Capitalism vs. Socialism: Happiness Could Care Less

Socialist or not, one might argue that being bailed out feels better than going under, personally, industrially and nationally. At least in the short run.

A new analysis of the happiness, or more specifically the "life satisfaction," of people living in parts of Europe in the 1990s as the Iron Curtain fell sheds more light on how our personal feelings of well-being respond to socialism, capitalism and big economic transitions.

The work, in short, suggests that our personal economic stability might be more important to life satisfaction (a measure of happiness or well-being) than the Gross Domestic Product, and the type of socioeconomic or political order in which we live. In other words, free market capitalism only works when it works. When it doesn't, some form of socialism (and its guarantees of employment, education and health care) can look attractive.

The research on former Communist-bloc nations was done by economist Richard Easterlin of the University of Southern California, a long-time scholar on "happiness economics." He is responsible for the "Easterlin Paradox," which concludes that more money makes us happier, but only up to a point. Once we are lifted out of poverty, more money does nothing to increase our happiness. A handful of economists disagree with this and say more money makes us more happy, though more slowly as our prosperity grows.

Anyhow, Easterlin's latest work focuses on life satisfaction (subjects were asked "All things considered, how satisfied are you with your life as a whole these days?").

He finds that life satisfaction correlated in a bad way with the initial collapse of GDP (gross domestic product) after socialism was abandoned in 13 Eastern, Central and Southern European nations in the 1990s (including Russia, Poland, Hungary and the Czech Republic). During the transitional years, GDP fell by 50 to 85 percent of 1989 levels within a few years in a downturn that affected 400 million people. Later in the decade, GDP recovered slowly but life satisfaction didn't keep up. The social response to the downturn was bad in Russia, for instance, according to a 2005 study by Brainerd and Cutler, cited by Easterlin — more divorce, suicides, domestic violence, alcoholism and drug use.

Income went up during the 1990s for many, but bigger disparities in income opened up. And those income increases were outweighed, in terms of life satisfaction, by losses in employment security, as well as health, senior and child care, that had previously been covered under socialism, Easterlin writes.

It was not until 2005, when GDP recovered to early 1990 levels or better, that life satisfaction started to catch up, he found. The results are forthcoming in the August 2009 issue of the Journal of Economic Behavior and Organization.

It reminds one of candidate Bill Clinton's campaign mantra in 1992: "It's the economy, stupid." Only with more nuance.

Easterlin found that the opportunity to enjoy the economic freedoms of capitalism was less critical to life satisfaction than one's personal economic stability, and that rising GDP is not enough, after a downturn, to restore happiness.

More critical to happiness are everyday socio-economic matters such as "do we all have jobs?" and "do we have health care, old age care and child care?" and "will our family manage to stick together through this?"

In American, we'll feel happier once the economy recovers, but don't draw any huge conclusions about socialism and capitalism from all this, Easterlin said.

"So far, we have very little scientific empirical study bearing on whether socialists are happier than capitalists," he said. "However, what my paper suggests is that there are elements of 'socialism' that appear to have more directly addressed important concerns of the 'average person' … and that if we are interested in promoting well-being we might learn from the study of experience under 'socialist' regimes, as well as 'capitalist.'"

Do we all spend too much time obsessing about political matters, when really the focus should be securing everyday socio-economic matters?

Easterlin says: "As my paper notes, the … evidence such as that for the transition countries does not seem to suggest an important effect on happiness of democratization, and indeed when people in countries throughout the world are asked about what makes them happy, they rarely mention political concerns. Yet, in my personal view, political and civil rights are important. So my answer is that we would do well to start paying attention to happiness, but we should not assume that it is in itself the last word on well-being."

Each week in Dollars & $cience, Robin Lloyd makes sense of the financial world and explores the latest findings that hit you in the wallet.