Freedom and Rationality as Predictors of Cross-National Happiness Patterns - The Role of Income as a Mediating Variable

HEINZ WELSCH

FREEDOM AND RATIONALITY AS PREDICTORSOF CROSS-NATIONAL HAPPINESS PATTERNS:

THE ROLE OF INCOME AS A MEDIATING VARIABLE

(Received 6 December 2002; Accepted 27 June 2003)

ABSTRACT. Freedom and rationality have traditionally been viewed as essentialingredients to the pursuit of happiness. Previous research has found that the wayin which happiness is linked to freedom and other attributes of individualistic soci-ety is affected by the income level. This paper formulates a structural model of thelinkage between political freedom, rationality, and happiness which takes explicitaccount of income as a mediating variable. Since income is hypothesized to be linkedto the degree of freedom and rationality prevailing in a society, this approach per-mits to distinguish between direct and indirect linkages of happiness to freedom andrationality. Estimating the model with cross-national data yields the following keyfindings: (1) Happiness is positively related to freedom as well as to rationality athigh freedom/rationality levels and negatively at low levels. (2) Whereas freedomaffects happiness only indirectly (through its impact on income), rationality has bothdirect and indirect effects on happiness.

KEY WORDS: happiness, modernization, freedom, rationality, income, prosperity.

1. INTRODUCTION

Freedom and rationality are fundamental normative principles of mod-ern societies, inherited from the philosophy of Enlightenment. Themaintained hypothesis implicit in these principles is that freedom andrationality contribute to improving the human lot or, in other words,that they are generic ingredients to the pursuit of happiness.

In contrast to this classic view, current opinion on how freedomaffects happiness is mixed. While individualistic social philosophystresses the positive effects, conservative thought tends to emphasizethe perils of freedom. Only recently it has become possible to addressthis controversial issue empirically; thanks to the growing availabil-ity of data on freedom and happiness. Using a cross-national data set,Veenhoven (1999) finds that the correlation between freedom and hap-piness is positive on the whole. When the data set is differentiated bylevels of income, the correlation turns out to be positive in rich andnegative in poor countries.

Unlike the freedomhappiness relationship, the linkage betweenrationality the prevalence of a science-based cognitive attitude and

Journal of Happiness Studies 4: 295321, 2003. 2003 Kluwer Academic Publishers. Printed in the Netherlands.

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happiness does not seem to have been investigated explicitly as yet.However, a construct which comes close to rationality the access toeducation and information has been examined by Veenhoven (1999)as well. The findings for this construct are similar to those for free-dom: a positive overall correlation with happiness, which differentiatesinto a positive relationship in rich and a negative relationship in poorcountries.

In addition to acting as a conditioning variable in the above relation-ships, income often plays a further role in empirical happiness research,namely to serve as a control in checking for spurious correlation. Whenincome is controlled for, correlates of happiness are frequently foundto become insignificant. This applies especially to (some types of) free-dom (Schyns, 1998; Veenhoven, 1999; 2000). Income, taken on its own,is universally among the most powerful predictors of cross-nationalhappiness differences (Diener and Oishi, 2000; Frey and Stutzer, 2002).

The insignificance of freedom (or some other correlate of happi-ness) when prosperity is controlled for does not necessarily imply thatfreedom is irrelevant for happiness. Rather, it may be the case that pros-perity is itself a function of freedom in the sense that free societies tendto generate higher income levels. Since income contributes to happi-ness, freedom might thus affect happiness in an indirect way. Similarreasoning may apply to rationality. It is therefore useful to distinguishbetween direct linkages of happiness to freedom and rationality, andindirect linkages via prosperity.

In distinguishing between direct and indirect linkages of happiness tofreedom, one can refer to Sen (1999), who says that freedom is impor-tant in two ways: as an ultimate value associated with peoples desire forunrestrained social and political participation, and as an instrumentalvalue in its capacity to enhance economic development.

With respect to freedoms role as an ultimate value, Sen arguesagainst the proposition that freedom is of importance only in rich coun-tries and that citizens of third-world countries do not care about civiland political rights; yet he acknowledges that the issue is difficult tocheck precisely in those circumstances when citizens are given littlepolitical opportunity to express their views on this. With respect to free-dom as an instrumental value, he refers to the claim sometimes madein modernization theory that there is a conflict between political free-doms and economic performance. He notes that the empirical evidenceis mixed and that the sign of the linkage seems to depend on many other

FREEDOM, RATIONALITY AND HAPPINESS 297

circumstances.1 In stressing the instrumental importance of freedom hepoints to the fact that there is, in general, no major starvation in democ-racies since political leaders have to respect the interests of the people.2

As concerns the relationship between rationality and happiness, ithas been suggested that the socio-emotional support offered by tradi-tional institutions is important for happiness (Veenhoven, 1995). As thespread of scientific and rational attitudes may go along with a loss ofthis support, rationality could be negatively associated with happiness.On the other hand, increased rationality may free people from fear ofsupernatural powers and improve their ability to shape their lives. Thiswould account for the direct linkages between rationality and happi-ness. With respect to the indirect linkage, it can be noted that humancapital which depends on the prevalence of science and engineering is an important ingredient to the theoretical and empirical literature oneconomic growth.1

In order to capture both the direct and indirect linkages, the presentpaper formulates a structural model of the relationship between politi-cal freedom, rationality, and happiness which takes explicit accountof income as a mediating variable, and estimates the model usingcross-national data. Key findings in this setup are the following: (1)Happiness is positively related to freedom as well as to rationalityat high freedom/rationality levels and negatively at low levels. (2)Whereas freedom affects happiness only indirectly (through its impacton income), rationality has both direct and indirect effects on happiness.

