Income distribution vs. happiness

Americans generally have more spending power now than 50 years ago, across almost all income levels. But the perception is that lower income families are losing ground. Of course, some are, but generally, pretty much all of us can buy more and better stuff than we ever could in the past. In 1909, many things we consider absolute necessities didn’t even exist. So why the perception of slipping back? The answer is that income distribution is indeed diverging. The extremely rich are getting much more of the expanding pie than anybody else, and those at the bottom get the least:

Income Distribution
Chart from the Afferent Input blog.

A rich class of people are becoming much more wealthy, and most other people are becoming somewhat more wealthy. So what? The problem is that our happiness is based on how we perceive we’re doing compared to those around us, and not on any absolute measure of our well being. This leads to three observations:

  1. A shepherd living in a hut in one of the poorest countries in the world is generally just as happy as someone living in a house in America, one of the richest.
  2. Displays of wealth are much easier for us to see than a measure of actual happiness – it is hard to fake driving around in a Lexus, but easy to hide psychologist visits for our depression.
  3. As soon as a remote shepherd acquires a television, his happiness will likely decline since suddenly he isn’t comparing his success with his shepherd neighbors, but instead to the wealthiest people on the entire planet.

Recognizing this human frailty – that our built-in happiness meter is relative rather than absolute, and therefore set more by how much stuff we see our neighbors have rather than by how much we have, is the only way to counter its effect. Moving yourself to an absolute rather than a constantly receding relative goal allows you to be happy with what you have even if others accumulate more. This is the crux of keeping up with the Joneses; the only way to win is to not play the game.

This also explains the discomfort I feel about credit card debt in the US. If it really did add to happiness, then all for the better. And indeed, some people use credit card debt for absolutes – food, basic shelter, etc that increase their happiness since they don’t starve to death. But the majority use it to try and exceed those just ahead of them on the consumption curve. Credit card debt therefore creates a self-fulfilling prophesy – you see your (current) peers pulling away with fancier homes, cars, clothes and stainless steel appliances, and you feel worse about yourself. So you also whip out your credit card to catch up, and the cycle continues. But nobody actually gets any happier, since the top keeps pulling away.

Have doubts? Let’s look further afield than the United States, where I suppose it can seem like I’m splitting hairs. Below is an IMF figure for world income distribution, albeit from 1989, although I doubt it has changed dramatically in the meantime. The people at the top of this diagram (United States and friends) are basing their happiness against their neighbors rather than the vast majority of the world.

World Income Distribution

12 Responses to “Income distribution vs. happiness”

  1. Steve says:

    I disagree. If there is a problem, it is not one of perception, it’s that in the end the people on the top of the income distribution (or wealth distribution) have more power and have the option to to crush and dominate the other people. However, that’s how it’s always been and it’s just getting to the point that it’s done better and more efficiently.

    The shepherd living in the hut isn’t happy when a rich foreigner buys the land he lives on and put a mine on it, forcing him to move to the city and become a ragpicker because he’s just a poor shepherd who no longer has animals or land to graze them on. The rich own the world, the poor, and any peole who are not as rich, live happily until someone who has a lot more power and influence wants a piece, or all, of their pie–because usually the powerful people will be able to take it.

  2. Nomadtent says:

    I really liked this article and thought it was right on. I have heard that the North Korean Farmer that is like that shepherd living in the hut is so far removed from truthful news that he thinks everyone else in the world is like him, a poor farmer. I do believe it is a matter of perception, yes indeed! All through the bible it talks of people who gain the whole world and yet lose their own soul. Someone whose treasures are here on earth will no doubt trample the poorer to achieve his desired goals. The bible talks about the true riches in 1 Timothy 6 and how that godliness with contentment is great gain. For a Christian whose eyes are not focused on the temporal riches of this world has everything to gain by not being so materialistic as I am learning. In fact the bible goes to far as say, that those whose riches are here alone and do not possess a relationship with God through our Lord Jesus Christ has nothing but a certain eternal fiery judgment. Here on earth greed is considered a normal way of life and through greed our own country is now at risk of demise. God who is absolutely holy (so far removed from the wicked mindset of mankind) hates sin and His harsh judgments of placing people in eternal hell are certain. If a person asks personally to Jesus to be his or her Savior and repents of sin, they will receive the FREE gift of eternal life, a pardon, a total forgiveness. When a person receives Christ, God the Father does not see their sin anymore but He sees His perfect Son in us. We are in fact clothed with the righteousness of God through faith in our Lord Jesus Christ. In fact through faith, simply believing in, relying on and trusting in the person of Jesus Christ you WILL receive as a gift from Almighty God a cleansed and renewed spirit and an entrance to eternal heaven with all the joys and eternal bliss this world could never offer.

    I myself am losing sight of the material comforts of this world and consider them trappings of a more baser instinct.

    Col 3:1 IF THEN you have been raised with Christ [to a new life, thus sharing His resurrection from the dead], aim at and seek the [rich, eternal treasures] that are above, where Christ is, seated at the right hand of God. [Ps. 110:1.]
    Col 3:2 And set your minds and keep them set on what is above (the higher things), not on the things that are on the earth.
    Col 3:3 For [as far as this world is concerned] you have died, and your [new, real] life is hidden with Christ in God.
    Col 3:4 When Christ, Who is our life, appears, then you also will appear with Him in [the splendor of His] glory.
    Col 3:5 So kill (deaden, deprive of power) the evil desire lurking in your members [those animal impulses and all that is earthly in you that is employed in sin]: sexual vice, impurity, sensual appetites, unholy desires, and all greed and covetousness, for that is idolatry (the deifying of self and other created things instead of God).
    Col 3:6 It is on account of these [very sins] that the [holy] anger of God is ever coming upon the sons of disobedience (those who are obstinately opposed to the divine will), Colossians 3:1-6 Amplified bible

    Mat 16:24 Then Jesus said to His disciples, If anyone desires to be My disciple, let him deny himself [disregard, lose sight of, and forget himself and his own interests] and take up his cross and follow Me [cleave steadfastly to Me, conform wholly to My example in living and, if need be, in dying, also].
    Mat 16:25 For whoever is bent on saving his [temporal] life [his comfort and security here] shall lose it [eternal life]; and whoever loses his life [his comfort and security here] for My sake shall find it [life everlasting].
    Mat 16:26 For what will it profit a man if he gains the whole world and forfeits his life [his blessed life in the kingdom of God]? Or what would a man give as an exchange for his [blessed] life [in the kingdom of God]?

