There is an ongoing debate whether economic freedom supports economic prosperity and happiness. The presentation “The Rise and Decline of Economic Freedom in the United States” provided an overview of the Economic Freedom of the World 2013 Annual Report.
The report discusses the authors’ Economic Freedom of the World (EFW) Index. The EFW Index is a weighted average of 42 distinct variables that are in the following five categories: 1. Size of government, 2. Legal system and property rights, 3. Sound money, 4. Freedom to Trade Internationally, and 5. Regulation.
By measuring these variables on a 0 to 10 scale, with 0 being the least free and 10 being the most free, the authors compare the economic freedom of 152 countries and territories.
The following figure shows how free each country is by quartile.
It is obvious that most of the developed world falls within the most free quartile. The least developed areas and those areas with less individual liberty are the least free.
The following figure of economic freedom and income per capita shows that the more free a country is the richer they are on average.
This is what we might expect around the globe; however the study focuses on the following important issue:
For a long time, economic happiness research has focused on the question: “Does money make people happy?” This is an important and interesting subject, but it has certainly not made use of the full potential that measures of life satisfaction have to offer for economic investigation. As a consequence, researchers have broadened the scope of questions in recent years, asking if political, social, and economic events might produce outcomes that have an impact that goes beyond pure monetary effects. For example, periods of unemployment are not only detrimental for life satisfaction due to the loss of labor income and the reduced consumption levels of the unemployed. They have additional psychological welfare effects both for those who are unemployed and for those who observe more unemployment in society.
The quality of economic and political institutions matters for life satisfaction basically for two reasons. First, free markets, and possibly also democracy, are important determinants of growth, thereby contributing to life satisfaction via higher income levels and lower unemployment rates. Second, risk aversion and freedom of choice as values in themselves may explain why positive effects on life satisfaction remain, even after controlling for income levels and other socioeconomic variables. This non-monetary impact seems to be quite important for the individual and collective evaluation of welfare. Economic freedom, therefore, not only makes people richer, but it also makes them happier. (Emphases are mine)
The figure below of life satisfaction and income provides an empirical relationship between GDP per capita and life satisfaction, a measure of happiness.
From these results, there is little doubt that economic freedom provides an essential framework for higher incomes that allow people to live happier lives.
Although the EFW Index is at the country level, these results provide a valuable reminder to the Texas Legislature that the best way to provide prosperity for all Texans is by promoting and ensuring economic freedom.