In the coming weeks, I will be travelling to present research findings at the annual conference of the Association of Private Enterprise Education. At the conference, I will be a part of an interdisciplinary panel discussion on “freedom and flourishing” and also will present preliminary results from a “free to be happy” research project that explores the relationship between economic freedom and survey responses on happiness.
Both projects are a part of an emerging research agenda where I have begun exploring the relationship between the institutions of free market capitalism and socially relevant matters such as civic engagement (social capital), trust and subjective well-being (happiness). The questions are asked through a general social survey (GSS).
I am not the first one to research these topics. In fact, interest in this topic goes back as far as Joseph Schumpeter and Karl Marx, if not all the way back to Adam Smith.
Schumpeter and Marx predicted that free market capitalism, as an economic institution, was not stable and eventually would collapse, although their reasoning couldn’t be farther apart from each other. From the viewpoint of Marx, the working class eventually would rise up and overthrow the ruling bourgeois class that had been exploiting them, so he felt the capitalist system is unstable due to class warfare.
On the other hand, Schumpeter believed that it actually was the success of capitalism that would doom it to destruction. If the success of capitalism leads to a destruction of community relationships and trust in neighbors and fellow statesmen, then, as people increasingly depend on themselves and individual success rather than on a community of support, the very success of capitalism in promoting individuals could lead to the degradation of civil society. This would lead to the collapse of capitalism in the resultant turmoil.
I am largely interested if the warnings of Schumpeter are coming to bear. My contribution to this stream of research is that I look to data to see what evidence is displayed.
Even with that, I am hardly the first interested scholar to do so. However, most academic studies examining the types of questions I ask involve looking at data that is international in scope. Surely, institutions of economic freedom vary greatly from nation to nation, as do the social capital, trust, happiness and economic well-being of their members.
There are a host of additional items that vary across countries as well, such as language, culture, political institutions, business cycles, racial homogeneity, corruptibility of institutions, and systems of law and courts. It is difficult, if not impossible, to account for all of these in an empirical study. I get around much of these issues by focusing on data that I have obtained, with each of the states in the U.S. being my unit of interest.
The Economic Freedom of North America Index (http://www.freetheworld.com/efna.html), published by the Fraser Institute, measures differences in economic freedom (measured as an overall index along with three subcomponents that measure economic freedom as it relates to size of government, taxation and the labor market) among U.S. states and Canadian provinces.
Further, it shows how economic freedom has changed through time. I have combined this dataset with a dynamic measure of social capital and with survey responses from the GSS. In a paper that is under review at an academic journal, my co-authors (Art Carden and Ryan Compton) and I show that economic freedom has a negative correlation with measured social capital (which constitutes a measure of civic engagement).
However, the correlation cannot be shown to be causal. That means that it does appear that economic freedom and social capital seem to be moving in opposite directions but there is no evidence that changes in economic freedom cause a movement in social capital. The measure of social capital we use in the paper does not include a measure of trust. In studies using international data, it has been shown that increased economic freedom causes increased trust.
The GSS asks the same question regarding happiness each year it conducts the survey. The question reads: “Taken all together, how would you say things are these days - would you say that you are very happy, pretty happy or not too happy?”
I have matched survey responses for individuals in the GSS to geographic location. This allowed me to look at the effect of measured economic freedom on an individual’s happiness depending on which state he or she lives in.
The results of the analysis on individuals are somewhat mixed. The overall effect of economic freedom on happiness in the U.S. is close to zero. However, the data suggest that smaller government size and lower taxes (increased economic freedom on the dimension of government size and taxation) are correlated with increased happiness.
It just happens that increases in happiness associated with these measures are canceled out by the negative effect on happiness from increased economic freedom as measured by labor market freedom.
I also conduct analysis to explore state level average happiness. The advantage of using the averaged measures is the ability to take full advantage of the panel (time varying) nature of the data. This allows me to effectively control for any variable that effects average happiness that doesn’t move with time (this controls for a host of time-invariant institutions).
Looking at the data in this way, the correlation between economic freedom and happiness is positive. The positive correlation comes primarily from the size of government and taxation measures, with correlation between happiness and labor market freedom essentially being zero.
What this research tells us is the many benefits of economic freedom can be enjoyed without fear that civil society is falling apart as a result. With increased economic freedom, people lead more prosperous and happier lives. People enjoy these benefits while maintaining, and possibly enhancing, social trust and civic engagement. It is possible for us to be free and to flourish as a society.