Economic freedom
Encyclopedia
Economic freedom is a term used in economic and policy debate
s. As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom. One major approach to economic freedom comes from classical liberal and libertarian
traditions emphasizing free market
s and private property
, while another extends the welfare economics
study of individual choice, with greater economic freedom coming from a "larger" (in some technical sense) set of possible choices. Another more philosophical perspective emphasizes its context in distributive justice
and basic freedoms of all individuals. Other conceptions of economic freedom include freedom from want
and the freedom to engage in collective bargaining
.
The free market
viewpoint understands economic liberty as the freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft. This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative. There are several indices of economic freedom
that attempt to measure free market economic freedom. Some empirical studies based on these rankings have found higher living standards, economic growth, income equality, less corruption and less political violence to be correlated with free markets. However, these results and their interpretation remain controversial.
both requires, and is required for economic freedom. Friedrich Hayek
argued that the certainty of law contributed to the prosperity of the West more than any other single factor. Other important principles of the rule of law are the generality and equality of the law
, which require that all legal rules apply equally to everybody. These principles can be seen as safeguards against severe restrictions on liberty, because they require that all laws equally apply to those with political and coercive power as well as those who are governed. Principles of the generality and equality of the law exclude special privileges and arbitrary application of law, that is laws favoring one group at the expense of other citizens. According to Friedrich Hayek, equality before the law is incompatible with any activity of the government aiming to achieve the material equality of different people. He asserts that a state's attempt to place people in the same (or similar) material position leads to an unequal treatment of individuals and to a compulsory redistribution of income. Both of those actions are contributing to a decline in economic freedom.
Hayek's position has been criticised as logically incoherent. Westmoreland argues that, in Hayek's final formulation, any tax system passes the rule of law test provided that it is imposed predictably and thus "Hayek does not achieve the intended synthesis of libertarianism and conservatism." http://www.springerlink.com/index/WN35W65318683Q23.pdf.
According to the free market view, a secure system of private property rights is an essential part of economic freedom. Such systems include two main rights: the right to control and benefit from property and the right to transfer property by voluntary means. These rights offer people the possibility of autonomy and self-determination according to their personal values and goals. Economist Milton Friedman
sees property rights as "the most basic of human rights and an essential foundation for other human rights." With property rights protected, people are free to choose the use of their property, earn on it, and transfer it to anyone else, as long as they do it on a voluntary basis and do not resort to force, fraud or theft. In such conditions most people can achieve much greater personal freedom and development than under a regime of government coercion. A secure system of property rights also reduces uncertainty and encourages investments, creating favorable conditions for an economy to be successful. Empirical evidence suggests that countries with strong property rights systems have economic growth rates almost twice as high as those of countries with weak property rights systems, and that a market system with significant private property rights is an essential condition for democracy. According to Hernando de Soto
, much of the poverty in the Third World countries is caused by the lack of Western systems of laws and well-defined and universally recognized property rights. De Soto argues that because of the legal barriers poor people in those countries can not utilize their assets to produce more wealth. Pierre Proudhon, a socialist and anarchist thinker, argued that property is both theft and freedom.
On the other hand, many leftists dispute that private property means "economic freedom" and believe in a system where people can lay claim to things based on personal use. They claim that "Property is the domination of an individual, or a coalition of individuals, over things; it is not the claim of any person or persons to the use of things" and "this is, usufruct
, a very different matter. Property means the monopoly of wealth, the right to prevent others using it, whether the owner needs it or not."