  3. Joe says:

    Warren Buffett has realised that money doesn’t make him happy. He loves his job but he only has one house and doesn’t have gold taps and fast cars like many people do who are much much poorer by comparison.

    He is giving most of his wealth away.

    Having things won’t make you happy, but not having to clean your own house will free up some time to spend with your family. Would you rather a brand new car that is worthless after you buy it or for a fraction of the monthly payments a maid a few hours a day?

  4. Sarah says:

    I have been so much happier without cable. Not only do I save $200 a month (we had a 3 in 1 package), but I have more free time and I just feel happier…no more shows tricking me, subliminally or otherwise into wanting more stuff.
    I’m commenting mainly because the shepherd image hit home for me! I am from a tiny tropical island and I saw what cable tv did to my country. In the early 1990’s, we went from having 3 local TV stations to having 30 on cable, which grew until now we have hundreds. Sadly, the lifestyle portrayed on most tv shows, American or otherwise are far from attainable for the average person in the Caribbean. So, in many ways, we joined the rat race too. Now that I’ve been studying in the US for a couple years, I can look back and see it even clearer, and it really disgusts me! Our tiny little island will never be the same… Don’t get me wrong, though… I don’t think that America is bad or anything, I just think that the culture is completely out of context in many developing countries, and then when we see things on tv, we believe that it is an accurate representation of the US and then …well it was described in the post – where people compare themselves and then ultimately become less happy…
    As far as cable goes…I admit that I miss the Food network a little, but otherwise, I am super happy now…most awesome PBS shows are free online anyway!

  5. ParisGirl111 says:

    This will always happen if you measure your success as a person or happiness based on wordly standards. Mesure you happiness in little things in life and not what the world says is the best. Comparison will always make you disatisified with your life because there will always be lesser or greater people than you. Race against yourself..strive to be a better you… 🙂 Knowing you tried to be more caring, considerate, and helpful to others is happiness. Don’t forget that each day is a gift. 🙂

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  7. I came accross this article just now because today Yahoo Finance published a story “How rich are you?”, which states that if you earn $52,000 per year, you are in the top 0.97% of the world income scale. Therefore, I just want to point out that the distribution graph in this article, although it may be correct, fails to make one very important point. This point is that most people in rich western world, Europe, USA, Australia, etc, would look at this graph, with their $52,000 median income and say, “Oh, i’m probably somewhere in that “Second 20%”, and the people in the top 20% are the celebrities like Robert Downey Jr and entrepreneurs like Warren Buffet, Bill Gates and Donald Trump”. Next, the person who thinks this probably thinks (s)he needs to struggle for the rest of his/her life in order to get into this top 20%. Instead, we should check our facts, the real world income distribution, and realize that with a median income of $52,000, we are in the top 1%, that is we are already richer than 99% of the world! People like Warren Buffet and Bill Gates are one in a billion, that is, the top 0.00000001% of the world income scale, and we should seriously think about sharing our immense wealth, which the average westerner has in comparison to the average Asian, African, South American, with poorer people before we even dream about being totally “blinged” out like our favorite R&B stars. For Real! 😛

  8. Joel Owen says:

    Happiness is a state of mind that really depends how we see the situations in our lives each day. you can have all the riches in the world but still see it as a lonely place.:,;

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  10. Cory says:

    I really like the observation by Matthew about how little money it actually takes to get into that Top 20% portion of the graph.

    I would like to mention that the second graph does not surprise me in any way. That roughly 80% of the world’s wealth is held by roughly 20% of the population is actually right on line with naturally occurring, predictable phenomenons.

    An Italian economist by the name of Vilfredo Pareto noted in 1906 that in almost any system of production, 80% of output was the result of 20% of inputs. This concept eventually became known as the Pareto Principle (or more commonly, the 80/20 Rule), and the corresponding power law probability distribution is called a Pareto Distribution.

    This obvious inequity in the distribution of wealth prompts many people to believe that the system is somehow corrupt, and that the solution is to simply redistribute the wealth evenly across society. Ultimately, though, wealth will naturally return to a Pareto distribution in relatively short order. The 20% who wind up with 80% of the wealth will be those who produce (or more accurately, those who direct the production of) most of the goods and services used in society.

    Not that any of that has to do with happiness, however. Once basic physiological needs are satisfied (e.g. sufficient food, clothing, shelter, hygiene, etc…), happiness becomes relative. After genuine needs are fulfilled, it is the constant creation of increased perceived needs that makes people feel as though they are poor. These needs are entirely optional, yet people create goals arbitrarily that are invariably beyond their means to achieve. When they subsequently fail to reach those goals, they lose their sense of self-worth needlessly.

  11. Ted says:

    Helen Keller said it well: “Most persons have a wrong idea of what constitutes true happiness. It is not attained through self-gratification but through fidelity to a worthy purpose.”

    I’ll add this: “False needs results in euphoria in unhappiness.”

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