Money, Happiness, and Economy

In a post passing along a study that shows that money really does buy more happiness, Matt Yglesias makes a point on one of my favorite subjects:

What I do want to call attention to, however, is that both of these charts plot income on a logarithmic scale. That's to say that a $5,000 increase in per capita GDP will generate a lot more happiness for a poor country than a rich one. And by the same token, a $5,000 increase in income will generate a lot more happiness for a poor family than for an affluent one. This is a key grounds for believing both in the importance of economic growth and in the importance of concern about the distribution of that growth. To be a little crude about it, halving the income of a millionaire will let you double the income of many poor households.

If you are willing to accept that an economy exists to allocate resources, and that an economy works best when it is most efficient, then you pretty much have to be willing to accept that resources have more utility when they go to people with less of them than people with more of them. That is, of course, pretty simplistic. And you can certainly make an argument that in the real world the model changes due to a ton of outside influences and complexities. But it becomes pretty difficult to imagine that continuing to concentrate resources in the hands of a few creates a useful and productive economy.