The paper is organized as follows. Section 2 introduces the concep-tual framework and describes the data and empirical strategy. Section 3presents the empirical results, and Section 4 offers a discussion andappraisal. Section 5 concludes.

2. GENERAL FRAMEWORK AND EMPIRICAL STRATEGY

2.1. Previous Research and Contribution of the Present PaperEmpirical research on subjective well-being has examined a variety ofcorrelates of happiness, both at the individual (micro) and the social(macro) level. The variables which are in general most closely andreliably related to the pattern of happiness include income, freedom,and religious involvement (see Veenhoven, 1997; Diener et al., 1999 foran overview and appraisal of the literature). The theory and evidence

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on the relation between income and happiness are reviewed by Dienerand Oishi (2000), while the linkage between freedom and happiness isexamined by Veenhoven (1999; 2000). The linkage between religiousinvolvement and happiness is examined by Ellison (1991). The roleof religion may be important in the current context to the extent thatreligious ties and belief systems are in a tension with scientific andrational attitudes.

The evidence on the material, social, and cultural predictors of sub-jective well-being mainly relies on univariate correlational designs, thenon-material variables sometimes being controlled by income (Dieneret al., 1999).3 Income is of particular importance in our context sincethe correlation between happiness and freedom has been found topractically disappear once income is controlled for (Schyns, 1998;Veenhoven, 1999). However, as suggested by Veenhoven (1999), therelationship between freedom and happiness may involve contingen-cies. Especially, this relationship may be different at different incomelevels. In fact, he found that the opportunity to choose shows asizable positive correlation with happiness in rich countries and asizable negative one in poor countries even if the overall correlationis low. A similar dichotomy was found with respect to the capabilityto choose (access to education and information), a construct whichshares some features with our proxy for rationality to be introducedbelow.

An additional issue involved in the study of subjective well-beingis whether some predictors of happiness are influenced by others.This issue seems to have been widely neglected in previous happi-ness research. An important aspect in the current case is whether theincome level may itself be a function of the degree of freedom and/orrationality prevailing in a country. As already noted in the introduction,cross-national growth studies suggest this to be the case.

The contribution of the present paper is to examine the relationbetween freedom, rationality, and happiness, taking into account thatfreedom and rationality may interact with prosperity in several ways.One possible form of interaction is that prosperity, being an importantpredictor of happiness, may itself be driven by freedom and rational-ity. This would then suggest that freedom and rationality may havedirect as well as indirect effects on happiness. The indirect effect if present could explain why some correlates of happiness tendto become insignificant when income is controlled for, while at the


same time defeating the conclusion that these correlates do not affecthappiness at all.

The main purpose of this paper is to contribute to disentanglingthese channels of influence. In addition, contingencies relating to thelinkage between happiness and freedom as well as between happinessand rationality will also be addressed.

2.2. Concepts and DataThis subsection defines the concepts of happiness, freedom, andrationality as they are used in this paper and describes the data used. Happiness is defined as the degree to which a person is satisfied with

the overall quality of the life she currently lives. Our variable happi-ness measures the average level of life satisfaction in a given country.The data are derived from happiness surveys in which the followingtype of question is asked: Taking all things together, would you sayyou are: very happy, quite happy, not very happy, not at all happy?Responses are rated as follows: not at all happy = 1, , veryhappy = 4. Our happiness data comes from the World Database ofHappiness (Veenhoven, 2001). The data set comprises 58 countriesand refers to the early and mid 1990s. In our regressions, 54 countriesare included, namely those for which all required variables are jointlyavailable.6 If happiness data are available for several years, the yearclosest to 1995 is chosen. Because happiness measures the averagewell-being across a large sample of respondents, it is a continuousvariable.4

The concept of freedom, as used in this paper, entails the opportunityto choose. Several dimensions of freedom can be distinguished, i.e.personal, economic, and political freedom (Veenhoven, 2000). Wefocus on political freedom, defined as the degree to which civil rightsand liberties are held in respect. Respect for rights is assessed on thebasis of expert judgements. It is measured on a scale ranging from1 (low levels of liberties) to 7 (high levels). The variable freedom istaken from Freedom House (2000).

Rationality is here taken to denote the prevalence of a science-basedcognitive attitude, as opposed to traditional belief systems and world-views. It is acknowledged that rationality is a complex concept.The conceptualization used in this study deliberately focuses on theprevalence of a technico-scientific attitude in a society. Given this

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TABLE IList of variablesVariable name Description

Happiness Average self-reported well-beingFreedom Civil rights and libertiesRationality Number of scientists and engineers per capitaIncome GNP per person

focus, an acceptable proxy for the degree of rationality in a countryis the number of scientists and engineers per thousand population.The variable rationality is taken from ESI (2001).5

Our concept of income is gross national product per capita (GNP percapita). The variable income is taken from the World DevelopmentReport and refers to 1995. The income data are purchasing powerparity estimates and are in thousand current $.

The variables used are summarized in Table I. The set of countriesfor which all required data are available comprises 54 countries. Thesummary statistics with respect to these countries are displayed in TableAI in the Appendix.

The correlation matrix is shown in Table AII. From this it can beseen that the variable most strongly correlated with happiness is income.Income also shows quite high and almost identical correlations withboth freedom and rationality. Freedom and rationality are substantiallyless correlated with each other than either of them is with income.