is the right to choose one's contracting parties and to trade with them on any terms and conditions one sees fit. Contracts permit individuals to create their own enforceable legal rules, adapted to their unique situations. Parties decide whether contracts are profitable or fair, but once a contract is made they are obliged to fulfill its terms, even if they are going to sustain losses by doing so. Through making binding promises people are free to pursue their own interests. The main economic function of contracts is to provide transferability of property rights. Transferability largely depends on the enforceability of contracts, which is enabled by the judicial system. In Western societies the state does not enforce all types of contracts, and in some cases it intervenes by prohibiting certain arrangements, even if they are made between willing parties. However, not all contracts need to be enforced by the state. For example, in the United States there is a large number of third-party arbitration
tribunals which resolve disputes under private commercial law. Negatively understood, freedom of contract is freedom from government interference and from imposed value judgments of fairness. The notion of "freedom of contract" was given one of its most famous legal expressions in 1875 by Sir George Jessel
MR
:
The doctrine of freedom of contract received one of its strongest expressions in the US Supreme Court case of Lochner v New York which struck down legal restrictions on the working hours of bakers. http://www.pbs.org/wnet/supremecourt/capitalism/landmark_lochner.html
Critics of the classical view of freedom of contract argue that this freedom is illusory when the bargaining power of the parties is highly unequal, most notably in the case of contracts between employers and workers. As in the case of restrictions on working hours, workers as a group may benefit from legal protections that prevent individuals agreeing to contracts that require long working hours. In its West Coast Hotel Co. v. Parrish
decision in 1937, overturning Lochner, the Supreme Court cited an earlier decisions http://www.law.cornell.edu/supct/html/historics/USSC_CR_0300_0379_ZO.html
From this point on, the Lochner view of freedom of contract has been rejected by US courts http://www.pbs.org/wnet/supremecourt/capitalism/landmark_lochner.html.
have simultaneously expanded with market-based economies, and present empirical evidence to support the claim that economic and political freedoms are linked.
In Capitalism and Freedom
(1962), Friedman developed the argument that economic freedom, while itself an extremely important component of total freedom, is also a necessary condition for political freedom. He commented that centralized control of economic activities was always accompanied with political repression. In his view, voluntary character of all transactions in a free market economy and wide diversity that it permits are fundamental threats to repressive political leaders and greatly diminish power to coerce. Through elimination of centralized control of economic activities, economic power is separated from political power, and the one can serve as counterbalance to the other. Friedman feels that competitive capitalism is especially important to minority groups, since impersonal market forces protect people from discrimination in their economic activities for reasons unrelated to their productivity.
Austrian School
economist Ludwig von Mises
argued that economic and political freedom were mutually dependent: "The idea that political freedom can be preserved in the absence of economic freedom, and vice versa, is an illusion. Political freedom is the corollary of economic freedom. It is no accident that the age of capitalism became also the age of government by the people."
In The Road to Serfdom
, Hayek argued that "Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends." Hayek criticized socialist policies as the slippery slope that can lead to totalitarianism.
Gordon Tullock
has argued that "the Hayek-Friedman argument" predicted totalitarian governments in much of Western Europe in the late 20th century - which did not occur. He uses the example of Sweden, in which the government at that time controlled 63 percent of GNP
, as an example to support his argument that the basic problem with The Road to Serfdom is "that it offered predictions which turned out to be false. The steady advance of government in places such as Sweden has not led to any loss of non-economic freedoms." While criticizing Hayek, Tullock still praises the classical liberal notion of economic freedom, saying, "Arguments for political freedom are strong, as are the arguments for economic freedom. We needn’t make one set of arguments depend on the other."
(IEF) are two indices which attempt to measure the degree of economic freedom in the world's nations. The EFW index, originally developed by Gwartney, Lawson and Block at the Fraser Institute
was likely the most used in empirical studies as of 2000. The other major index, which was developed by The Heritage Foundation
and The Wall Street Journal
appears superior for data work, although as it only goes back to 1995, it is less useful for historical comparisons.
According to the creators of the indices, these rankings correlate strongly with higher average income per person, higher income of the poorest 10%, higher life expectancy, higher literacy, lower infant mortality, higher access to water sources and less corruption. The people living in the top one-fifth of countries enjoy an average income of $23,450 and a growth rate in the 1990s of 2.56 percent per year; in contrast, the bottom one-fifth in the rankings had an average income of just $2,556 and a -0.85 percent growth rate in the 1990s. The poorest 10 percent of the population have an average income of just $728 in the lowest ranked countries compared with over $7,000 in the highest ranked countries. The life expectancy of people living in the highest ranked nations is 20 years longer than for people in the lowest ranked countries.
