Money and Happiness: A response

A frequent and enthusiastic reader of Jayhawk's Nest, Pat, responds to a post earlier, so aptly titled "$$$ = :) ?":

"How many times must we be told that money does not equal happiness? I am thinking about an economic model in which households seek to maximize gratitude (as opposed to profit), because the link between a sense of gratitude and happiness is MUCH more robust than that between money and happiness.

Practical consequence of an economy that seeks to maximize gratitude as opposed to profit?: buying locally, especially from people you know. I am not anti-trade... I'm anti-anonymity. I am not pro-protectionism... I'm pro-personal transactions."

Pat - Great thoughts, as usual, and thanks for checking in.

Just a few minor points - it's firms that maximize profits, not households. Households, which are made up of individuals, are "utility" maximizers. Supposedly, utility would include money. And, if so, households would save money. Strangely, they generally have not.

However, I don't think the reason we have a negative savings rate is that people don't want to save. In fact, they believe they are saving when they invest in their homes and their 401(K)'s etc. Elaborate investment vehicles were not easily available 30 - 40 years ago, e.g. IRAs. The stock market was way too expensive for the average Joe, i.e. commissions were high and minimum requirements to stocks (or better put partnerships in companies) were astronomical. Competition and technology has changed that over the past decade or so, and for the better. The only problem is that education has lagged. People do not realize that their investments are not a ticket to purchase the world.

I think the issue is that we went too far with credit and have hit extremes. The availability of credit anonymously had never been experienced before and it's likely that we - as a society - simply went too far using it, and profit-maximizing firms went too far issuing it. The intent was not criminal, but the consequences seem to be that way. It's simply a process or learning a new way of thinking, i.e. how to effectively use credit. I believe we're now in the process of correcting back to equilibrium.

The problem is that money does matter when it comes to making people happy. (See this study by Firebaugh and Tach.) However, the correlation between money and happiness is not linear, but rather it has diminishing marginal returns. After so much dough, you have enough. The question is: what's the threshold? And that is the problem. At some point, one has to say enough is enough. For most people, though, it's a hard thing to do since we're naturally inclined towards greed.

So, where does that leave us? I believe that the current system is fine. It's impossible to measure gratitude or utility. As a society, we need to educate people, especially the youth, about credit. It is *not* free money. Instead, it's simply a means of convenience. I see personal credit as a substitute for cash. I'd rather carry one credit card than cash. In this way, I can track expenses, not worry about emergency funds on the road, etc, etc.

I'm not convinced about buying local, etc. I'll refer you to Ricardo's competitive advantage argument. I'll buy from the moon if it's cheaper and my goal is to maximize savings. I don't see any reason to buy from the local dude if Wal-Mart has the same item for half the price (which it generally does).

In relation to the article I initially posted, I think my take-away is this: forget the past (after seeking forgiveness of course!), don't worry too much about the future, and make the most of the present for it is a gift!

Suzi Orman says it best: people first, then money, then things.