All Commentary
Monday, January 1, 2001

Money Can Buy Happiness

Daniel Oliver is a research associate at the Washington, D.C.-based Capital Research Center and a freelance writer.

Defenders of capitalism often argue that its chief justification is its unparalleled ability to produce wealth, provide a multitude of goods and services, and raise the general standard of living in a society. With the failure of the Soviet command economy, there is today little serious doubt that freer economies outperform less free ones.

Economic Freedom of the World: 2000 Annual Report, published by the Vancouver-based Fraser Institute, rates 123 countries on seven factors: the size of government, the structure of the economy and use of markets, monetary policy and price stability, freedom to use alternative currencies, legal structure and property rights, freedom of international exchange, and freedom of exchange in capital and financial markets. It presents overwhelming evidence that countries with the most economic freedom generally have the highest standards of living, while those with the least economic freedom tend to have the lowest. For example, per capita income in nations ranked in the top quintile is over $20,000 while in the lowest quintile it is a meager $2,000.

Others have defended capitalism on moral grounds, arguing that it requires people to practice such virtues as rationality, honesty, and uncoerced exchange. But there is another reason for advocating capitalism: people are happier in capitalist societies.

In Happiness in Nations (Rotterdam: Erasmus University, 1992), Professor Ruut Veenhoven analyzes survey data on self-reported happiness among people in several dozen countries. He finds that four variables—material comfort, social equality, freedom, and access to knowledge—explain 77 percent of the variation in happiness among these nations. Moreover, “economic prosperity is one of the strongest predictors of happiness.” Significantly, Veenhoven argues that differences in cultural understandings of happiness do not account for variations in reported happiness. For example, he notes that although Germans have a common cultural history, easterners before unification were significantly less happy than westerners. This, he argues, was largely due to East Germany’s lower standard of living.

Are the Free Happy?

Intrigued by Veenhoven’s findings, I decided to compare them to those of Economic Freedom of the World to see if there is more evidence that happiness and economic freedom are related. Economic Freedom measures economic freedom on a 1-to-10 scale with 1 indicating low freedom and 10 high freedom. Veenhoven’s data is drawn from the World Database of Happiness, a 50-year longitudinal study of 93 nations. Its most commonly asked question, “Taking all things together, would you say you are . . .?” is answered on a 1-to-4 scale with 1 being “not at all happy” and 4 “very happy.” Data on both economic freedom and self-reported happiness in 1996 are available for 49 countries.

As Table I shows, six of the ten countries whose citizens report being the happiest are also among the ten most economically free. (Unfortunately, there is no data on happiness for the well-known economically free countries of Hong Kong and Singapore.) Additionally, the other four countries whose citizens report the highest levels of happiness are also well above average in economic freedom.

Ten Economically Freest Countries

1 = low economic freedom / 10 = high economic freedom

mean average = 6.37

New Zealand   9.1

United States   9.0

Ireland   8.7

Australia   8.6

Canada   8.6

Netherlands   8.5

Switzerland   8.5

Argentina   8.4

Denmark   8.4

Belgium   8.3

Ten Happiest Countries

1 = “not at all happy” / 4 = “very happy”

mean average = 2.674

Venezuela   3.47

Iceland   3.40

Ireland   3.36

Netherlands   3.34

Australia   3.33

Philippines   3.32

Switzerland   3.31

United States   3.30

Denmark   3.30

Sweden   3.30

Countries in bold appear on both lists.


Sources: Economic Freedom of the World: 2000 Annual Report (Vancouver: Fraser Institute, 2000) and Ruut Veenhoven, Happiness in Nations (Rotterdam: Erasmus University, 1992).


Table II shows that of the ten countries reporting the least happiness, four are among the least economically free. And similarly, five other countries reporting low happiness are also among the least economically free. Only Croatia is above average in happiness, although only slightly. Significantly, Russia and nine other countries in eastern Europe—a region that has only tentatively embraced capitalism—are the ten least happy countries.

Ten Least Economically Free Countries

1 = least free / 10 = most free

mean average = 6.37

Ukraine   4.5

Romania   4.6

Croatia   4.7

Nigeria   4.7

Bangladesh   5.3

Bulgaria   5.3

Russia   5.4

India   5.8

Brazil   5.9

Venezuela   6.0

Ten Least Happy Countries

1 = “not at all happy” / 4 = “very happy”

mean average = 2.674

Bulgaria   2.33

Ukraine   2.44

Russia   2.51

Slovakia   2.51

Lithuania   2.55

Estonia   2.61

Latvia   2.62

Romania   2.63

Czech Republic   2.67

Croatia   2.69

Countries in bold appear on both lists.

Sources: Economic Freedom of the World: 2000 Annual Report (Vancouver: Fraser Institute, 2000) and Ruut Veenhoven, Happiness in Nations (Rotterdam: Erasmus University, 1992).

The relationship between economic freedom and happiness becomes more convincing when all 49 countries are considered. A Pearson’s Rank Correlation Coefficient can be calculated to measure the degree of association between economic freedom and happiness. It is an impressive 0.71 at the p << 0.001 level (just one chance in one thousand that the relationship between economic freedom and happiness is due to chance), indicating a very strong statistically significant relationship. In other words, people in countries with high levels of economic freedom are more likely to report high levels of happiness than people in countries with little economic freedom.

Of course, this does not mean that economic freedom causes happiness. But it does strongly suggest that economic freedom is a very important foundation (a necessary but not sufficient condition) for happiness.

This should not come as a complete surprise. As Economic Freedom of the World shows, countries with freer economies are more likely to be wealthy, and countries with less free economies poor. Quite simply, it is difficult to be happy when you’re poor.

Veenhoven notes that “happiness research has as yet had little relevance for major political discussions.” Advocates of a free society should ponder that remark. We have used both economic and moral arguments to make the case for capitalism. Perhaps it is time to use the “happiness” argument as well.