Higher economic freedom, as measured by both the Heritage and the Fraser indices, correlates strongly with higher self-reported happiness.
Erik Gartzke of the Fraser Institute estimates that countries with a high EFW are significantly less likely to be involved in wars, while his measure of democracy
had little or no impact.
The Economic Freedom of the World score for the entire world has grown considerably in recent decades. The average score has increased from 5.17 in 1985 to 6.4 in 2005. Of the nations in 1985, 95 nations increased their score, seven saw a decline, and six were unchanged. Using the 2008 Index of Economic Freedom methodology world economic freedom has increased 2.6 points since 1995.
Members of the World Bank Group
also use Index of Economic Freedom as the indicator of investment climate, because it covers more aspects relevant to the private sector in wide number of countries.
The nature of economic freedom is often in dispute. Robert Lawson, the co-author of EFW, even acknowledges the potential shortcomings of freedom indices: "The purpose of the EFW index is to measure, no doubt imprecisely, the degree of economic freedom that exists." He likens the recent attempts of economists to measure economic freedom to the initial attempts of economists to measure GDP: "They [macroeconomists] were
scientists who sat down to design, as best they could with the tools at hand, a measure of the current economic activity of the nation. Economic activity exists and their job was to measure it. Likewise economic freedom exists. It is a thing. We can define and measure it."
Thus, it follows that some economists, socialists and anarchists contend that the existing indicators of economic freedom are too narrowly defined and should take into account a broader conception of economic freedoms.
Critics of the indices (e.g. Thom Hartmann
) also oppose the inclusion business-related measures like corporate charters and intellectual property
protection. John Miller in Dollars & Sense
has stated that the indices are "a poor barometer of either freedom more broadly construed or of prosperity." He argues that the high correlation between living standards and economic freedom as measured by IEF is the result of choices made in the construction of the index that guarantee this result. For example, the treatment of a large informal sector (common in poor countries) as an indicator of restrictive government policy, and the use of the change in the ratio of government spending to national income, rather than the level of this ratio. Hartman argues that these choices cause the social democratic European countries to rank higher than countries where the government share of the economy is small but growing.
Economists Dani Rodrik
and Jeffrey Sachs
have separately noted that there appears to be little correlation between measured economic freedom and economic growth when the least free countries are disregarded, as indicated by the strong growth of the Chinese economy in recent years. Morris Altman found that there is a relatively large correlation between economic freedom and both per capita income and per capita growth. He argues that this is especially true when it comes to sub-indices relating to property rights and sound money, while he calls into question the importance of sub-indices relating to labor regulation and government size once certain threshold values are passed. John Miller further observes that Hong Kong
and Singapore
, both only "partially free" according to Freedom House
, are leading countries on both economic freedom indices and casts doubt on the claim that measured economic freedom is associated with political freedom. However, according to the Freedom House, "there is a high and statistically significant correlation between the level of political freedom as measured by Freedom House and economic freedom as measured by the Wall Street Journal/Heritage Foundation survey."
and other economists have considered economic freedom in terms of the set of economic choices available to individuals.
's distinction between positive freedom and negative freedom. Classical liberals favour a focus on negative freedom as did Berlin himself. By contrast Amartya Sen
argues for an understanding of freedom in terms of capabilities to pursue a range of goals. One measure which attempts to assess freedom in the positive sense is Goodin, Rice, Parpo, and Eriksson's measure of discretionary time, which is an estimate of how much time people have at their disposal during which they are free to choose the activities in which they participate, after taking into account the time they need to spend acquiring the necessities of life.
included freedom from want in his Four freedoms
speech. Roosevelt stated that freedom from want "translated into world terms, means economic understandings which will secure to every nation a healthy peacetime life for its inhabitants-everywhere in the world". In terms of US policy, Roosevelt's New Deal
included economic freedoms such as freedom of trade union
organisation, as well as a wide range of policies of government intervention and redistributive taxation aimed at promoting freedom from want. Internationally, Roosevelt favored the policies associated with the Bretton Woods Agreement which fixed exchange rates and established international economic institutions such as the World Bank
and International Monetary Fund
.
