Money can buy you (a bit) of happiness


I recently came across this article. It’s main headline is that that Richard Easterlin, who argued that after a certain point, additional income does not increase happiness, was wrong: money does buy happiness no matter how rich you are.

I think that’s a misleading way of putting it: money does always make you happier, but the rate at which it makes you happier diminishes really very rapidly. They argue that happiness varies proportionally with the log of happiness. That’s a very steep concave function, and means that the effect of an additional $1 on the happiness of a millionaire is pretty much negligible compared to the effect of an additional $1 on the happiness someone living on $1.25 per day.

One thing I’ve wondered for a long time, though, is: why don’t economists incorporate this into cost-benefit analysis? Rather than rating interventions by how many dollars they produce with every dollar spent (standard cost-benefit analysis, or analysis in terms of Kaldor-Hicks efficiency), why don’t they rate interventions by using the log of dollars per person? You need a bit more information than you do for standard CBA, but it would mean that the analysis would be much closer to tracking what actually matters. If there are any economists reading this who have an explanation, please do get in touch.