2.3. The ModelUsing the notation from Table I, the above considerations concerningpredictors of happiness and their possible interactions are captured bythe following framework:

happiness = h (f reedom, rationality, income), (1)income = f (f reedom, rationality). (2)

The arguments in eq. (1) reflect the propositions discussed inSection 2.1 that cross-national happiness patterns may be linked to theprevalence of freedom (civil rights and liberties), scientific rationality,and the level of per capita income. Equation (2) reflects the propositionof Hall and Jones (1999) that cross-national productivity differencesare largely driven by differences in social infrastructure.


The main purpose of this paper is to clarify whether freedom andrationality affect happiness directly via eq. (1), indirectly via eq. (2), ordirectly as well as indirectly. If the relationship is exclusively indirect,the corresponding variable should be dropped from eq. (1).

The model of eqs. (1) and (2) provides the basis for quantifying therelationship between happiness, and freedom and rationality. Theserelationships can be decomposed as follows:

d happinessd freedom

= happiness freedom

+ happiness income

income freedom

(3)d happinessd rationality

= happiness rationality

+ happiness income

income rationality

(4)In these equations the left-hand side measures the total effect of freedomand rationality, respectively, on happiness. The first expression on theright-hand side of each equation measures the direct effect, whereasthe second term measures the indirect effect.

2.4. Empirical StrategyOur general approach is to run linear regressions of eqs. (1) and (2) ona cross-section of 54 countries.6 It should be noted that this does notnecessarily imply linear relationships between dependent and explana-tory variables. Especially, it is possible to include interaction terms(the product of two variables) or squared variables among the regres-sors. For instance, including income as well as income-squared in thehappiness regression allows to check for decreasing marginal utility ofincome. Similarly, the product of freedom (or rationality) and incomecould be included in order to check the proposition mentioned abovethat freedom (or rationality) affect happiness differently at differentincome levels.

Experimentation with the latter approach showed that this procedureleads to substantial multicollinearity problems as the interaction termsare dominated by income. As a consequence, coefficient estimates arehighly unreliable. An alternative way of capturing income-dependenceof effects would be by means of dummy variables for poor and richcountries. However such an approach would suffer from the arbitrari-ness of the poor/rich classification used. Yet another possibility wouldbe a splitting of the sample, but this would be at the expense of degreesof freedom.

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In this situation a slightly different hypothesis is pursued here: Itis examined whether freedom (or rationality) affect happiness differ-ently at different freedom (or rationality) levels, instead of incomelevels. This is achieved by including not only the respective regres-sor (freedom, rationality) but also the second power. If the coefficienton the first-power is negative while the one on the second-power ispositive, the respective variable has a negative effect at low levels anda positive effect at high levels. Effectively, this may come close toincome-dependence.

A few comments on more technical aspects of the estimation strategyare in order. It should be noted that our variable happiness is the averageof self-reported well-being taken across all respondents in a particu-lar country. Thus, even though the individual responses are categoricaldata cardinalized on a four-point integer scale happiness is a contin-uous variable. Therefore, estimation techniques for discrete variablesare inappropriate. Our strategy is to use in a first step ordinary leastsquares to estimate several versions of the happiness equation (eq. (1)).The single-equation estimations will shed some light on the issue ofcontingencies. Having settled this, the complete model (eqs. (1) and(2)) is estimated, using the method of seemingly unrelated regressions(SUR).7

It should also be noted that issues of simultaneity are not addressedin this paper. Even though it is conceivable that happiness might causefreedom and rationality, and not just follow from them, a formal test ofthis hypothesis is prevented by data limitations. In the first place free-dom and rationality are rather static variables, so time-series methodscannot be used to check causality. In the cross-section framework con-sidered here, only instrumental variable techniques could be employed,but it is unclear what kind of variables could serve as a persuasiveinstrument for freedom and rationality in a happiness regression.

3. EMPIRICAL RESULTS

3.1. Basic Happiness RegressionsTable II presents our basic happiness regressions. Versions of theseare obtained by including not only freedom and rationality, but alsothe corresponding squared variables. These versions are shown inTable III.8


TABLE IIBasic happiness regression

A B C D E F G

Intercept 2.355(11.64)

2.644(27.47)

2.526(34.87)

2.668(11.45)

2.709(35.44)

2.356(11.57)

2.839(16.54)

Freedom 0.066(1.99)

0.033(0.73)

0.067(1.84)

0.030(0.87)

Rationality 0.033(0.92)

0.132(3.02)

0.03(0.07)

0.131(2.98)

Income 0.023(5.11)

0.027(4.46)

0.038(5.32)

0.042(5.66)

Adjusted R2 0.062 0.003 0.278 0.276 0.412 0.045 0.411Note: Dependent variable: happiness. Number of observations: 54. t-statistics inparenthesis are White-corrected to control for heteroskedasticity.

TABLE IIIHappiness regressions including contingencies

A B C D E F


3.116(20.37)

2.403(4.22)

3.137(25.38)

3.892(10.70)

3.407(9.79)

Freedom 0.277(1.30)

0.093(0.39)

0.368(2.45)

0.120(0.86)

Freedom-squared 0.035(1.66)

0.014(0.57)

0.049(3.13)

0.014(0.93)


0.533(4.94)

0.621(4.46)

0.566(4.22)

Rationality-squared 0.081(3.14)

0.074(3.72)

0.104(4.24)

0.079(3.32)

Income 0.030(4.82)

0.038(5.64)

0.035(4.56)

Adjusted R2 0.095 0.132 0.268 0.549 0.318 0.537Note: Dependent variable: happiness. Number of observations: 54. t-statistics inparenthesis are White-corrected to control for heteroskedasticity.