Herbert Hoover
saw economic freedom as a fifth freedom, which secures survival of Roosevelt's Four freedoms. He described economic freedom as freedom "for men to choose their own calling, to accumulate property in protection of their children and old age, [and] freedom of enterprise that does not injure others."
) states that "all human beings, irrespective of race, creed or sex, have the right to pursue both their material well-being and their spiritual development in conditions of freedom and dignity, of economic security and equal opportunity". The ILO further states that "The right of workers and employers to form and join organizations of their own choosing is an integral part of a free and open society."
Policy debate
Policy debate is a form of speech competition in which teams of two advocate for and against a resolution that typically calls for policy change by the United States federal government or security discourse...
s. As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom. One major approach to economic freedom comes from classical liberal and libertarian
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...
traditions emphasizing free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
s and private property
Private property
Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...
, while another extends the welfare economics
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...
study of individual choice, with greater economic freedom coming from a "larger" (in some technical sense) set of possible choices. Another more philosophical perspective emphasizes its context in distributive justice
Distributive justice
Distributive justice concerns what some consider to be socially just allocation of goods in a society. A society in which incidental inequalities in outcome do not arise would be considered a society guided by the principles of distributive justice...
and basic freedoms of all individuals. Other conceptions of economic freedom include freedom from want
Four Freedoms
The Four Freedoms were goals articulated by US President Franklin D. Roosevelt on January 6, 1941. In an address known as the Four Freedoms speech , he proposed four fundamental freedoms that people "everywhere in the world" ought to enjoy:# Freedom of speech and expression# Freedom of worship#...
and the freedom to engage in collective bargaining
Collective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...
.
The free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
viewpoint understands economic liberty as the freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft. This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative. There are several indices of economic freedom
Indices of Economic Freedom
The annual survey Economic Freedom of the World is an indicator produced by the Fraser Institute, a Canadian think tank which attempts to measure the degree of economic freedom in the world's nations. This indicator has been used in peer-reviewed studies some of which have found a range of...
that attempt to measure free market economic freedom. Some empirical studies based on these rankings have found higher living standards, economic growth, income equality, less corruption and less political violence to be correlated with free markets. However, these results and their interpretation remain controversial.
Free market viewpoint
Rule of law
Free market advocates argue that the conservative principle of the rule of lawRule of law
The rule of law, sometimes called supremacy of law, is a legal maxim that says that governmental decisions should be made by applying known principles or laws with minimal discretion in their application...
both requires, and is required for economic freedom. Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
argued that the certainty of law contributed to the prosperity of the West more than any other single factor. Other important principles of the rule of law are the generality and equality of the law
Equality before the law
Equality before the law or equality under the law or legal egalitarianism is the principle under which each individual is subject to the same laws....
, which require that all legal rules apply equally to everybody. These principles can be seen as safeguards against severe restrictions on liberty, because they require that all laws equally apply to those with political and coercive power as well as those who are governed. Principles of the generality and equality of the law exclude special privileges and arbitrary application of law, that is laws favoring one group at the expense of other citizens. According to Friedrich Hayek, equality before the law is incompatible with any activity of the government aiming to achieve the material equality of different people. He asserts that a state's attempt to place people in the same (or similar) material position leads to an unequal treatment of individuals and to a compulsory redistribution of income. Both of those actions are contributing to a decline in economic freedom.
Hayek's position has been criticised as logically incoherent. Westmoreland argues that, in Hayek's final formulation, any tax system passes the rule of law test provided that it is imposed predictably and thus "Hayek does not achieve the intended synthesis of libertarianism and conservatism." http://www.springerlink.com/index/WN35W65318683Q23.pdf.
