Happiness and Economic Freedom: Are They Related?
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SHS Web of Conferences 28, 01109 (2016) DOI: 10.1051/shsconf/20162801109 RPTSS 2015 Happiness and economic freedom: Are they related? Ilkay Yilmaz1,a, and Mehmet Nasih Tag2 1Mersin University, Department of Economics, Mersin University, 33342 Mersin, Turkey 2Mersin University, Department of Business Administration, Mersin University, 33342 Mersin, Turkey Abstract. In this article we investigate the linkage between economic freedom and happiness (subjective well-being). We attempt to understand which economic institutions (rule of law, limited government, regulatory efficiency, open markets) have influence on subjective well-being. For this purpose we use a panel dataset and analyze the effect of economic freedom on subjective well-being while using various control variables such as government expenditures as percentage of GDP, human development, social support, freedom of choice and generosity. Our pooled FGLS estimations indicate that all pillars of economic freedom have a strong influence on the average subjective well-being in society. Three of these pillars, namely rule of law, regulatory efficiency and open markets, positively affect subjective well-being. To our surprise we have found a negative relationship between limited government and subjective well- being. This might be due to the situation that reducing the size of government possibly leads to lower government expenditures and higher unemployment, which in turn results in lower subjective well-being. 1 Introduction if any, increase the level of subjective well-being in a country. The literature on the relationship between As the great Austrian economist Ludwig von Mises economic institutions and economic growth suggests that explained in his magnum opus, human action can be good governmental institutions foster economic growth defined as the striving for happiness. When people act, as in the studies of Rodrik, Subramanian and Trebbi they act in order to satisfy their desires. Therefore it is (2004) [2], Acemoglu, Johnson and Robinson (2005) [3], not erroneous to say that individual judgments of value Keefer and Knack (2007) [4] and Rodrik (2008) [5]. One are the only standard of satisfaction, though people's might think that institutions, positively affecting the judgments of value may be different from each other and material well-being of a society, must also increase the they might even differ for the same individual at happiness of that society. As stated in Bjornskov, Dreher different times. Things that make a person happy or and Fischer (2010, p. 420), the literature on the unhappy completely depend on his/her own will and relationship between economic institutions and judgment, his/her personal and subjective valuation subjective well-being, on the other hand, is quite limited (Mises, 1998, p. 14) [1]. and earlier works in this field are not very conclusive These statements do not imply in any way that people [6]. In their study Bjornskov, Dreher and Fischer find only think for themselves in life. There have always been that in poor countries the effects of economic-judicial and will be people who work and struggle mainly to institutions on subjective well-being are more important improve the conditions in which other people live. than those of political institutions. Actually, it is impossible to find a person whose However, results of two recent works in this field are happiness is not affected by the well-being of some other quite unequivocal; authors find a strong positive people. Not only our own troubles, but also the troubles relationship between economic freedom and subjective of those whom we know and care for make us uneasy. well-being. The study made by Rode, Knoll and Pitlik We tend to be happy when people whom we love are (2013) arrives to the conclusion that economic and also happy. Nevertheless these considerations do not political freedom make people happy through two alter the fact that how happy one feels in a given set of channels [7]. First, free markets and probably also conditions depends on one’s own subjective valuation. democracy increase economic growth and decrease There is no objective measurement of happiness. unemployment, thereby also increasing the level of Happiness, by definition, is subjective well-being. happiness in the society. Second, risk aversion and In this paper we study the relationship between freedom of choice are values in themselves and make economic institutions and happiness (subjective well- people happy. Pitlik, Redin and Rode (2015) paper, on being). We try to determine which economic institutions, the other hand, emphasizes that economic freedom a Corresponding author: [email protected] © The Authors, published by EDP Sciences. This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0 (http://creativecommons.org/licenses/by/4.0/). SHS Web of Conferences 28, 01109 (2016) DOI: 10.1051/shsconf/20162801109 RPTSS 2015 increases individual happiness by increasing the feeling and generosity; z is an institutional variable that could be of control that people experience in life and also by one of the four dimensions of economic freedom; u is the giving them the freedom to choose between different error term with mean zero and assumed to be options in various markets [8]. uncorrelated with the right-hand side covariates in the The remainder of this paper is organized as follows. model. Below we describe the measures for these In the next section we describe the model specification variables. and the estimation procedure as well as the data used in Subjective well-being is our national level measure of the study. Results are presented and interpreted in average happiness on a scale from 0 to 10 and is based Section 3. The final section concludes the paper. on the following question from GWP survey: “Please imagine a ladder, with steps numbered from 0 at the bottom and to 10 at the top. Suppose we say that the top 2 Data and Methodology of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible 2.1 Sample and Data life for you. On which step of the ladder would you say you personally feel you are standing at this time, In this paper, we attempt to analyze and understand the assuming that the higher the steps, the better you feel sources of subjective well-being of the national level. about your life, and the lower the steps the worse you Along with the increasing interest among researchers in feel about it? Which step comes closest to the way you this subject, there have been several attempts to measure feel?” subjective well-being of the national level, or happiness. As noted, our main interest in this paper is how One of the widely used measures utilizes data from economic freedoms are related to subjective well-being. Gallup World Poll (GWP) survey. Since 2005, GWP Economic freedoms are defined as the right of an survey includes a life evaluation question that measures individual to control what s/he does with his/her own happiness. In our analyses, we utilize data on this labor and property. One of the well-known assessments question as well as other measures of social environment of institutions of economic freedom is provided by from the same survey. We construct our sample by Heritage Foundation’s Index of Economic Freedom. combining GWP survey data with macroeconomic This index is calculated by assessing ten institutions on a indicators from World Bank’s World Development scale from 0 to 100. These institutions include property Indicators (WDI), United Nations’ Development right protection, freedom from corruption, fiscal Program’s (UNDP) data on human development, and freedom, government spending, business freedom, labor Heritage Foundation’s data on economic freedom. freedom, monetary freedom, trade freedom, investment Although the WDI and economic freedom data that we freedom and financial freedom. Following the index’s use in our analyses are available since 1995, our sample methodology, we aggregate the measures on these period is limited by the years covered in the GWP data, institutions to obtain what we call four pillars of and human development data, which are available for the economic freedom. These pillars are the rule of law, period between 2008 and 2013. Thus, our final sample limited government, government efficiency and open includes one-year observations of 639 countries, and the markets. Rule of law is obtained by taking the average of observation of 137 countries for the period between 2008 a country’s scores on property rights protection and and 2013. freedom from corruption. Limited government is calculated by taking the average of a country’s scores on 2.2 Empirical Specification and Measures fiscal freedom and government spending. Regulatory efficiency is calculated by taking the average of a The related literature provides several explanations with country’s scores on business freedom, labor freedom and regard to the variance in subjective well-being of the monetary freedom. Finally, market openness is national level. These explanations could be broadly calculated by taking the average of a country’s scores on classified into three sub categories: economic, social and trade freedom, investment freedom and financial institutional. So far, perceived corruption and democratic freedom. institutions have received the most attention among As discussed previously, social and economic factors institutional explanations. On the other hand, there have as well are likely to be closely related to subjective well- been few studies relating institutions of economic being. Thus, following the related literature, we consider freedoms to subjective well-being of the national level. additional explanatory variables in our econometric Thus, in our empirical analyses we focus our attention on analyses. Three of these control variables are based on how a cross-country variation in economic freedoms is World Happiness Report (2013, 2015), which employs related to subjective well-being of the national level.