It can be seen from columns A and B of Table II that ina univariate perspective there is a positive association betweenhappiness and freedom as well as between happiness and rational-ity, but in the case of rationality it is insignificant. The linkage

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between happiness and income is positive and highly significant(column C).

Columns D and E consider the linkage between happiness and,respectively, freedom and rationality when income is included. Itis important to note that the inclusion of income leads to negativecoefficients on both freedom and rationality, where the coefficienton freedom is insignificant while the one on rationality is highlysignificant.

Columns F and G present regressions in which freedom and ratio-nality are jointly included. When income is absent from the regression(column F), freedom has a significant positive coefficient whereas ratio-nality is insignificant. Once income is included (column G), freedomis again insignificant, whereas rationality is significant and negative.Since these results are present in versions D and E as well, they are obvi-ously not due to the joint inclusion of freedom and rationality in oneregression. Rather, what seems to matter is whether income is includedor not.

The result that the linkage between happiness and freedom dis-appears (becomes insignificant) whenever income is included in theregression is consistent with findings obtained by Schyns (1998) andVeenhoven (1999, 2000) in correlational analyses of the freedomhappiness relationship when income is controlled for. It is also consis-tent with the regression analysis by Inglehart and Klingemann (2000).As mentioned above, Veenhoven (1999) has suggested that contin-gencies may be involved here. Specifically, he showed that happinessdisplays a sizable negative correlation with freedom at low levels ofincome and a positive one at high income levels even if the overallcorrelation is low.

A different explanation for the disappearance of the happinessfreedom linkage when income is included is that freedoms might affecthappiness only indirectly, via their effect on income. According to thisreasoning, the significant positive effect in the absence of the incomevariable (columns A and F) would reflect the indirect effect. In thepresence of the income variable this effect would vanish.9

In a similar vein, the fact that rationality becomes significant andnegative when combined with income, while being insignificant andpositive on its own, could indicate that rationality has a negative directand a positive indirect effect (via income) as a predictor of happiness. Ifthis were correct, these two influences would be blurred in regressions


which omit income, leading to insignificance of the rationality variable(columns B and F).

The two explanations put forward for the results presented in Table II(contingencies and indirect effects) are not mutually exclusive. We willreturn to the indirect effects hypothesis below. First we address the issueof contingencies.

3.2. Accounting for ContingenciesAs mentioned in Section 2.4, we will consider a version of the contin-gency hypothesis according to which the linkages between happinessand freedom as well as between happiness and rationality depend onthe level of the respective explanatory variable. This idea is imple-mented by including second-power terms of freedom and rationality inthe regressions. The results are displayed in Table III.

The structure of the presentation is similar to Table II. Columns A andB show the separate regressions of happiness on freedom and rational-ity, respectively. With respect to both variables, the coefficients of thefirst-power terms are negative whereas the coefficients of the squaredterms are positive. This suggests a negative linkage between happinessand the explanatory variables at low levels of these variables and apositive linkage at high levels. It should be noted, however, that bothfreedom terms are insignificant, whereas both rationality terms are sig-nificant. The latter is remarkable because regression B in Table II entailsan insignificant coefficient on rationality. This insignificance thus arisesbecause happiness is linked to rationality differently at different levelsof rationality.

Columns C and D augment the previous regressions by includingincome. In this case, the t-values of the freedom terms get furtherreduced and their signs are reversed (column C). In contrast to this, thesigns of the rationality terms are preserved, and their t-values get evenimproved (column D).

Regression E includes freedom and rationality jointly, but notincome. It could be interpreted as the reduced form of our structuralmodel, i.e. the form obtained by inserting eq. (2) into eq. (1). Allregressors are found significant and the sign pattern is the same as inregressions A and B: The first-power terms have negative coefficientswhereas the second-power terms have positive ones.

Regression F augments regression E by including income. The resultis that the sign pattern from E is preserved, but the freedom terms are

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now insignificant. Thus, even after accounting for contingencies, therole of freedom for happiness evident in the reduced form seems tobe of an indirect nature. In contrast to freedom, the rationality termsremain highly significant even after including income.

Overall, the findings presented in Table III clearly support the ideathat the linkage between happiness and freedom/rationality is differentat different freedom/rationality levels. More specifically, the linkage isweak (or even negative) when the level of freedom or rationality is lowand strong when freedom/rationality levels are high.

3.3. Estimating the Complete ModelIn estimating the complete model we take the contingencies just men-tioned as given. Since freedom seems to play only an indirect role as apredictor of happiness, the contingencies relating to freedom can onlyarise if the hypothesized linkage between freedom and income is con-tingent on the level of freedom. Therefore, contingencies will be takeninto account not only in the happiness equation but also in the incomeequation.

Table IV shows the results from the joint estimation of the hap-piness and the income equation. Column A refers to the completespecification, including all explanatory variables from eqs. (1) and(2). This estimation confirms our previous result that freedom aswell as freedom-squared are insignificant in a happiness equationincluding income: Happiness exhibits no direct linkage to politicalfreedoms. Previous results concerning rationality and income are alsoconfirmed.

With respect to the income equation, we see that the coefficient onfreedom is negative and the one on freedom-squared is positive. Bothare significant at conventional levels. Thus, the income equation in factshows the kind of contingency required to accommodate the contin-gency found in the reduced-form happiness equation (regression E inTable III). With respect to the rationality terms, the sign pattern is thesame as that for the freedom terms, but the first-power term is insignifi-cant, whereas the second-power term is weakly significant (confidencelevel: 5.8%).

