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Happiness economics unearths the undesirable effects of economic growth and criticizes the economic model based on the belief in the supremacy of market relations over the relational bonds of society. Economic growth brings about substantial increases in material well-being; yet, it has the potential to destroy the social and environmental fabric of society. This is visible in the post-World War II cross-country variability of the subjective well-being measures, which shows the importance of relational goods and associational activities. These themes echo Karl Polanyi’s concerns over the destructive effects of the self-regulating market mechanism. In this paper, we demonstrate the relevance of the interdisciplinary work of Polanyi for happiness economics. We argue that Polanyi’s conception of the self-regulating market system comes together with the spread of unhappiness. The treatment of labor as a fictitious commodity is of utmost significance in this respect. No less important is the similar degrading of land, a proxy for environment. Furthermore, the distinction Polanyi maintained between “exploitation” and “cultural degeneration” in assessing the Industrial Revolution is useful for this critique. In essence, Polanyi’s approach is relevant to explain the deterioration of social relations, which is thought to be the ultimate reason behind the happiness paradox.