Does money make you happy?

Syracuse, N.Y. - You've heard it a thousand times: Money doesn't buy happiness. Yet in spite of this axiom, people throughout history have tried mightily to accumulate riches. Are we suffering from some sort of collective delusion, or is it possible that money truly does buy happiness?

The evidence offers some surprising lessons:

•Rich nations aren't necessarily happier than poor ones.

•People at all income levels say they need about 40 percent more than they make.

•Feeling successful – not being rich – is most closely related to happiness.

•Capitalism is a vital ingredient in America's gross national happiness.

Let's take the global view first. Compare Mexico and France. In Mexico, most people live above the level of subsistence, but the average purchasing power is only about a third what it is in France. And yet Mexicans, in aggregate, are happier than the French. In Mexico in 2002, 63 percent of adults said they were very happy or completely happy. In France, only 35 percent gave one of these responses.

The more we get, the more we need

Like nations, once individuals reach subsistence, they get little or no extra happiness as they get richer – even massively richer.

In a 1978 study, two psychologists interviewed 22 major lottery winners and found that the joy of sudden wealth wore off in a few months. They had a harder time than others enjoying life's prosaic pleasures: watching television, shopping, talking with friends, and so forth.

The reason for this phenomenon is that humans tend to adapt psychologically to their circumstances – including their monetary ones – quickly. Economists call this the "hedonic treadmill."

One study shows that people report needing 40 percent more to reach a level they consider sufficient. If you earn $50,000 per year, you'll "need" $70,000. But if you get a raise and make $70,000, you'll soon "need" about $98,000. The more you have, the more you find you need.

Some research appears to suggest that how much money we make is largely irrelevant to our happiness; it's how much more we make than others that matters.

In one study involving faculty, staff, and students at Harvard, participants were asked to choose between earning $50,000 per year while everyone else made $25,000, or earning $100,000 per year while others made $200,000.

It was stipulated that prices would be the same in both cases, so a higher salary really meant being able to own a nicer home or buy a nicer car. But that didn't matter much: 56 percent chose the first option, hypothetically forgoing $50,000 per year simply to feel richer.

Do we really care more about one-upmanship than material comforts? Hardly. What the data tell us is that richer people are happier than poorer people because they feel successful in their lives. And it is success – not money – that we really crave.

Success matters more than money

Imagine two people who are the same in income, education, age, sex, race, religion, politics, and family status. One feels very successful; the other does not. The former is about twice as likely to be very happy about his or her life than the latter. And if they are the same in perceived success but one earns more than the other, there will be no happiness difference at all between the two.

The upshot: If you and I feel equally successful but you make four times as much as I do, we will be equally happy about our lives. Of course, successful people make more money than unsuccessful people, on average. But it is the success – not the money per se – that is giving them the happiness.

Financial status is one way we often measure our success. There is nothing strange about this; we measure things indirectly all the time. I require my students to take exams not because I believe their scores have any inherent value, but because I know these scores correlate extremely well with how much they have studied and how well they understand the material.

What scholars often portray as an ignoble tendency – acquiring more than others – is really evidence that we are driven to create value. This is a virtue, not a vice. The fact that it also brings us happiness is a tremendous blessing.

Money is a measure of success, and a handy one at that. But there is a dark side to this fact: People tend to forget that money is only a measure. Some people focus on money for its own sake, forgetting what really brings the happiness.

Among other things, they leave out of the equation all of the kinds of success – in our family lives, in our spiritual lives, in our friendships – that money does not measure. And even their work choices reflect the sad mistake of forgoing what they love doing for what brings in the most monetary compensation.

The evidence on happiness is clear that we should avoid the measurement error of materialism.

Some believe market capitalism is to blame, and here is what they advocate: Tax away our incomes at very high rates so that money and success were no longer so highly correlated. Then, that money (if we still bothered to earn it) could be spent on public goods and services instead of big houses and other ostentatious displays of our success. We would be happier if we were forced out of the capitalistic consumers' arms race that we have (literally) bought into. And as a bonus, we could enjoy all the good things the government would give us.

Simple, it seems – but misguided. Although consumerism does not buy happiness, government spending does not, either. On the contrary, it makes us less happy in general.

Government spending doesn't help

In 1972, the federal government devoted about $4,300 to each American (in 2002 prices). By 2002, spending had risen to $6,900 per person. Yet we have not gotten any happier. In 1972, 30.3 percent of Americans said they were very happy. In 2002, that percentage was still exactly 30.3. Even worse, research shows that higher government spending turns out to be pushing average happiness down, not up.

The market system, which often rewards success with dollars, can create the tendency to confuse success itself with money. But allowing the government to take more of our hard-earned money will not fix this; on the contrary, government would only make things worse for us if it tried to adjust our values through taxation and public spending. The moral confusion of materialism is one best left to ourselves, our families, our communities, and our faiths to resolve.

Alexis de Tocqueville wrote in his 1835 classic "Democracy in America" about the tendency toward "excessive individualism" in an atomistic American society.

Tocqueville noted, however, that the remedy lay not in reordering the American system, but in the institutions of civil society: families, churches, charities, and friendships, which are the connective tissue between people that help us avoid errors in our values.

In other words, markets are not enough – we need morality as well, and the institutions that make it possible to express this morality.

Free markets and morals

Free markets allow us to live the way we want – giving most people maximum buying power and allowing citizens to find jobs that match their skills and passions.

How we use this power and freedom is up to us, and depends on our values: We can make decisions that lead to happiness or make us miserable.

But to weaken free market capitalism because it does not bring happiness directly would be senseless: It would be like throwing out your computer because it didn't make your coffee.

The fact that some sick or disabled or otherwise-challenged people struggle to provide for themselves in a free-market system does not mean there is something wrong with our system – it means there is something wrong with our morals.

In a moral society, these people should be aided by the rest of us in a way that preserves dignity and avoids dependence.

The fact that money doesn't buy happiness is no indictment of capitalism. On the contrary, capitalism is the best – actually, it's the only – framework for allowing people to succeed on their merits – and we know success is vital to happiness.

Capitalism, moored in proper values of honesty, fairness, and charity, is a key ingredient in our gross national happiness.

• Arthur C. Brooks is a professor at Syracuse University's Maxwell School and a visiting scholar at the American Enterprise Institute. This article is adapted from his new book, "Gross National Happiness" (Basic) and an essay in the May/June issue of The American magazine (american.com).