In column B we drop the (insignificant) freedom terms fromthe happiness equation. The remaining coefficients in the happinessequation are highly significant and show the expected signs. Theincome equation is not much affected by this modification of the


TABLE IVEstimation results for the complete equation system

A B C

Dep. Var. HappinessIntercept 2.843

(21.30)2.895(36.95)

3.142(26.12)

Freedom 0.012(0.415)



0.271(6.16)

0.544(5.44)


0.103(4.20)

0.075(4.25)

Income 0.035(5.19)

0.040(7.66)

0.040(7.65)

Adjusted R2 0.537 0.548 0.548Dep. Var. IncomeIntercept 11.86

(1.66)12.124(1.70)

9.416(1.45)

Freedom 5.830(2.04)

5.942(2.09)

5.505(1.95)


0.900(3.00)

0.837(2.85)


1.923(0.88)


0.713(1.92)

0.397(4.09)

Adjusted R2 0.660 0.660 0.662Note: Estimation method is SUR.

happiness equation. Especially, the first-power of rationality remainsinsignificant. Therefore, column C drops this regressor from theincome equation. This leads to the rationality coefficient in the happi-ness equation becoming larger (in absolute terms). Overall, we obtainan equation system in which almost all explanatory variables arehighly significant. The first-power of freedom in the income equationis significant at a 5.4% confidence level.

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3.4. Measuring the Influence of Freedom and RationalityHaving established plausible and significant links from freedom andrationality to happiness, we now turn to the magnitudes involved. Weuse eqs. (3) and (4) to quantify the direct and indirect as well as thetotal effects of freedom and rationality on happiness.10 The results areshown in Table V.

The figures relating to freedom say how many happiness categories(on a scale from 1 to 4) a country is better off or worse off if freedomsare stronger by one category (on a scale from 1 to 7). Similarly, thefigures relating to rationality say how two countries whose number ofscientists and engineers differs by one person per thousand differ interms of happiness (where the rationality index ranges from slightlyabove zero to slightly below 5, see Table AI).

The first thing to note with respect to freedom is that its averageimpact is positive in terms of both the mean and the median. How-ever, in some countries with low freedom levels the freedomhappinessrelationship is negative. This aspect will be addressed more explicitlybelow. Here it is sufficient to say that a country in which freedomsare one category stronger than in another one is on average happier by0.16 categories. It should be recalled that this difference is due to theindirect effect only.

With respect to rationality, a direct as well as an indirect relationshipcan be identified. The direct relationship is negative on average whereasthe direct one is positive, leading to a slightly negative total linkagebetween rationality and happiness. The relationship is more negative incountries with low rationality scores11 while being positive in countries

TABLE VLinks of happiness to freedom and rationality

Direct Indirect Total

FreedomMean 0.160 0.160Median 0.214 0.214Minimum 0.120 0.120Maximum 0.247 0.247

RationalityMean 0.154 0.082 0.072Median 0.168 0.079 0.089Minimum 0.543 0.000 0.543Maximum 0.194 0.155 0.349


with high rationality scores. The indirect rationalityhappiness linkageis always positive, but at the minimum it is below the level of precisionemployed in Table V.

Figures 14 provide more detailed information on the links of happi-ness to freedom and rationality. In these diagrams, the marginal effectsof freedom/rationality on happiness are plotted against income.

0.2

0.1

0.0

0.1

0.2

0.3

0.4

0 10 20 30

Income

Figure 1. Total marginal impact of freedom.

0.6

0.4

0.2

0.0

0.2

0.4

0 10 20 30

Income

Figure 2. Total marginal impact of rationality.

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0.6

0.4

0.2

0.0

0.2

0 10 20 30

Income

Figure 3. Direct marginal impact of rationality.

0.00

0.05

0.10

0.15

0.20

0 10 20 30

Income

Figure 4. Indirect marginal impact of rationality.

As Figure 1 shows, the freedomhappiness linkage is positive for thevast majority of the countries included in our sample. The countries inwhich the linkage is negative are poor countries, but the converse doesnot hold: There are many more poor countries in which the linkage ispositive than countries with a negative linkage. Overall, the relationshipbetween freedom and happiness is stronger, the richer a country is.


Similar information with respect to the rationalityhappiness rela-tionship is provided in Figure 2. It can be seen that the proportion ofcountries in which this relationship is negative is quite large. With onlya few exceptions, the countries in which the relationship is positivetend to be rich countries. With respect to the direct component of therationalityhappiness linkage, as displayed in Figure 3, there are in factonly about a dozen countries for which this component is positive, andagain these are rich countries. The indirect component shown inFigure 4 is always positive and tends to be the stronger the richer acountry is. Overall, the linkage between rationality and happiness tendsto be positively related to income.

3.5. More Specific ResultsFor a more specific understanding of these general results it maybe useful to have a closer look at which are the countries wherefreedom and/or rationality displays a positive/negative relationship tohappiness.

With respect to freedom, the linkage to happiness (which is exclu-sively an economic one) is predominantly positive. There are only four(out of 54) countries with a negative relationship. These are Azerbaijan,Belarus, China, and Nigeria. The first three are post-communist coun-tries whereas Nigeria is a post-colonial country. Both types of countryhave in common that democracy is a relatively recent event. By con-trast, the countries with the strongest positive linkage between freedomand happiness mostly have long liberal and democratic traditions, viz.Australia, Canada, Denmark, France, Iceland, Ireland, the Netherlands,New Zealand, Norway, Sweden, Switzerland, and the U.S. Their cit-izens seem to have learned to make appropriate economicallybeneficial use of their freedoms, apparently in contrast to the cit-izens of the former group of countries. The freedom score at whichfreedom starts to be beneficial is about 3.3 (within a range from 1to 7) and corresponds to countries like Peru, Turkey, and the RussianFederation.

