How Capitalism Facilitates the Pursuit of Happiness

Can money buy happiness? The answer is yes. In the early days of well-being research, data pointed to the opposite conclusion. Economist Richard Easterlin noted in 1974 that we were getting richer but we did not seem to become any happier. We simply got used to the rising prosperity and instead we compared ourselves to the neighbours who became even richer than we did. This “Easterlin paradox,” which has its roots in Rousseau’s critique of materialism and modernity, became famous, and it is still the only thing many non-experts remember about the connection between money and happiness. But in the barely half-century that has passed since then, many more surveys in far more places have been undertaken, with more sophisticated methods, so we have been able to follow developments over time. And our knowledge has changed.

When I wrote a book about happiness in 2009, I interviewed the Dutch sociologist Ruut Veenhoven, the man behind the famous “World Database of Happiness.” He told me he had become interested in well-being research because he thought it showed that prosperity did not contribute to happiness, and he was quickly met with interest from politicians critical of economic growth. But as he collected statistics from more countries, a different pattern began to emerge. Growth actually proved to be good for well-being: “The Easterlin paradox does not exist. It is not supported by the data of most countries and the theoretical basis is incorrect.” In any case, the new insight had a clear political result. “Then the green politicians stopped calling,” states Veenhoven.

Nobel Prize-winning psychologist Daniel Kahneman is another scholar who has made the case for the Easterlin paradox. But after receiving statistics from several countries, he has changed his mind:

“We had thought income effects are small because we were looking within countries. The GDP differences between countries are enormous, and highly predictive of differences in life satisfaction. In a sample of over 130,000 people from 126 countries, the correlation between the life satisfaction of individuals and the GDP of the country in which they live was over .40 – an exceptionally high value in social science. Humans everywhere, from Norway to Sierra Leone, apparently evaluate their life by a common standard of material prosperity, which changes as GDP increases. The implied conclusion, that citizens of different countries do not adapt to their level of prosperity, flies against everything we thought we knew ten years ago. We have been wrong and now we know it.”

In my book on well-being, I observed that you can buy happiness – but only at a very bad exchange rate. Compared to having health, peace of mind and good relationships, money is not much to write home about. Based on the statistics we had then, I stated that if your mental worry and anxiety for some reason increase by a tenth, you need to increase your monthly salary by around $20,000 to get back to the same level of happiness that you had before. But most goods, services, and technologies that make a real difference to one’s well-being spread quickly in market-based societies, so a few hundred bucks here or there does not make much of a difference to one’s happiness. The important thing is to live in a rich, free, capitalist society. If you have been lucky enough to be born there, much of your potential for happiness is already fulfilled.

We are not talking about objective indicators here but about what people say regarding their own emotional state. The sources of error are many: both those who are too depressed and those who have too much excitement in life may not respond to surveys; occasional events play a disproportionately large role in our mood (such as the weather on the day you respond, if you missed the bus, or if you happened to find a coin in the elevator just now); not everyone is honest even in anonymous surveys (the French believe melancholy is a sign of intelligence and some think Scandinavians have such low expectations of life that they are constantly pleasantly surprised). So one has to treat this data with great care, but it is fascinating that what well-being research suggests now is completely opposite to the notion that free markets and individualism suck the joy out of life.

The data indicates that individuals’ average happiness grows with their income and the population’s average happiness grows with the country’s GDP per capita, and that both of these levels increase on average over time, as people and countries become richer. In Western Europe, North America, Australia, and New Zealand, people report the highest level of well-being. In Africa, South Asia, and the Middle East, the levels are lowest. The correlation is clear, though not perfect. Latin American countries are happier than their level of prosperity would predict and former communist countries are unhappier.

Ruut Veenhoven sums up the state of research as, “[t]he more individualized society, the happier its citizens are” and the research project World Values Survey documents that the most important factors behind increased well-being are “global economic growth, widespread democratization, growing tolerance of diversity, and a rising sense of freedom.” After devoting an entire book to talking about a happiness crisis, even the British economist Richard Layard admits that “we in the West are probably happier than any previous society.”

That people claim to be so satisfied with their lives is in itself a surprise to most people. The British believe that only 47 percent of Brits perceive themselves as very or fairly happy, while as many as 92 percent state that they are fairly or very happy themselves. The result is similar in all 32 countries where the question has been asked. People apparently look more depressed on the outside than they feel on the inside. And the underestimate is not small. Canadians and Norwegians are most optimistic about their compatriots and assumed that 60 percent of them were happy. That is actually lower than the self-perceived happiness in the least happy country, Hungary (69 percent).

This makes it incredibly risky to speculate about human well-being without relying on data – particularly when it comes to intellectuals, who (according to many studies) suffer more from anxiety and neuroticism than others. This is often what drives them onwards, to create, write, and debate in public. Yet it also makes them even more inclined to underestimate the happiness of others, especially as they really can’t comprehend how someone can be happy with the trivialities of everyday life, unintellectual professions, and taco Tuesday. It also makes them inclined to look for causes of these problems in societal structures and in vulgar capitalism. David Hume said of his close friend Rousseau that he just happens to be unhappy but tries to blame it on society instead of his own melancholy disposition.

