Yes, liberal capitalism can buy you happiness - The Centre for Independent Studies
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Yes, liberal capitalism can buy you happiness

Happiness is the new battleground between market liberals and their opponents. Having accepted that free markets create more wealth, that they promote development in poor countries and that nothing else can create the resources to deal with social and environmental problems, critics have found one last objection to liberal capitalism: it doesn’t really make us happy.

Earlier this year, Ross Gittins wrote in The Sydney Morning Herald that happiness research showed taxes “are clearly performing some useful function beyond that of raising money”. In The Herald Sun, Mirko Bagaric and James McConvill said the research indicated we should view the “Australian Taxation Office as friend rather than foe”.

The argument, popularised by British economist Richard Layard in his book Happiness: Lessons From a New Science, goes something like this: economic growth in rich countries doesn’t contribute to more happiness because we are most interested in our relative position. The fact that someone else earns a higher income (which makes them happy), makes others less happy, forcing them to work harder to retain their relative position. In the end we are all richer, but we are no happier than before, since we cannot all be richer than the others.

The argument for high taxes is that they discourage hard work and economic restructuring and instead give us more time for the things that really make us happier family and friends. This is an innovative argument, but it doesn’t find support in the data.

We know that there’s a dramatic jump in citizens’ reported wellbeing when countries move from a national income per capita of about $US5000 ($6578) to about $US15,000 a year. The fact that this levels off afterwards makes Layard and others conclude that money can’t buy happiness.

But that’s not what the figures show. From surveys we know that a lack of hope and opportunity correlates strongly with unhappiness. If you’re looking for a happy European, try someone who thinks that his present situation is better than it was five years ago, or who thinks that his situation will be better five years from now. If you want to meet a happy Australian, find someone who thinks he or she has a good chance of a better standard of living.

In poor and badly governed countries, entire societies suffer from hopelessness. You have few opportunities, no conviction that what you do affects your position, no hope that tomorrow will be a better day.

Belief in the future grows when poor countries begin to experience growth, when markets open up and when incomes increase. That could help explain why happiness reached high levels in the Western world after the Second World War. With economies growing rapidly, people began to think their children would enjoy a better life.

For a recent example, look at Ireland . This country reported declining levels of life satisfaction between the early 1970s and the late 1980s. Ireland did not grow poorer during this time, but it had low growth and high unemployment. A lack of opportunities for the young led to high emigration.

In the 1990s, things turned around. Rapid liberalisation, foreign investment and information technology doubled Irish gross domestic product per capita in the space of 10 years. It became easy to start a business and to get a job. Unemployment fell from about 15 to 5 per cent and emigrants returned. At the same time, reported levels of happiness grew rapidly, by about 1 point on a 10-point scale a dramatic change for such a slow-moving indicator. Today, Ireland is one of the world’s happiest countries. The fact that economic growth during prosperity hasn’t increased happiness much doesn’t mean it’s useless continuing growth makes it possible for us to continue to believe that the future is bright, and to continue experiencing such high levels of happiness. Raising taxes to discourage work and reduce economic growth would be a way to cut off that progress.

Layard only presents indirect correlations to support his case for reducing economic activity. For example, he says working hard undermines the family and moving to a new neighbourhood lowers trust and increases crime, and since we know that family breakdown, lack of trust and crime are bad for wellbeing, we should avoid this. But that doesn’t follow, because there are other benefits to working as much as you want and moving to a place you prefer that might compensate for these risks. Unless Layard and others manage to establish a direct link between work/mobility and unhappiness, this argument is bogus.

The critics who think they can conclude from the stability of happiness that zero growth is preferable overlook that loss of income undermines happiness.

Almost all studies show that loss of income and opportunity undermine happiness. The unemployed are among the least happy people in society. Growth makes non-zero-sum games possible. Without it, whenever someone succeeds and gains, someone else has to fail. A strong indication that Layard’s interpretation is wrong is that he misreads the data. In fact, happiness hasn’t stopped increasing in the West. According to the World Database of Happiness, directed by leading Dutch researcher Ruut Veenhoven, happiness has increased since 1975 in most Western countries where there are such surveys. Yes, there are diminishing returns, but even at our standard of living people do get happier when our societies grow richer. Happiness is not a zero-sum game.

Another reason for this happiness is that a liberal and market-oriented society allows people freedom to choose. And if we get used to it we get increasingly better at choosing to live and work in ways we like.

And if you don’t think you get happier by hard work and mobility, just skip it. A survey showed that 48 per cent of Americans had, in the past five years, reduced their working hours, declined promotion, lowered their material expectations or moved to a quieter place. Fast food or slow food, no logo or pro logo? In a liberal society, you decide. That is, as long as we are free to make the decisions ourselves. Those who use happiness studies to put forth an anti-market agenda would deny us that freedom. They would tell us how to live our lives, and therefore they would reduce our ability to make such decisions in the future. The paternalist institutions that Layard and others propose would deprive us of our sense of control, and therefore probably also of happiness.

Despite Layard’s criticism against individualism and materialism, even he admits that “we in the West are probably happier than any previous society”. Shouldn’t he examine why, before he and his Australian followers start undermining this society?

Johan Norberg will give the 2005 Centre for Independent Studies’ John Bonython Lecture in Sydney on October 11. This article is based on his article ‘The Scientist’s Pursuit of Happiness’ in the Spring 2005 issue of Policy magazine. His best-selling book, In Defence of Global Capitalism, will be republished by the CIS next week. Norberg works for the Timbro think tank in Sweden .