While the economic linkage of freedom to happiness is positivein most countries, the economic linkage of rationality to happinessis positive in all countries. However, the degree shows some vari-ation. The relationship is rather weak (below 0.04) in Bangladesh,Brazil, Colombia, Ghana, India, Mexico, Nigeria, Peru, the Philippines,Turkey, and Venezuela. With the exception of Nigeria, this group

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of countries is different from that group with a negative freedomhappiness relationship. Rather, the countries in which the economicrationalityhappiness linkage is low tend to coincide with those inwhich the direct rationalityhappiness linkage is strongly negative. Thisobservation will be discussed below (see Section 4.4).

Turning to the direct (non-economic) linkage of happiness to ratio-nality, we find that it is negative in the majority of cases (41 countries).It starts to become positive when the number of scientists and engi-neers per thousand is about 3.6, which is the case in countries likeFinland or Germany. Strong positive links can be observed in the casesof Iceland, Israel, Japan, Norway, Russia, Sweden, and the U.S. Ingeneral a positive relationship prevails in the former communist coun-tries that traditionally have a lot of scientists. Strong negative linksexist in the cases of Brazil, Ghana, India, Mexico, Nigeria, Peru, thePhilippines, Turkey, and Venezuela.

If we consider the total (direct and indirect) linkage of happinessto rationality, the number of countries with a negative relationshipdrops to 32. The point of inflection is about three persons per thousand,which corresponds to countries like Belarus, Belgium, the Netherlands,Slovenia, South Korea, and Ukraine.

4. SUMMARY AND DISCUSSION

4.1. Key ResultsThe results obtained can be summarized as follows: The linkage of happiness to freedom and rationality involves contin-

gencies in the sense that happiness is negatively related to freedomas well as rationality at low freedom/rationality levels and positivelyat high levels.

Freedom becomes insignificant in the happiness equation wheneverincome is included. This holds no matter if the above contingen-cies are accounted for or not. Freedom does, however, belong in theincome equation. Happiness is thus linked to freedom only indirectly,via income.

Rationality belongs in the happiness equation as well as in the incomeequation. Rationality thus has direct as well as indirect links to hap-piness. The rationality-income relationship is positive and exhibitsincreasing returns.


The contingencies mentioned above work through different chan-nels in the cases of freedom and of rationality. Income is negativelylinked to freedom at low levels of freedom and positively at highlevels. These relationships carry over to the freedom-happiness link-age via incomes effect on happiness. In the case of rationality thecontingencies are based on the direct linkage and amplified by theindirect linkage.

The results obtained imply a negative association of freedom andrationality with happiness at low levels of income and a positiveassociation at high income levels.

The relationship between freedom and happiness (via income) tendsto be negative in countries where political freedom has been acquiredonly recently. This group of countries is distinct from that group inwhich the economic effect of rationality is particularly low.

These results will now be discussed in the light of the previous literature.

4.2. ContingenciesOne of our key results that freedom and rationality need not bebeneficial in all circumstances is consistent with earlier literature.Veenhoven (1999) found that key attributes of individualistic society especially freedom are negatively correlated with happiness in poornations and positively correlated in rich nations. The current paper leadsto similar conclusions, but the mechanism is different: The linkage offreedom and rationality to happiness is conceptualized as being contin-gent on the freedom/rationality level, not on the income level (whichis an outcome in the current framework). The empirical results supportthis conceptualization.

Considering which are the countries where happiness is posi-tively/negatively linked to freedom and/or rationality suggests thefollowing intuition behind these contingencies: People need to be suffi-ciently acquainted with democratic institutions (freedoms) and rationalworld views in order to be able to reap their benefits. Societies inwhich freedoms are sparse and have been acquired only recently lackexperience and familiarity with these institutions. This may promoteinadequate use, for instance in the form of excessive strikes or thesupport of populist governments. With respect to rationality, the coex-istence of traditional and rational cognitive attitudes within one societymay result in tensions between the holders of these diverse worldviews. Thus, rationality is beneficial only if it is shared throughout

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society. And even so, it may be a poor substitute for the socio-emotionalsupport offered by more traditional institutions. Overall, the directrationalityhappiness linkage is thus positive only in the most mod-ern societies, in which rationality has become a generic mode ofexistence.

4.3. Ultimate vs Instrumental ValuesThe result that happiness is linked to freedom only via income mayappear surprising, all the more so since we are dealing with political,not economic freedom.12 It emphasizes the importance of freedomsinstrumental role, as opposed to its role in terms of social and politi-cal participation. Interestingly, we found that relatively low levels offreedom are sufficient for freedom to be instrumentally (economically)beneficial. Only if freedom has been acquired only recently is there apotential for detrimental effects.

Provocative as it may seem, the lack of an intrinsic value of politicalfreedom is consistent with earlier findings (Inglehart and Klingemann,2000). In order to understand why happiness does not seem to have adirect linkage to freedom one may note that freedom involves a trade-off. On the one hand, autonomy and freedom of choice may well beappreciated values. On the other hand, being confronted with contin-uous choice entails the cost of information acquisition, informationprocessing, balancing pros and cons and, after all, the risk of mak-ing wrong choices. In the aggregate, these costs of freedom seem tomore or less neutralize the benefits, such that a direct linkage betweenfreedom and subjective well-being is hard to establish. Interestingly,this neutrality result seems to be invariant with respect to the level offreedoms.

