Academic journal article Journal of Regional Analysis & Policy

Do Changes in Economic Freedom Affect Well-Being?

Academic journal article Journal of Regional Analysis & Policy

Do Changes in Economic Freedom Affect Well-Being?

Article excerpt

Abstract. In this paper we test the relationship between changes in economic freedom and well-being. Unlike previous work which has relied on international data sets, the novelty of this paper is that we use state-level data. Using the economic freedom measures provided by the Fraser Institute and a recently published data set on well-being across states, we find that improvements in economic freedom lead to increases in well-being for the average state. Further analysis shows that the presence of regional variations across the states may in fact suggest differences in optimal freedom levels between regions.

1. Introduction and review

The question posed in the title incorporates two areas of burgeoning interest: determining how the development of social institutions fosters economic freedom and how economic freedom is related to well-being. This area of research crosses discipli- nary boundaries, including social psychology (for an excellent review, see Kahneman et al., 1999) and economics (a review of the happiness/well-being and economics literature is provided by Frey and Stutzer, 2002). While increasing one's subjective well-being is a basic principle in economics, at- tempts to measure this concept and ascertain just what causes well-being to change is a continuing area of empirical research.1

Easterlin (1974) made early use of available rele- vant country-level data on happiness to conduct a systematic analysis of the role that economic factors play. Twenty years later, Easterlin (1995) argued that the use of such aggregative measures masks the unequal distribution of happiness across popula- tions, thus casting doubt on country-level results. In a long-delayed exchange, Hagerty and Veenhoven (2003) found that increasing national incomes are associated with increasing national happiness, though Easterlin (2005) continued to refute this claim. Other investigators, such as Telia et al. (2003) also found that changes in survey-based measures of happiness are positively correlated with macroeco- nomic measures, such as GDP. While areas of disa- greement remain, in general the data suggest that well-being is positively related to increases in income.

A number of studies have broadened the scope of this research agenda by examining the relationship between well-being and economic freedom. If, as the preponderance of previous research results sug- gests, improvements in economic freedom lead to improved economic outcomes (e.g., higher per capita income and faster economic growth), does improved economic freedom also promote higher levels of well-being? Norton (1998) found that the poorest citizens in countries in which property rights (a building block of economic freedom) were established and enforced showed improvements in well-being when economic freedom expanded. Esposito and Zaleski (1999) reported that increased economic freedom improves the quality of life, measured as life expectancy and literacy. A causal link from economic freedom to income to well-being is indicated in Welsch (2003). Stroup (2007) concluded that improvements in economic freedom enhance economic well-being, though the magni- tude of the effect varies with the level of democracy in a country. Inglehart et al. (2008) and Bjornskov et al. (2010) also found that increases in economic free- dom and institutional quality raised levels of happi- ness and well-being, though again the magnitude of the effects differs across rich and poor countries. Gropper et al. (2011) tested the happiness-economic freedom nexus using three separate measures of happiness. Conditioned on the presence of GDP per capita, they found that countries with higher levels of economic freedom on average report higher levels of happiness.

The evidence from this large body of work, of which the above is just a sample, does not reject the hypothesis that improvements in economic freedom create an environment in which economic success blossoms and this, in turn, improves individual well-being. …

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