Happiness, properly defined, is a sense of well-being that comes from a great sense of knowing that you’re on the right path.– Mark Anielski, economist and author of An Economy of Well-Being

As practitioners of what philosopher Thomas Carlyle called the “dismal science,” economists aren’t the folks you’d usually seek out to find the secret of happiness.

After all, happiness is normally the province of philosophers and psychologists.

Still, economists are people too…

And the best of them can offer some essential advice on how you can live a satisfying and happy life.

Their ultimate conclusion that, yes, money matters, may be politically incorrect in some circles.

But it’s also the key to living a richer life…

In ways that go far beyond the importance of money itself.

Let’s start with how economists have thought about money throughout the ages.

Happiness: The Neoclassical View

Jeremy Bentham (1748-1832) – the father of utilitarianism and a mentor to John Stuart Mill – was one of the first economists to tackle the subject of happiness.

He suggested happiness comes from maximizing pleasure and minimizing pain.

Alfred Marshall (1842-1924) later refined Bentham’s theory.

He argued that you should consume goods up to the point where the marginal utility, or satisfaction, is equal to marginal cost.

In short, buy stuff until it makes you happy – but no more.

Refining Marshall’s thinking further, Austrian economist Carl Menger (1840-1921) highlighted the diminishing marginal utility of extra income.

Your first Ferrari will make you very happy.

The second one… less so.

Menger’s recommendation?

Rather than maximizing the number of goods you consume, you should seek a broader range of life experiences.

The Secret of “Skilled Consumption”

In The Joyless Economy: The Psychology of Human Satisfaction, Hungarian-American economist Tibor Scitovsky (1910-2002) criticized the implicit link between consumption and happiness in neoclassical economic theory.

Scitovsky argued that there are two different types of positive experiences.

First, there are the hedonistic, short-term pleasures. Think sex, drugs and rock-and-roll – or a garage full of sports cars.

Second, there are the more unpredictable, enriching experiences that provide the potential for real joy and lasting satisfaction in life.

He argued that genuine happiness doesn’t come from Bentham’s simplistic formula of maximizing pleasure and minimizing pain.

Instead, happiness comes from taking risks and challenging yourself to try different things.

It also comes from learning what he called “skilled consumption”- developing an appreciation of literature, culture and art.

Yes, skilled consumption requires more effort and commitment…

But it also enables you to experience a real sense of joy rather than mere fleeting pleasure.

Happiness Economics

Recent research from Swiss economist Bruno Frey supports Scitovsky’s fundamental insight that consumption is overrated in measuring happiness.

In his 2010 book Happiness: A Revolution in Economics, Frey concluded that most people are irrational in assessing what makes them happy.

People both overestimate the utility of higher salaries in the future…

And underestimate the importance of nonmaterial things like friendship and social interaction.

But the American economist Betsy Stevenson disagrees.

Her research into “happiness economics” shows a strong link between income and happiness.

Wealthy countries are the happiest countries. And the wealthier they are, the happier they are.

So What’s the Answer?

Here’s how I reconcile these two contradictory views.

Money isn’t everything… but how you spend what you have is.

As the title of an article published in the Journal of Consumer Psychology put it…

“If Money Doesn’t Make You Happy, Then You Probably Aren’t Spending It Right.”

At the same time, how you spend your money depends on your personal needs and preferences.

If your goal is to die with the most toys, then you’ll side with the neoclassical economic theories of Bentham and Marshall.

However, if you agree with Scitovsky and Frey and feel that more money won’t make you happier…

Then you’ll focus on developing new interests and having unique experiences.

And these will provide you with the kind of satisfaction no amount of material wealth can give you.

In short…

Live your life on your own terms…

And you’ll live a happy one.

Good investing,

Nicholas

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