Private property rights
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
sees property rights as "the most basic of human rights and an essential foundation for other human rights." With property rights protected, people are free to choose the use of their property, earn on it, and transfer it to anyone else, as long as they do it on a voluntary basis and do not resort to force, fraud or theft. In such conditions most people can achieve much greater personal freedom and development than under a regime of government coercion. A secure system of property rights also reduces uncertainty and encourages investments, creating favorable conditions for an economy to be successful. Empirical evidence suggests that countries with strong property rights systems have economic growth rates almost twice as high as those of countries with weak property rights systems, and that a market system with significant private property rights is an essential condition for democracy. According to Hernando de Soto
Hernando de Soto (economist)
Hernando de Soto is a Peruvian economist known for his work on the informal economy and on the importance of business and property rights. He is the president of the Institute for Liberty and Democracy , located in Lima, Peru.-Childhood and education:Hernando de Soto was born in 1941 in Arequipa,...
, much of the poverty in the Third World countries is caused by the lack of Western systems of laws and well-defined and universally recognized property rights. De Soto argues that because of the legal barriers poor people in those countries can not utilize their assets to produce more wealth. Pierre Proudhon, a socialist and anarchist thinker, argued that property is both theft and freedom.
On the other hand, many leftists dispute that private property means "economic freedom" and believe in a system where people can lay claim to things based on personal use. They claim that "Property is the domination of an individual, or a coalition of individuals, over things; it is not the claim of any person or persons to the use of things" and "this is, usufruct
Usufruct
Usufruct is the legal right to use and derive profit or benefit from property that either belongs to another person or which is under common ownership, as long as the property is not damaged or destroyed...
, a very different matter. Property means the monopoly of wealth, the right to prevent others using it, whether the owner needs it or not."
Freedom of contract
Freedom of contractFreedom of contract
Freedom of contract is the freedom of individuals and corporations to form contracts without government restrictions. This is opposed to government restrictions such as minimum wage, competition law, or price fixing...
is the right to choose one's contracting parties and to trade with them on any terms and conditions one sees fit. Contracts permit individuals to create their own enforceable legal rules, adapted to their unique situations. Parties decide whether contracts are profitable or fair, but once a contract is made they are obliged to fulfill its terms, even if they are going to sustain losses by doing so. Through making binding promises people are free to pursue their own interests. The main economic function of contracts is to provide transferability of property rights. Transferability largely depends on the enforceability of contracts, which is enabled by the judicial system. In Western societies the state does not enforce all types of contracts, and in some cases it intervenes by prohibiting certain arrangements, even if they are made between willing parties. However, not all contracts need to be enforced by the state. For example, in the United States there is a large number of third-party arbitration
Arbitration
Arbitration, a form of alternative dispute resolution , is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons , by whose decision they agree to be bound...
tribunals which resolve disputes under private commercial law. Negatively understood, freedom of contract is freedom from government interference and from imposed value judgments of fairness. The notion of "freedom of contract" was given one of its most famous legal expressions in 1875 by Sir George Jessel
George Jessel (jurist)
Sir George Jessel , a British judge, was born in London. He was one of the most influential commercial law and equity judges of his time, and served as the Master of the Rolls.-Early life and education:...
MR
Master of the Rolls
The Keeper or Master of the Rolls and Records of the Chancery of England, known as the Master of the Rolls, is the second most senior judge in England and Wales, after the Lord Chief Justice. The Master of the Rolls is the presiding officer of the Civil Division of the Court of Appeal...
