not exclude the opposite causation. Countries often get happier when they grow fast. But I’d like to offer a tentative hypothesis about one quirk in the data discovered by Sacks, Stevenson and Wolfers. They found that happiness has risen in many countries as income rose, but not in the US. Let’s assume that people respond to these questions partly in a sort of general “life satisfaction” sense, not just the bliss one feels at each second, on average. In that case Americans may have had a fairly high level of life satisfaction due to our world-leading GDP per capita throughout most of the modern era. Other developed countries were depressed after WWII, and tended to grow faster than the US in a sort of catch-up phase. People in places like Germany may have sensed that they were well behind where they should have been in the 1950s, and felt less life satisfaction due to that fact. Once they caught up to the living standards in the richer countries, they became more satisfied with things. It’s just a thought, but it might explain why the US is an outlier on the growth question.

The Chinese currently express an extremely high level of satisfaction with how China is doing, but unless I’m mistaken don’t exhibit an extremely high level of “bliss” in their day to day life. Thus one issue here is whether in life satisfaction questions researchers are able to distinguish between bliss and a more detached evaluation of how things are going in an economic sense. It’s the “bliss factor” that I think is less affected by income gains. I doubt I have any more bliss than when my income was much lower. That’s partly aging, but not entirely. One year I had a huge (and unexpected) raise, and don’t recall being more blissful the next year.

Again, I’m not an expert on this topic, and perhaps researchers have already addressed the causality issue. If so I’d appreciate hearing about any studies that do so.