When seen from the inside, capitalism is not as depressing as most intellectuals assume. Veenhoven, who was active in the Dutch Social Democrats when he began to study happiness, first believed that government redistribution and generous social spending contributed to the well-being of a population. It is easy to assume this when you tend to find countries like Denmark, Finland, and Sweden near the top of the happiness lists. But as Veenhoven got more statistics, it became clear that other small, rich democracies such as Iceland, Switzerland, and New Zealand, with much smaller welfare states, were also at the top of the rankings. Ireland, the Netherlands, and Australia have about half the social spending as a share of GDP as Belgium, Italy, and France do, but they are significantly happier. Government redistribution has not even succeeded in creating a more equal distribution of well-being. “Happiness is not greater in welfare states,” Veenhoven now states, “I was simply wrong.”

Another conclusion that surprised Veenhoven was that income inequality does not reduce a country’s well-being: “Income inequality is a by-product of capitalist societies and they have such a positive effect on well-being that outbalance the negative effect of being relatively poor.” This is not a popular conclusion in all camps: “My colleagues are not amused. Inequality is big business here in the sociology department. Entire careers have been built on it.”

There is a strong correlation between economic freedom and subjective well-being, and – contrary to most expectations – it is strongest for low-income earners. The researchers suspect this is due to the fact that free markets introduce autonomy and freedom of choice for those who have a more difficult socio-economic situation: “For high income earners, this effect is much less important, as their income already gives them the access to more choices.” No matter how much critics say we should feel like we are naked and afraid in capitalist societies, people insist on saying that it gives them a sense of control over their lives, at least compared to other systems.

None of this means the problems that critics equate with life in an individualist, capitalist society do not exist. It just means the same problem seems to be even greater in non-capitalist societies. It can be difficult to compete, but competition for resources and positions does not disappear because they are distributed politically instead of according to supply and demand. On the contrary, in capitalism we search for opportunities for mutual gain, while in economies based on distribution from the top we begin to see other groups as threats because what they take is something we do not get. It is telling that more than 30 years after the fall of communism, its destructive effects on communities and social trust have not completely faded. Although the gap with other countries is narrowing, it is still in postcommunist societies that we find less trust, more loneliness, and less well-being.

The hunt for status is no less brutal because there are fewer arenas in which to compete. If there are many different ways in which people can develop their identity and seek confirmation, there is a chance for more people to find their way than in more collectivist societies where there is just one true way. It may even apply to our consumption. The philosopher Steven Quartz and the political scientist Anette Asp believe that diversity and freedom of choice can be an explanation for the fact that increased inequality has not made us more unhappy – even though they point out that it should: “As a result, social status, which was once hierarchical and zero-sum, has become more fragmented, pluralistic and subjective. The relationship between relative income and relative status, which used to be straightforward, has gotten much more complex.”

In poorer societies, consumption is often about showing how high one has climbed on the prosperity ladder. That is why, paradoxically, poor societies have such a large share of consumption of pure luxury products that are sought after precisely because they are expensive. That exists in richer and more individualistic societies too, of course, but there, consumption increasingly becomes a way of expressing one’s personality. People no longer automatically covet the most expensive item but rather what suits their taste and expresses their identity. Someone dreams of a Porsche, but someone else prefers to show his green identity with a Tesla, a third person prefers a cheap and comfortable car because their status is based on not caring about status when choosing a car, while a fourth person talks happily and often about how it is vulgar to have a car when you can get anywhere on a bicycle and public transport. They can all converge in feelings of well-being, even if they diverge in income and taste.

The most important word in economic freedom is not “economic” but “freedom.” We are all different with different needs, and our chance of finding relationships, communities, work, and consumption that we enjoy increases if we get the freedom to choose. Not everyone wants to constantly work and strive for material rewards, and one of the advantages of an open society is that you do not have to choose that. Even before the pandemic, surveys in the Western world showed that between 20 and 50 percent of workers in recent years had chosen a less demanding job with less pay, reduced their working hours, declined a promotion, or moved to a calmer neighbourhood to focus on their family, make everyday life easier, or just to unwind with a less stressful life.

If you do not like the rat race, you can leave it – provided you live in a growing economy with high productivity so that you can do it without catastrophic consequences for the private economy. That is exactly what capitalism makes possible, and that is why the average working time of the average worker has decreased by about half in the last 150 years. In 1870, Britons worked more hours between January and August in an average year than they now do between January and December. In addition, we start working later in life and live for far longer after retirement than previously. That’s why you sit here and read and think about the viability of different political and economic systems and their implications for human well-being – a pastime that used to be reserved for a tiny elite with many servants and plenty of free time, or someone who happened to have a generous friend whose family lived off a cotton fortune, as Karl Marx had.

This essay is excerpted with permission from Johan Norberg’s new book, “The Capitalist Manifesto: Why the Global Free Market Will Save the World,” which is available to order here.


Johan Norberg
Johan Norberg
Johan Norberg is a historian, lecturer and commentator. He is a senior fellow at the Cato Institute in Washington DC, and his books have been translated into 30 languages. His books include the international bestsellers Progress: Ten Reasons to Look Forward to the Future and Open: The Story of Human Progress , which was an Economist book of the year. He regularly writes for publications such as The Wall Street Journal, Reason and HuffPost.
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