Michael R. Hagerty and Ruut Veenhoven
Social Indicators Research, vol. 64, 2003, pp. 1-27
“Will raising the incomes of all increase the happiness of all?” Intuition says 'yes' but theories of relative utility caution that the answer may be ‘no’. The theory of relative utility holds that rises in income will produce at best short-lived gains in happiness. If people’s happiness depends on income relative to others (social comparisons), or on income relative to their own past income (adaptive expectations) then raising the incomes of all may not increase average happiness. In contrast, the theory of absolute utility predicts that additional income allows each person to fill additional needs, thus increasing average happiness.
We test the absolute utility theory against both types of relative utility theories. Previous tests have been plagued by low statistical power, which has been incorrectly interpreted as evidence against absolute utility models. The current study improves statistical power by including longer time series, by adding 9 nations with low GDP/capita and (in some analyses) by pooling countries into income tiers. We also apply a model by VanPraag and Kapteyn (1973), which can estimate separate effects for social comparisons, adaptive expectations, and absolute income theories.
The results show no effect for social comparison across countries, but show support for partial adaptation to new income over a two-year period. Most importantly, increasing national income does go with increasing national happiness, but the short-term effect on happiness is higher than the long-term effect for a given rise in income.