Income, Wealth and Happiness

As far back as the 19th Century, economists have known the diminishing utility of income or wealth and happiness.

Alfred Marshall popularised the idea in his Principles of Economics (1890) which said

“The additional benefit a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has”

Alfred Marshall, Principles of Economics

This means that, as your income or wealth increases, the happiness or utility (or usefulness) decreases.

Take the example of increasing your income from zero to £100 a week. If you have no income, the £100 can be used to improve your living standards significantly. Without any income, your living standards would be very tough indeed.

What about an increase from £400 to £500 a week? In this situation, you might already have enough to cover the basics, and while the increase is the same, the amount of usefulness decreases. It might, for instance, allow you to enjoy a meal out a week, or shop at your favourite store once a month.

If you consider the increase of £10,000 to £10,100 a week, again a £100 increase, it’s easy to see that this same increase of £100 per week will have little effect on your living standards.

The same can be said for wealth, this time using the example of car ownership. Owning a single car is a drastic improvement in walking, cycling, or using public transport if you would otherwise prefer to drive.

A second car lets you keep on the road when the other is in for a service or repair.

However, owning a collection of cars might make you happy if your collector, in terms of usefulness, you can only drive one at a time.

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