Economic Freedom, and the Effect on Misery

Abstract

Questions regarding whether the economy should be free or heavily regulated are relevant in the structuring of government. One might assume that the purpose of government policies should be to maximize the population’s utility and minimize misery. Therefore, it is interesting to research how economic freedom affects personal misery. This thesis investigates whether there is a correlation between misery and economic freedom. The study was conducted by running a random effects model with clustered standard errors between Okun’s Misery Index and the Heritage Foundation’s Economic Freedom Index. The Misery Index is the sum of a country’s inflation rate and unemployment rate, both of which have been shown to have a negative effect on personal well-being. The Economic Freedom Index consists of twelve variables that represent free-market values.

The results showed a significant negative correlation between the Misery Index and the Economic Freedom Index. This indicates that a higher level of economic freedom leads to a less miserable population. To observe which aspects of the Economic Freedom Index that affects misery, separate regressions were run between the Misery Index and the twelve variables representing economic freedom. These results showed that only one of the twelve variables, namely the variable of property rights, had a significant correlation with the Misery Index. However, when the Bonferroni Correction was applied, none of the individual variables showed significance.