Mert Yildiz, an analyst at Renaissance Capital, in a slightly offbeat article for the silly season, examines how money influences our happiness.
Happiness…world happiness. No, we are not competing in a beauty pageant. But we believe GDP, inflation, unemployment and market returns are mere numbers…what really matters is individual and collective happiness.
Gross domestic product (GDP) is so 1900s; gross national happiness (GNH) is the new statistic on the block. Bhutan, a country of 700,000 people, is the only country to officially measure the happiness of its citizens. It was the idea of former King Jigme Wangchuck, in 1972, that good governance yields happier citizens.
We believe many developed countries will follow Bhutan’s example over the next 10 years. It might be overreaching to say “forget GDP, let us track only GNH” but we believe that over the next decade, GNH will be a commonly used supplementary data set for policymakers, since measures such as GDP overlook important human factors such as health and education.
Ahead of the curve, we look at what makes people happy. We suspect most would say money. It would be ironic for us, in the banking industry, to suggest otherwise (people do not go into banking for their love of arts). But to redeem ourselves slightly, and perhaps appease our brothers at the Occupy Wall Street camps, we can say that money is not the only source of happiness.
An abundance of money does not make people happy…but a lack of it can make us unhappy. When we compare GDP per capita levels with the happiness index, we can identify four groups of countries.
To dissect the relation between money and happiness we analyse two sets of data; GDP per capita and the happiness index compiled by Erasmus University. Assuming equal distribution of wealth and happiness, our analysis can apply to individuals as well. In a nation where GDP per capita is $12,000, if all wealth is equally distributed, every citizen makes $12,000 per year, or $1,000 per month. With this mindset, we can draw some conclusions about individual wealth as well.
For GDP per capita below $2,000, money makes people happy. Food and shelter are our most basic needs. When one risks not meeting these on a daily basis, great unhappiness may follow. For a man who makes less than $5 a day (corresponding to $1,825 GDP per capita), every penny counts. This is why happiness is directly related to wealth at very low levels of income per capita.
$2,000 to $20,000
Between $2,000 and $20,000 GDP per capita, money takes a back seat. For medium-income countries, there is still some relation between wealth and happiness, but decreasingly so. Data suggest that for most of these nations, many factors other than money determine the level of overall happiness.
Latin American nations are very happy with very little. Almost all Latin American countries with varying income levels between $2,000 and $13,000 are as happy as countries with income levels way above theirs. This goes to suggest that one does not need money to be happy.
The source of Latin American happiness is hard to identify. Our best attempts to explain the contentment enjoyed by Latin Americans are at best inconclusive. It might be a combination of nice weather, beautiful women and great music…but we suggest another likely explanation; the lack of political conflict.
Costa Rica, happiest nation in the world, has no armed forces. This peace-loving analyst is inclined to think that happiness is generated internally and neither power nor money can buy it. Latin America is a case in point. Latin American nations are among the lowest in terms of military spending per GDP and not very wealthy but still very happy. There is an element of luck here. All Latin American countries (with the exception of Brazil and Guyana) speak the same language. They share a similar culture. They are in a removed corner of the world, away from major political conflict and are under the protection of the US. This makes external and internal conflicts rare in Latin America.
There is a relation between security and happiness. The data suggest that a certain level of military spending generates happiness as people feel more secure. However, at some point the military spending maxes out and lower-spending (less conflictual) nations are happier.
Former Soviet nations are unhappy, despite moderate wealth. When we ask our Russian colleagues why they are so unhappy, they point out of the window and ask, how can we be happy in this weather? We agree. Weather does have a significant impact on people’s mood. Still, it is hardly an excuse. Scandinavian countries which have similar weather to Russia are among the happiest. This suggests that if Zeus – the Greek god of the sky and weather – will not grant you happiness, it can be attained through competitiveness (Scandinavian economies are the most competitive in the world, but we will get to that).
We think the reason for Soviet unhappiness has to do with the old regime. No, we are not claiming that communism was a cause of unhappiness. Some current communist nations are happy (Cuba, China). We think it was the relatively sudden switch from communism into capitalism which makes people unhappy. Such traumatic experiences can have a long-lasting impact on people…in particular those who were so submersed in the old regime. As a new generation without communist memories grows, we believe these nations will become increasingly happy.
Middle Eastern countries, as well as Asia, also look relatively unhappy. We lump these together because we do not believe this phenomenon has anything to do with religion. We believe the reason for the lack of happiness in these nations, despite high wealth, is a lack of political freedom.
$20,000 to $50,000
Between $20,000 and $50,000 GDP per capita, money comes back into the picture. Most of these nations are European or North American, or in what is commonly called the West. Another common denominator is that capitalism is the rule of the land. Perhaps a by-product of capitalism is that it makes us greedier and indexes our happiness to the wealth we generate.
More than $50,000
Above $50,000 GDP per capita, money loses all significance. When one finally attains a high level of wealth, he realises that it wasn’t all about the money. For people who attain this kind of wealth the impact on happiness differs: some find comfort in expensive trips to the Himalayas in search of a guru, others consume themselves in their wealth and yet most just keep on doing what they did to get there…perhaps for the fear of losing this level of happiness (but more likely because there is a third force which drives both happiness and wealth)
Competitiveness is the key to happiness and wealth. Is this a surprise? The commonly used happiness survey has many similarities to the World Economic Forum’s (WEF) competitiveness index. Questions about one’s health in the GNH’s index come in the form of health spending per capita in the WEF’s competitiveness index. Similarly for education. The GNH index also raises many questions about political participation (the strength of the institutions component in the WEF’s index) as well as living standards (the macroeconomic environment in the WEF’s index). Hence, we think the real driver of happiness is competitiveness: the power of knowledge, which brings wealth along with it.
The greatest thing about happiness is that it is tradable commodity. We doubt we will ever see a regulated ‘happiness market’, but at least we can safely say that one can give happiness as well as receive it…most of the time with very narrow margins.