In contrast to freedom, rationality does play an intrinsic as well asan instrumental role. However, the intrinsic role tends to be negative inmost cases. This is in line with common views that increased rational-ity may go along with a loss of socio-emotional backup. There is, thusin many cases, a trade-off between the intrinsic role of rationality andthe universally beneficial instrumental role.

4.4. Determinants of Economic DevelopmentOur results concerning democracy and income entail a qualified con-firmation of earlier literature. Hall and Jones (1999) emphasize the


positive role of social infrastructure for prosperity, and this is con-firmed for the vast majority of countries in our sample. As discussedabove, freedom may have a negative impact on income when demo-cracy is a relatively recent event and people lack familiarity withdemocratic institutions. Once people are more familiar with demo-cracy, they learn to use it in an economically beneficial way (forinstance to get rid of inefficient or corrupt governments). In somesense, this is consistent with the finding of Barro (1996) that politi-cal freedoms have a small adverse effect on growth in poor countries,but it should be noted that it is not low income as such that ham-pers the beneficial effect of freedom, but a lack of experience withdemocracy.

Finally, it is worth discussing why rationality is less productive insome countries than in others. As observed above, the group of countriesin which the impact of rationality on income is low does not coincidewith that group where freedom has a negative effect on income. There-fore, it is probably not the counterproductive use of freedom whichhampers the economic productivity of research and engineering inthese countries. Rather, it may be that research and engineering havea low productivity because the social climate is not very well adjustedto rationality in general. This idea is supported by the fact that thecountries in which the economic impact of rationality is low tend tocoincide with those in which the direct impact of rationality is stronglynegative. Conversely, the countries in which the economic effect ofrationality is particularly strong tend to be the same as those in whichthe direct effect is strongly positive. This, then, suggests that rationalitydisplays particularly high economic productivity if rationality is valuedper se.

4.5. Caveats and Overall AppraisalThis study has identified several channels through which happiness islinked to freedom and rationality. The question is whether the statisti-cal relationships mean that different levels of freedom and rationalityacross countries really imply different degrees of happiness. It could bethe case that causation works the other way. Happier people might bemore tolerant, and they might be less inclined to seek comfort in meta-physical thinking. They may also exhibit higher productivity (Kenny,1999). In fact, causation always refers to a dynamic process, so iden-tification of directions of influence would ideally require time series

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data. On the basis of the present data, this limitation of the analysismust be acknowledged.

A related aspect refers to the measurement of rationality and how itis linked to income. The (relative) number of scientists and engineersis to some degree contingent on prosperity, via a countrys infrastruc-ture for higher education. Moreover, there is a tendency for scientistsand engineers to leave poor countries (brain drain). There is thussome endogeneity in the rationality variable. However, this endogene-ity could probably not be avoided by using more direct measures ofscience-based attitudes (if available) because attitudes are linked topeople.

In spite of these limitations it is reasonable to assume that there doexist effects of freedom and rationality on happiness. What, then, is thenature of these effects?

Freedom and rationality both involve some possibility to choose.Political freedom, like any freedom, is a potential opportunity tochoose, whereas rationality is an indicator for the capability to choose.Both are essential features of individualistic society, and their posi-tive and negative effects are partial reflections of the benefits andcosts of individualization. The costs are frequently described interms of isolation and anomy. The benefits consist of increased self-actualization, such as social and political participation in the caseof political freedom. In the case of rationality, benefits may derivefrom less fear of supernatural powers and increased ability to shapeones life.

This study has shed light on the problems of reaping these benefitsin the process of transition from traditional community-based culturesto modern individualistic societies. During this transition process, thecosts of modernization may well exceed the benefits.

The study has also revealed that freedom and rationality mayhave a substantial instrumental value. In the first place, rationalityis an essential feature of human capital and contributes to happi-ness via income. However, rationality is less effective in this roleif the direct valuation of rationality is strongly negative. Politi-cal freedom may promote good governance, thus contributing tohigher income and greater happiness. However, freedom may alsobe used in inefficient ways, thus obstructing prosperity and happi-ness. Again, the costs may exceed the benefits during some phase oftransition.


5. CONCLUSIONS

Freedom and rationality have traditionally been viewed as essentialingredients to the pursuit of happiness. The channels through whichfreedom and rationality affect happiness may be of a more idealisticor a more materialistic nature. In an idealistic perspective, freedomand rationality would be ultimate values, whereas the materialisticview entails that they contribute to happiness mainly through theirinstrumental role as contributors to economic prosperity.

This paper has attempted to disentangle these issues. We foundthat the idealistic view is hardly tenable with respect to political free-dom. The benefits of freedom seem to be neutralized by the respectivecosts, such that a direct freedomhappiness linkage is hard to establish.Freedom thus affects happiness only through its impact on per capitaincome. In the case of rationality, by contrast, a direct as well as anindirect linkage to happiness could be identified.

As concerns the signs of the freedomhappiness and rationalityhappiness linkages it was found that neither freedom nor rationality isnecessarily beneficial in all circumstances. What seems to be neededin order to reap their benefits is a certain degree of familiarity andgeneral acceptance. This is something which has evolved in Westernsocieties over the past two centuries. In other societies this assimilationof freedom and rationality has yet to happen, if they are to contributeto the quality of life.

Assimilation necessarily involves a time dimension. Therefore, fruit-ful future research should include evidence from time series. This couldalso serve to make conclusions concerning causation more reliable.

ACKNOWLEDGEMENTS

I wish to thank Ruut Veenhoven and three anonymous referees foruseful comments on an earlier draft.

