Positive Marginal Utility of Consumption?

We’re frequently told, by news-you-can-use segments and bank ads hawking savings accounts, that Americans are not saving enough for their retirements. Yet just as often we’re reminded that, given the fleeting nature of human existence, we should eat, drink, and be merry while we still can. Thriftiness is making a comeback in the wake of our latest speculative bubble, but some new evidence may help to tip the scales back in favor of the carpe diem approach to life. It turns out that money can buy you happiness—but young people get a lot more happiness out of their dollars than old people do.

Recent research by economists Amy Finkelstein, Erzo Luttmer, and Matthew Notowidigdo suggests that you’ll get a bigger bang for your consumer buck by spending while you’re healthy, before old age starts to take the fun out of life’s indulgences. Their research is part of a larger academic enterprise attempting to understand what makes us happy. Economics is a field more associated with rational calculation than emotion, but there’s an ever-growing subculture of “happiness economists.” Just as mainstream economists spend their time figuring out things like gross national product—how much a country produces in dollar terms—these happiness scholars churn out numbers like gross national happiness (how much happiness a country produces).

It’s relatively easy to measure things like corporate profits and trade flows. Measuring a person’s psychic well-being is trickier, though happiness economists take a relatively straightforward approach: For the most part, they just ask people if they’re happy. They then try to figure out what makes people say yes or no. Perhaps not surprisingly, money-obsessed economists have been fixated on whether higher incomes make us happier. And after much debate, their conclusion is that money does indeed buy happiness. Or, as an economist would put it, there’s a positive marginal utility of consumption. People in rich countries say they’re happier than people in poor countries, and in just about every nation, the well-to-do report being happier than their impoverished counterparts.

Ray Fisman
Slate