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July 15, 2015 / Gabriel

Economic Freedom Creates Greater Prosperity and Happiness

The greater the economic freedom, the wealthier and happier the people.

This is the libertarian thesis differentiating them from liberals (and even many conservatives), who view greater government involvement in economic decision-making as the key to growth, equality and opportunity. From minimum-wage laws to higher progressive taxation to greater unionization to larger welfare programs to more regulations, liberals demand a stronger and more economically active central government. Libertarians, on the other hand, favor smaller government, less regulation, lower taxes, and greater individual and property rights.

But which economic policy approach actually yields the best results?

We’ve already clearly demonstrated via international and U.S. state migration rates that people the world over are naturally drawn towards greater economic freedom. Across countries, and even across states, millions of people every year migrate¬† away from greater taxation and regulation and towards lower taxation and regulation. But are they better off?


Let’s take a look at the 50 U.S. states, ranked by their level of economic freedom (a combination of free market ideals such as lower tax burden, greater property rights, less government spending, labor market freedom, and so on).

Taking into account cost-of-living differences, the top 10 most economically free states have an average $52,334 median household income, which is considerably higher than the $43,090 median income for the 10 least free. That’s a 21% raise for workers by switching state government policies to a smaller government approach. How much more could it be increased if the same were done at the national level?

The observed results are not a question of race or country of origin: African-Americans, Hispanics, Asians and immigrants also earn substantially more in the more economically free states. While liberals should be lauded for their apparent concern for the welfare of minorities, the truth is that their policies yield the worst results for them, a standard of living pay cut just for living in a more regulated and taxed state.


One may think that this could be driven by urban vs. rural states more than policies, but the top 10 free states are 71% urban vs. 72% for the bottom 10–a negligible difference. Moreover, the states in between the two are even more urban, at 75%, which effectively rules out correlation.

Another objection may be that “the rich” or “the 1%” are skewing the numbers–that income inequality is running rampant with less government to level the playing field, as many persistently believe. The exact opposite is the case.

Using median incomes as the measure (instead of average incomes) effectively eliminates the impact of the very wealthy on the numbers. And the Poverty Measure is lower in the most free states (13.3%) than in the least free (15.1%).

But the real measure of income inequality is the Gini index, and we can put aside for now the fact that median incomes are a far better measure of overall economic well-being than inequality of incomes (i.e. 100 people making $1 a day are perfectly equal but not better off than 99 people making $2 a day and 1 making $5 a day, despite the latter’s higher inequality). If we assume inequality to be an important economic measure instead of a normal byproduct of economic growth, the most free states do better, with a .446 Gini index vs. a higher and less equal .462 Gini for the least free states. Not only that, but the rate of growth of inequality over the past 40 years is lower in the most free states compared to the least free: 22% vs. 30%. In other words, heavier government involvement has led to more income inequality and faster growth of such, while less government has created a more equal growth in incomes.


A final argument might be that while there may be greater income in more free market states, the increased government regulation and intervention provides greater care and increases the population’s happiness and well being. But the opposite is the case.

Gallup publishes an annual Well Being Index, which measures and ranks each state’s population across 5 core measures of well being:

  1. Purpose (Liking what you do each day and being motivated to achieve your goals)
  2. Social (Having supportive relationships and love in your life)
  3. Financial (Managing your economic life to reduce stress and increase security)
  4. Community (Liking where you live, feeling safe and having pride in your community)
  5. Physical (Having good health and enough energy to get things done daily)

Averaging each state’s Wellness rank for the past 7 years we find that states with greater economic freedom also bring greater happiness and well being.


So what happens when you create a more libertarian environment where people make more money, have less poverty and find greater happiness in their lives? People want to move there. And indeed, looking at state-to-state migration of Americans between 2006 and 2010, we see a net migration flow of 704,000 from the 25 least economically free states to the 25 most economically free. That’s hundreds of thousands of Americans choosing to relocate away from greater government to more free market oriented government.

On that latter point, it’s important to distinguish small-government libertarian from Republican. While it’s true that there’s a strong correlation between Republicans and economic freedom–the 10 most free states had a Partisan Voter Index (PVI) average of R+10.3 vs. D-6.1 for the 10 least free–it’s not a perfect correlation either. Two of the top 10 states (Virginia and New Hampshire), for instance, are swing states, and two of the bottom 10 economically free states (West Virginia and Mississippi) are solidly Republican. So there’s strong, but not perfect, correlation (hence the often uneasy political alliance of libertarians with Republicans).


It’s also worth noting what economic freedom is not: it is not corporatism or crony capitalism, where the government bails out banks and subsidizes politically connected businesses, which both major political parties are heavily guilty of. Rather, it’s smaller, less intrusive government–one focused primarily on keeping the peace and staying as much as possible out of people’s personal and economic lives.

Libertarians and liberals have almost diametrically opposed economic theories about what works best for the majority of people, and the reality on the ground is that it’s the libertarian free market policies that yield the better results: greater median incomes, a more equitable distribution, less poverty, greater success for minorities and immigrants, and higher overall levels of happiness and well being. In the political rhetoric landscape the battle of ideology is fierce and filled with demagoguery; in the real world the difference in results between competing economic policies are strikingly clear.




Leave a Comment
  1. Josh Borden / Aug 21 2015 3:51 pm

    Gabriel, you should try to monetize your blog with Amazon Associates and Google Ad Sense. I don’t agree with your conclusions, or reasoning, but it looks like you put a lot of work into this and should monetize it better than with just Gravity =)


  1. does money lead to happiness - The Superior Self

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