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Money Brings Happiness – Sometimes More, Sometimes Less

Money is important – but exactly how important ultimately depends on our cultural background, and varies around the world. Young people today answer the question of whether money brings happiness differently than their parents.

"Money, Money" is one of Liza Minnelli's best-known songs. The paean to money says that material wealth means the same around the world: "A mark, a yen, a buck or a pound – that clinking, clanking, clunking sound is all that makes the world go 'round."

Most people would agree that money does matter, but exactly how is open to debate. Americans don't think it unusual to flaunt their wealth, while it is considered vulgar to do so in Switzerland, and even foolish in Bhutan. There is also a widening generation gap in terms of attitudes toward money and prestige between "digital natives" and older generations. Material wealth is not as pivotal for young digital natives as it is for their parents from the post-war generation.
Does money bring happiness? That's the 64,000 dollar question!

Mexicans Need Less Money to Be Happy than Americans Do

The connection between money and happiness is not the same all over the world. With such a "fickle" foundation, it should come as no surprise that money's relationship with happiness – another complex concept – is hard to establish. Lately, there have been many innovative attempts to measure happiness across countries – e.g., the World Happiness Report (see the chart to the left) or the OECD's Guidelines on Measuring Subjective Wellbeing – and in 2011 the UN General Assembly passed a resolution asking member countries to measure the happiness of their people with a view to fostering the design of better public policies.

Cross-country studies of happiness typically conclude that, on a country-wide level, happiness is not determined by GDP per capita alone. Although high-income economies such as Denmark, Norway, Switzerland, the Netherlands and Sweden typically appear at the top of these rankings, there are also some unexpected results, with Costa Rica ranking as high as New Zealand, Mexico at a similar level with the United States, and Brazil ahead of France and Germany (note that these rankings reflect data for 2010–12, so they predate the results of the 2014 World Cup), while China ranks lower than Zambia. On the other hand, low-income countries such as Rwanda, Burundi, Central African Republic, Benin, and Togo typically appear at the bottom of these rankings.

Money Is Still a Factor in Happiness

The outliers can be explained by the fact that other important variables that influence happiness, such as life expectancy, strength of social networks and family support, cultural traits of generosity, freedom of choice and freedom from corruption are not always strongly correlated with income per capita. It is true that many of these studies find that beyond a certain point (roughly 70,000 dollars in the case of the US), the impact of more money on reported levels of happiness is limited. But this finding may simply reflect the weak relationship between experienced happiness and levels of well-being (these, in turn, are well-correlated with income). And it is also important to acknowledge that the concept of a "satiation" point remains a hotly debated topic in the academic literature.

Speaking (or Not Speaking) about Money

The cultural dimensions of how money and happiness are perceived in different societies also merit special attention. Happiness, for example, has a quite different meaning in the US – where its pursuit is enshrined in the Declaration of Independence – compared to Asia, where people tend to be much more circumspect about declaring that they are happy. Moreover, in some countries (again the US comes to mind) people are much more exuberant in communicating their successes and linking them to money than others. In contrast, in Calvinist Geneva such exuberance would be interpreted as a sign of weakness of character.

Millionaires in Second Class

That is not to say that the Swiss do not consider money important. In fact, some observers would characterize their relationship with money as one of reverence. But the stereotypical Swiss – even if a millionaire – would rather travel second class than "squander" resources on a first-class ticket. From an outsider's perspective, it's almost as if they are uncomfortable with their wealth.

In the same vein, in some cultures (e.g., Middle Eastern countries) bargaining is considered a sign of thriftiness, while in others (e.g., France) it is considered to be in bad taste. These differences in attitudes toward money also occur across the urbanrural divide of a given country such as Brazil, where a New York-style attitude towards wealth and its display can be found in places like São Paulo, while a much more reserved attitude prevails in rural settings.

Dissatisfaction Is Growing in Southern Europe

The relationship between money and happiness is also influenced by the macroeconomic context. Recent surveys – such as the one released in October 2014 by the Pew Research Center (see the chart above) – show a significant convergence between developed and emerging economies in terms of their median life satisfaction evaluation (a proxy for happiness) as compared to an earlier survey (2007). Most of this convergence seems to be driven by the better relative economic performance of emerging economies. There is evidence, however, that the impact of the global financial crisis – which has been particularly strong in the European periphery – has also influenced these evaluations. Some recent analysis suggests that life satisfaction is much more sensitive to negative growth than to positive growth. Accordingly, it should not come as a surprise that countries such as Greece, Portugal and Spain have experienced significant declines in terms of reported life satisfaction.

The Main Thing Is Being Richer than Our Neighbors

Another dimension to consider is the issue of increasing inequality. It has been argued that the growth in inequality observed in developed economies over the last two decades adds a new rationale for the so-called Easterlin paradox (the proposition developed by US economist Richard Easterlin in the 1970s that higher incomes correlate well with happiness, but in international comparisons reported levels of happiness do not correlate well with income per capita). According to this view, what make us feel happy is not absolute levels of income (money), but improvements in relative position in the social scale – in other words, feeling wealthier than our neighbors. In societies where inequality has been increasing significantly (e.g., the US) and social mobility has declined, the rat race becomes even more perverse.

Digital Natives: Money Isn't Everything

What about age? Perceptions about money and happiness, beyond cultural differences, are influenced by age. The MBA class I teach at IMD has offered me a unique "laboratory" to observe these differences. It is a small class – only 90 students per year are accepted – but incredibly diverse. Their attitudes towards topics such as money and wealth, the role of globalization in the world economy, and their aspirations in terms of career and the pursuit of happiness are revealing.

These students are typical representatives of what we could characterize as digital natives – a generation that grew up in the internet age and which puts a much greater weight on the importance of "transparency" in their everyday lives. They are skilled users of digital technologies and take for granted that information about individuals, companies and countries should be easily accessible and should be used to provide insights not only about career opportunities, but also to derive ethical inferences. 

When asked about what they see as a "good life," in most cases money does not come out as a determining variable. Many make reference to the fact that they would like to make a difference in their countries of origin (particularly those that come from developing countries) and almost all emphasize the importance of the ethical reputation of potential employers in determining career choices. Maybe the transparency bias (driven by technology) and the ethical concerns (influenced by the repercussions of the global financial crisis) are just a fortunate coincidence, but I believe that we are witnessing a transformation process that will greatly influence how societies perceive and use money in the coming generations.

Ethics and Virtue Have a Bright Future

Money is a social construct. In the end, beliefs (and trust) are what determine the role money plays in different societies. Economists have been quite influential in shaping the debate about what constitutes a "good life" (and the achievement of happiness) by emphasizing a materialist angle, based on the utility function of money. Money, and its related consumption options, became the centerpiece of what is considered success.

The experiences of the last few decades (in particular, the global financial crisis) and the disruptive role of technology are, however, providing a return to the emphasis on the role of ethics and virtue as important factors in the determination of happiness. Liza Minnelli is still providing the soundtrack, but the current generation seems to be much more interested in revisiting the teachings of Buddha, Aristotle and St. Thomas Aquinas in defining their future. It will be interesting to observe how their perceptions and beliefs about the role of money penetrate the mainstream, and disruptive technologies like bitcoins erode old monopolies.