Equalizing wealth will not make happiness more equal -- remember high school?

A post at EconLog brings up the topic of what effect redistributing wealth would have on people's happiness levels. I already left two comments there, which I'll just summarize. Briefly, happiness doesn't depend on how much money we have but rather on how much esteem and praise we've earned from others. The association between more money and more happiness is a case of there being an unobserved third variable that highly correlates with one that we're looking at -- namely, that in the labor market, you get more money if other people value what you do more. Those who are impressive tend to get paid more, but it's the feeling of being an impressive person that causes higher happiness, not the fatter bank account.

Just consider a loser who comes into great wealth through winning the lottery -- after a quick rush, they'll still feel like a loser because they didn't get that load of dough by doing something to wow others. And a winner who doesn't get a high salary isn't fazed by their meager bank statement because they command the respect and affection of lots of other people.

Still, even if that story is plausible, it's still hypothetical because no country has so massively transferred wealth from the rich to the poor. (If you think it's bad now, just imagine if the equalizers could get their way.) Are there cases where monetary and material stuff is more or less equal? Why don't we look there to see what effect the equalizers' policies would have. To be realistic I'm ignoring hunter-gatherer groups and sticking with advanced industrial economies.

Indeed there is -- from elementary school through high school, wealth and possession of material stuff is just about equal. Children and adolescents have little wealth because they don't work, and even those with wealthier parents don't have a proportionate wealth advantage themselves. If the poor kid's parents make $30K and the rich kid's parents make $300K, the rich kid does not get 10 times the allowance money, 10 times the money to go out with friends on Saturday night. In all likelihood, the extra money that the rich parents could give to their kids goes into a trust fund that can't be accessed until they turn 18 or 21 or whatever.

For the exact same reason, material possessions don't vary so much among children and adolescents -- the prevalence and quality of the jeans, mp3 players, cell phones, video games, etc., that kids have at the poor school and the rich school are pretty similar. It is nothing like taking a Wal-Mart cashier vs. a PR executive and comparing their clothing, cars, etc. It's true that rich kids get to enjoy the material stuff that their parents provide for the entire family, like a well designed house, good furniture, and so on, but children and adolescents don't factor these possessions into what makes them happy. Those things do not count in kid world or teen world -- they compete instead over clothing, consumer electronics, and other things that are for personal use only. On that dimension, the children of rich and poor are fairly similar.

Well, although it isn't an equalizer's utopia, it's still tremendously farther in that direction than grown-up world, so of course we're going to see a lot less variation in happiness, right? Think again. In fact the differences are even greater -- some teenagers want to crawl in a hole and die, while others are just walking on sunshine. What gives?

The answer is what I said at the beginning: happiness doesn't depend nearly at all on money or material junk, but instead on earning the praise of your fellows. And since there are gigantic differences in popularity among kids and teenagers, it is no surprise that having a more equal distribution of wealth and stuff doesn't make them happier -- the true source of happiness is feeling like a winner rather than a loser. Why are these differences in peer-esteem even more pronounced in high school than in the adult labor market? Because division of labor is limited by the extent of the market: in adult world, there are a fantastically larger number of people who can value your talents, while in school there are at most 5,000 or so people to give you feedback about your worth. There's a lot less variety in the things that will make others see you as a winner in high school compared to the case in adult world.

So, some people in school may not have what it takes to garner popularity among their schoolmates, but do have traits that could impress employers and co-workers -- and their fellows as well, if they told stories about how great they're doing at their exciting job. As teenagers, these people won't be so happy; as adults, they'll become more happy. At the other extreme, those few who do have what it takes to win over the crowd in high school will find much stiffer competition in whatever job they pursue on the adult labor market. They'll be less happy than when they were Miss Thang in high school. Esteem from peers is a lot more winner-take-all in elementary through high school than it is when you're settled into adult world. Still, wealth and material possessions are more winner-take-all among adults than among kids and teenagers.

The esteem theory of happiness therefore predicts that teenagers will be more miserable, while the wealth theory of happiness predicts they'll be happier. You can read the empirical data on age and happiness or just reflect on your own experience since the answer is really quite clear. In the end, wealth hardly matters, and believing that others value you is everything.