Economic freedom and happiness.

• Jurisdiction: United States
• Date: 22 March 2011
• Author: Gropper, Daniel M.

That liberty is necessary for greater happiness and a better life is a notion deeply rooted in the American sensibility. But is there a link between greater freedom and greater happiness across countries? In this article we explore this question by examining the empirical relationship between liberty, as measured by economic freedom, and happiness across more than 100 countries.

There is a now a large literature on human happiness and its measurement. There is even a journal fully dedicated to the study of happiness. Kahneman, Diener, and Schwartz (1999) offer discussions of the many interesting theoretical and methodological issues involved in studying happiness. Kahneman et al. (2004) and Kahneman and Krueger (2006) discuss the current attempts to measure happiness at the individual and societal level. Frey and Stutzer (2000) and Wilkinson (2007) offer interesting reviews and criticisms of the happiness literature in economics. Norberg (2010) outlines the motivations behind the development of some of the happiness measures and potential pitfalls in their use.

There is also a large literature on the concept and measurement of economic freedom (Gwartney and Lawson 2003). The Economic Freedom of the World (EFW) index (Gwartney and Lawson 2008) has spawned hundreds of scholarly articles on the impact of economic freedom on economic growth and other indicators of human welfare (see, for example, Hall and Lawson 2011, de Haan et al. 2006, Lawson and Clark 2010, Seully 2002, Lawson and Roychoudhury 2010, Stroup 2008).

Early research tended to find that economic freedom was positively associated with happiness (Veenhoven 2000, Ovaska and Takashima 2006). More recent work, however, has been mixed. Bjornskov, Dreher, and Fischer (2010) argue that the association between measures of institutional quality (like freedom) and happiness are different between rich and poor countries. Ott (2010a, 2010b) contends that the relationship between government size (a component of economic freedom) mad happiness is contingent on the quality of the governance. Venne (2009) provides a theoretical argument and empirical evidence that "freedom of choice" is a strong factor in determining happiness.

Data, Model, and Results

While happiness research has advanced a great deal in the last decade, shortcomings in measurement remain. As Norberg (2010) notes, measures of happiness are less scientific and more subjective than measures of output, but some analysts still favor them in place of GDP to guide government policy. He points out that Bhutan used a Gross National Happiness index, created by the Centre for Bhutan Studies, as a way to excuse the government's failure to improve poor living standards, and even to justify repression of minorities in efforts to create a national identity.

Regardless of the motivations behind the development of happiness measures, we think it is worthwhile to examine the relationship between happiness and economic freedom, bearing in mind the limitations of the measures. We use three measures of happiness in our analysis. The first measure was originally gathered from Veenhoven's World Database of Happiness and was based primarily on the results from the World Values Survey (WVS); however, results from the Latinobarometer and Afrobarometer were also taken into consideration. The average reported life satisfaction (happiness) score for this sample was 6.16 (out of a possible 10), with a range of 3.0 (Burundi) to 8.19 (Denmark).

The second measure of subjective well being comes from the updated Happy Planet Index 2.0. Released in July 2009, the data from this study are almost entirely derived from an average of a comprehensive multinational survey performed by the Gallup Poll and the two most recent waves of the World Values Survey. The Gallup World Poll posed the same, commonly used question as in the World Values Survey: "'All things considered, how satisfied are you with your life as a whole these days?" Responses were ranked on a scale of zero to ten. Zero was file least satisfied and ten was file most. The Gallup poll and WVS average produced 112 observations out of a total of 143 for the entire study. The remaining observations are unmatched countries from each study, respectively. The average score for this sample was 6.12, with a range of 2.4 (Tanzania) to 8.5 (Costa Rica). While any survey questions about how satisfied one is with life are subject to criticisms about reliability for any given person across different times, and particularly across different people in widely varying circumstances, they are nonetheless interesting to examine, and at this time, they represent the best data available.

The third measure of subjective well-being is simply a combination of subjective well-being and life expectancy at birth. This measure is created by dividing the responses to Gallup's life satisfaction survey by 10 and multiplying by the country's life expectancy. Referred to as "Happy Life Years," this measure serves to ensure that both subjective and objective elements of well-being are captured. It recognizes that a satisfying life is not ideal if it is very short, but also that a long life is not ideal if it is miserable. The average score for this sample was 43.62, with a range of 12.5 (Tanzania) to 66.7 (Costa Rica).

The economic freedom data for this study come from the EFW index (Gwartney and Lawson 2008). For over a decade, the EFW project has been devoted to measuring the degree of economic freedom for large numbers of countries. The EFW index uses personal choice (voluntary exchange), the freedom to enter and compete in markets, and protection of persons and property as core elements for evaluating a country's economic freedom. Each country is ranked on a scale of zero to ten. Ten is the highest degree of economic freedom and zero the lowest. Hong Kong scores the highest with a rating of 9.0 and the Democratic Republic of Congo is lowest at 3.8.

Table 1 reports the three happiness measures and the...