NOTES

1 There is a huge literature on cross-country growth analysis which is impossibleto discuss here in its entirety. The relationship between democracy and growth isexplicitly addressed by Barro (1996), who finds that political freedoms have a small

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adverse effect on growth in poor countries, but a positive effect at higher levelsof income. An encompassing assessment of 62 variables presumably contributingto growth is provided by Sala-i-Martin (1997), who finds a negative relationshipbetween civil liberties and growth. Conversely, Hall and Jones (1999) find socialinfrastructure, a construct which includes the degree of political freedom prevailingin a society, to be beneficial for economic development.2 A version of the proposition that there is a conflict between freedom and economicperformance maintains that freedom can only be reached if a certain threshold ofincome is achieved. That is, freedom should be the dependent, not the independentvariable. This issue is addressed by Hall and Jones (1999), using instrumental variabletechniques. They find clear evidence of causality from freedom to income.3 An important exception is Helliwell (2003) who goes beyond univariate correla-tions in cross-country happiness research.4 Measures of happiness are generally found to have a high scientific standard interms of internal consistency, reliability and validity, and a high degree of stabilityover time (Diener et al., 1999). As concerns the comparability across nations, noindication has been found that cultural or linguistic bias may prevent a comparisonof happiness across nations (Veenhoven, 1993).5 It should be noted that the data in ESI (2001) are expressed in terms of Z scores, i.e.deviations of individual values from their mean, divided by their standard deviation.This transformation was performed in order to make aggregation to more encom-passing indicators possible. We converted the data back into the underlying naturalunits.6 The countries are: Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh,Belarus, Belgium, Brazil, Bulgaria, Canada, Chile, China, Colombia, Czech Repub-lic, Denmark, Dominican Republic, Estonia, Finland, France, Gabon, Germany,Ghana, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Latvia, Lithuania,Mexico, the Netherlands, New Zealand, Nigeria, Norway, Peru, the Philippines,Poland, Portugal, Romania, Russian Federation, Slovenia, South Africa, South Korea,Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, United States,Uruguay, Venezuela.7 SUR takes account of heteroskedasticity and correlation of errors across equations.Estimation techniques more sophisticated than SUR are not required in the presentcase: For the linear model corresponding to eqs. (1) and (2) the matrix of coefficientsof the endogenous variables is triangular, implying that its determinant is 1. Thus theJacobian term in the loglikelihood function for the system (1), (2) vanishes, and theloglikelihood function has the same form as the loglikelihood function for a set oflinear SUR (Davidson and McKinnon, 1993, 644645).8 The regressions presented in the main text do not include squared income terms,but the Appendix (Table AIII) reports the counterparts of the happiness regressionspresented here, with squared income included. It can be seen there that the jointinclusion of income and income-squared yields insignificant coefficients. In addition,these have wrong signs in some cases. Therefore, non-linearities with respect toincome are not pursued any further.


9 It should be noted that the insignificance of freedom is not an artifact ofmulticollinearity. Freedom and rationality show an almost identical degree of cor-relation with income (0.67 and 0.68, respectively, see Table AII). Therefore, ifmulticollinearity were the problem, it would affect freedom and rationality inthe same way.10 Talking about effects presupposes that the causality runs from freedom andrationality to happiness, and not the other way. This issue is discussed in Section 4.5.11 The very pronounced negative value at the minimum should be interpreted withcare: The thought experiment underlying Table V would imply that the number ofscientists in countries with very low rationality scores be multiplied by more than100 (see Table AI).12 This finding shows an interesting symmetry to results by Veenhoven (2000)which imply that economic freedom must affect happiness in other ways thanthrough economic growth. One explanation offered is that economic freedom mayrelieve dependency in oppressive family situations or by reducing social tensions.There might also exist an intrinsic role for another kind of freedom, i.e. personalfreedom.

APPENDIX

TABLE AISummary statistics of variables used

Mean Median Maximum Minimum Standard deviation

Happiness 2.764 2.806 3.240 2.068 0.318Freedom 5.722 6.505 7.000 1.500 1.445Rationality 2.593 2.503 4.909 0.003 1.254Income 10.331 7.740 25.880 0.770 7.420

Note: The summary statistics refer to the common sample of the countriesincluded in the analysis.

TABLE AIICorrelation matrix

Happiness Freedom Rationality Income

Happiness 1.00 0.28 0.09 0.54Freedom 0.28 1.00 0.47 0.67Rationality 0.09 0.47 1.00 0.68Income 0.54 0.67 0.68 1.00

Note: The correlation matrix refers to the common sample ofthe countries included in the analysis.

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TABLE AIIIHappiness regressions including income-squared

2D 2E 2G 3C 3D 3F


2.787(30.49)

2.868(17.21)

2.424(4.32)

3.139(25.68)

3.410(9.66)

Freedom 0.028(0.56)

0.022(0.61)

0.094(0.40)

0.119(0.85)


0.014(0.92)


0.133(3.06)

0.531(4.46)

0.564(4.03)


0.079(3.13)

Income 0.016(0.65)

0.018(1.02)

0.025(1.21)

0.020(0.80)

0.037(1.98)

0.033(1.64)

Income-squared 0.0004(0.53)

0.0009(1.43)

0.0007(1.02)

0.0004(0.52)

0.0001(0.059)

0.0001(0.13)

Adjusted R2 0.264 0.413 0.407 0.256 0.540 0.527

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Address for Correspondence:HEINZ WELSCHDepartment of Economics,University of Oldenburg,26111 Oldenburg Germany

E-mail: [email protected]

Documents

Freedom and Rationality as Predictors of Cross-National Happiness Patterns - The Role of Income as a Mediating Variable