Is Economic Freedom the Secret to Happiness?

Created by Jeremy Jackson |

The scientific study of happiness and well-being is relatively young. The field got its start as philosophers sought to discover what it meant to live a meaningful and virtuous life.  More recently, researchers in psychology have created a thriving subfield known as positive psychology.

Economists, with a few notable exceptions, were late to the party, but they are now turning their thinking and methods to the study of happiness.

Much attention in positive psychology has been paid to discover the role of individual differences and attributes in achieving happiness. Researchers constructed what is referred to as the “happy personality”.  Economists have expanded this research by looking at how happiness and well-being are shaped by common experiences, such as the economy and public institutions.

An individual’s income has long been known to impact his or her reported level of happiness. Principally, a higher income leads to increased security and consumption. Less obviously, those with higher incomes tend to compare themselves with those who have less. Seeing their relative success, or failure, individuals report more or less happiness based on how they compare to others.

Because income is important for individual reported happiness, it should follow that aggregate measures of income, such as GDP per capita, should influence aggregate measures of happiness. It turns out this is a point of contention.

Richard Easterlin, one of the early entrants into the field of happiness economics, gained fame for what is now known as the “Easterlin Paradox”.  This paradox demonstrated the strong correlation between individual income and happiness, but as Easterlin documents, no such positive relationship is present between GDP per capita and national happiness. While this empirical observation gained Easterlin some notoriety, his claims are highly disputed.

Economists Bruno Frey and Alois Stutzer found that people are happier in democratic political institutions. According to their study, democratic and localized governments achieve political outcomes closer to the preferred policies of their citizens. This then generates higher happiness scores. Interestingly, not only does democracy matter for happiness, but so does the quality of the democracy.

If economic development and political institutions matter for happiness, it follows that economic freedom, which is known to coincide with both democracy and economic growth, should also positively affect happiness. 

Economic freedom refers to the ability of individuals to use their property as they see fit. Therefore, measures of economic freedom “should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions.” (Gwartney et al. 1996: 12).

Economic freedom affects happiness because it directly increases the number of options available. This happens as institutions of economic freedom lead to greater wealth and prosperity and as individuals are granted autonomy in their decision-making. Without economic freedom, individuals are forced to accept coercive decisions, which reduces their overall happiness.

The relationship between economic freedom and happiness has been shown extensively at the international-level. Moreover, I recently published a study in the Journal of Happiness Studies using data from the U.S. to demonstrate a positive relationship between economic freedom and happiness at the state-level.

Despite economists’ late entrance into the study of happiness, their findings – particularly related to economic freedom – have been robust.

Institutions are a fundamental feature of our world. They shape many aspects of our daily life from the side of the road we drive on to the elections we participate in and the contracts we enter into. Institutions, directly and indirectly, affect our quality of life. In particular, the institutions of liberal democracy and free markets are vital for the pursuit of happiness.

Meet the Author

Jeremy Jackson is the director of the Center for the Study of Public Choice and Private Enterprise (PCPE) and an associate professor in the NDSU Department of Agribusiness and Applied Economics. Read his bio.

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