What does "funny farm" mean?

A funny farm is a slang term for a facility for psychiatric patients, a place where they take care of crazy people. They might get drugs there that make them feel happy; that may be why "life is beautiful all the time" there.

That is commonly known these days as a psychiatric ward; more commonly known in the past as an insane asylum or just asylum, or mental ward or mental hospital.

Of course it is a place where folks who are seriously not right in the head might find themselves, either for treatment, warehousing, or incarceration, depending upon the nature of their problem.

That being said, I definitely remember Napoleon XIV's song (a one-hit wonder). I was about 12 when it came out, and I had a copy on 45rpm record. I liked playing this song occasionally, and one day I played it about three or four times running until my father came into the living room (where the stereo was), and took the player arm off the record, gave me his special "Don't you dare play this again in my hearing" glare, and walked back to wherever he had been beforehand. Precious!

Here's the song: They're Coming to Take Me Away, Ha Ha!

Farm colonies as part of a hospital system in the United States date back to 1885 and were intended for the chronic, harmless insane - no doubt this is how the term "funny farm" became associated with mental institutions

~ From Byberry State Hospital by Hannah Karena Jones, page 11, which shows people working on such a farm

Aka "banana farm", which is defined as:

An asylum for the insane: among Britons in tropical or semi-tropical countries: later C.20. (William Marshall, Hatchet Man, 1976: set in Hong Kong.) Cf. synon. funny farm.

~ From A Dictionary of Slang and Unconventional English by Eric Partridge, page 46