3 Paradoxes of wealth We study the economy because we believe that income effects individuals’ utility,1or their well-being. Of course, we all know that money cannot buyhappiness, but we assume that it will increase happiness because it cannot reduce happiness, people can always not use the money, but sometimes it will allow them to consume things that make them happier. Certainly, it would be reasonable to assume that giving individualsmore will make them happier. Robinson Crusoe would be happier if he had more things: more food, more warmth in winter, more lights at night, more clothes, maybe a car with a GPS system. And it is thinking in this way, from the perspective of methodological individualism, which leads many economists to conclude that more will make all of us happier. If a car with a good Bluetooth stereo make us happy, then shouldn’t we be ecstatic if we had two, three, or ten? By this logic, contemporary Americans should be euphoric. By modern standards, Americans were very poor at our nation’s beginnings, but there is no reason to think they were terribly miserable so the rapid economic growth since then should have made them very happy. Over the past two centuries, Americans have attained affluence never before imagined. Since 1790, income per capitahas grown by nearly 1.7% per year to a level over 20 times that of 1820; in my lifetime, since 1955, per capita income has almost tripled. At the same time, leisure time has increased because the standard work week has fallen, more retire at younger ages, and young people begin their work lives at older ages. Americans in 2014 consume items previously unavailable, including not only Bluetooth car stereo speakers, but cell phones, jet travel, high-definition television, Spotify, and Netflix. Consider the luxuries that are now standard in American households of virtually all income levels: hot-and-cold running water, light and heat at the touch of a switch, if not a command to a digital personal assistant, frozen ice cream, winter vegetables, fresh fruit year-round. Over 98% of Americans live in a house with a color television (63% have cable), 84% own a computer, 92% own a car, and 62% own two or more cars. As late as 1970, fewer than 25% of households had frost-free refrigerators and only 34% had central heating and air conditioning; those proportions have grown to nearly 90% today. One measure of our prosperity is the low proportion of Americans’ income spent on food. One hundred years ago, Americans spent nearly half their income on food with less than half available for clothing, housing, medical care, 1Utility refers to the amount of happiness enjoyed by a person. 126.96.36.199.188.8.131.52$0$10,000$20,000$30,000$40,000$50,000$60,000Life Satistaction IndexPercapita income, Purchasing Power Parity $USFigure 1. Life Satisfaction and Income, 190 countries, 2013.