Economic Freedom

I believe that there is a general consensus amongst economists that “good” economic policy consists of:

Private property rights to generate incentives

Stable monetary system to maximize information

Reliable legal framework to correct externalities and constrain predation

Free trade and the embrace of markets.

Recollect that economic calculation requires prices, which stem from exchange, which requires property rights. And it is property rights that underpin development. According to Hernando De Soto “the west” developed capital through the following steps:

  • Define the economic potential of assets through securities, title, contract, etc.
  • Integrate legal framework into one system.
  • Make people accountable through the legal system.
  • Make assets fungible, by representing them in a standard form to facilitate interaction and exchange.
  • Form networks of people that allow assets to move between agents.
  • Protect transactions via the rule of law.

There is very strong evidence to suggest that secure property rights correlate with higher GDP/capita. This might appear to be a little theoretical, and economists are forced to rely on theory given our inability to conduct experiments. Unlike the physical sciences it’s far harder for economists to isolate single variables. But human history has created a number of “natural” experiments. The starkest, and most illustrative, happened in Korea.

From 1910 to 1945 Korea was under Japanese rule. It was economically, culturally and ethnically homogeneous. There were no geographical differences. But after Japan’s defeat in World War II, Korea was divided in two, with the USSR controlling the North, and the US the South. This was a completely “exogenous” separation, approximating an experiment where similar subjects are “treated” differently. And in this case the “test” was with regard to alternative economic and political institutions. Communism was applied in the North, and capitalism in the South. Again, this isn’t a perfectly controlled experiment. It was capitalism with a large amount of government intervention and early on without democracy. But the outcome was astounding – GDP per capita sharply diverged from 1976,55 and in 2000 it was 14 times higher in the South than the North. Robert Higgs provides an overview of the “results” of this “50 year experiment in political economy”, and on every measure the role of “good” economic institutions shines through.

As the famous joke about Castro’s revolution goes,

The three successes were education, healthcare and sports.
The three failures were breakfast, lunch and dinner.

This has led a number of think tanks and organizations to attempt to measure “economic freedom”, and they have found that it correlates with:

  • Higher GDP per capita
  • Higher GDP growth
  • Higher life expectancy
  • More income for the poorest 10%

Here is the Economic Freedom of the World, published by the Fraser Institute.

Finally, although the title of this topic is “economic freedom”, and I’ve attempted to emphasize the link to human flourishing, to some extent this phrase is misleading. According to Thomas Sowell,

“One of the last refuges of someone whose pet project or theory has been exposed as economic nonsense is to say: “Economics is all very well, but there are also non-economic values to consider.” Presumably, these are supposed to be higher and nobler concerns that soar above the level of crass materialism. Of course there are non-economic values. In fact, there are only non-economic values. Economics is not a value in and of itself. It is only a way of weighing one value against another.”

Thomas Sowell

As Sheldon Richman (who was drawing upon Sowell) says,

“there is no economic freedom. There is only freedom.”

Sheldon richman