On Rule of Law, Civic Virtues, Trust, and Happiness

Abstract

In literature, there is a long and ongoing dispute over whether free market institutions encourage or discourage civic virtues. On the one hand, the so-called doux commerce thesis states that free market institutions have a favorable influence on civic virtues, such as honesty, respect for private property, and fair dealings. This idea goes back to, amongst others, Adam Smith who famously argued that where commerce is introduced, people are more faithful to their word. Smith also believed that civic virtues foster human happiness. The policy implication would be that free market institutions increase happiness by stimulating civic virtues. On the other hand, the so-called self-destruction thesis states that free market institutions are inimical to the civic virtues, which would mean that free markets decrease human happiness by crowding out civic virtues. Although the debate on free market institutions and civic virtues is very relevant to policy makers, empirical evidence on these opposing propositions is still scarce. In this paper we test both relationships on a sample of 212,431 individuals from 80 countries by using data from the World Values Survey and the European Values Survey over the 1990-2020 period. We focus on one important dimension of free market institutions: rule of law. We find that civic virtues are positively related to rule of law and that happiness increases with civic virtues. In addition, civic virtues indirectly increase happiness by stimulating trust. In addition, trust is directly positively related to rule of law, indicating that both formal institutions (rule of law) and informal institutions (civic virtues) affect trust. An analysis of all the effects of rule of law on happiness shows, however, that the indirect effects through civic virtues and trust are of relatively minor importance in comparison to its total effect.