:
The doctrine of freedom of contract received one of its strongest expressions in the US Supreme Court case of Lochner v New York which struck down legal restrictions on the working hours of bakers. http://www.pbs.org/wnet/supremecourt/capitalism/landmark_lochner.html
Critics of the classical view of freedom of contract argue that this freedom is illusory when the bargaining power of the parties is highly unequal, most notably in the case of contracts between employers and workers. As in the case of restrictions on working hours, workers as a group may benefit from legal protections that prevent individuals agreeing to contracts that require long working hours. In its West Coast Hotel Co. v. Parrish
West Coast Hotel Co. v. Parrish
West Coast Hotel Co. v. Parrish, , was a decision by the United States Supreme Court upholding the constitutionality of minimum wage legislation enacted by the State of Washington, overturning an earlier decision in Adkins v. Children's Hospital,...
decision in 1937, overturning Lochner, the Supreme Court cited an earlier decisions http://www.law.cornell.edu/supct/html/historics/USSC_CR_0300_0379_ZO.html
From this point on, the Lochner view of freedom of contract has been rejected by US courts http://www.pbs.org/wnet/supremecourt/capitalism/landmark_lochner.html.
Economic and political freedom
Some free market advocates argue that political and civil libertiesCivil liberties
Civil liberties are rights and freedoms that provide an individual specific rights such as the freedom from slavery and forced labour, freedom from torture and death, the right to liberty and security, right to a fair trial, the right to defend one's self, the right to own and bear arms, the right...
have simultaneously expanded with market-based economies, and present empirical evidence to support the claim that economic and political freedoms are linked.
In Capitalism and Freedom
Capitalism and Freedom
Capitalism and Freedom is a book by Milton Friedman originally published in 1962 by the University of Chicago Press which discusses the role of economic capitalism in liberal society. It sold over 400,000 copies in the first 18 years and more than half a million since 1962. It has been translated...
(1962), Friedman developed the argument that economic freedom, while itself an extremely important component of total freedom, is also a necessary condition for political freedom. He commented that centralized control of economic activities was always accompanied with political repression. In his view, voluntary character of all transactions in a free market economy and wide diversity that it permits are fundamental threats to repressive political leaders and greatly diminish power to coerce. Through elimination of centralized control of economic activities, economic power is separated from political power, and the one can serve as counterbalance to the other. Friedman feels that competitive capitalism is especially important to minority groups, since impersonal market forces protect people from discrimination in their economic activities for reasons unrelated to their productivity.
Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
economist Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
argued that economic and political freedom were mutually dependent: "The idea that political freedom can be preserved in the absence of economic freedom, and vice versa, is an illusion. Political freedom is the corollary of economic freedom. It is no accident that the age of capitalism became also the age of government by the people."
In The Road to Serfdom
The Road to Serfdom
The Road to Serfdom is a book written by the Austrian-born economist and philosopher Friedrich von Hayek between 1940–1943, in which he "warned of the danger of tyranny that inevitably results from government control of economic decision-making through central planning," and in which he argues...
, Hayek argued that "Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends." Hayek criticized socialist policies as the slippery slope that can lead to totalitarianism.
Gordon Tullock
Gordon Tullock
Gordon Tullock is an economist and retired Professor of Law and Economics at the George Mason University School of Law. He is best known for his work on public choice theory, the application of economic thinking to political issues...
has argued that "the Hayek-Friedman argument" predicted totalitarian governments in much of Western Europe in the late 20th century - which did not occur. He uses the example of Sweden, in which the government at that time controlled 63 percent of GNP
GNP
Gross National Product is the market value of all products and services produced in one year by labor and property supplied by the residents of a country...
, as an example to support his argument that the basic problem with The Road to Serfdom is "that it offered predictions which turned out to be false. The steady advance of government in places such as Sweden has not led to any loss of non-economic freedoms." While criticizing Hayek, Tullock still praises the classical liberal notion of economic freedom, saying, "Arguments for political freedom are strong, as are the arguments for economic freedom. We needn’t make one set of arguments depend on the other."
Indices of economic freedom
The annual surveys Economic Freedom of the World (EFW) and Index of Economic FreedomIndex of Economic Freedom
The Index of Economic Freedom is a series of 10 economic measurements created by The Heritage Foundation and The Wall Street Journal. Its stated objective is to measure the degree of economic freedom in the world's nations....
(IEF) are two indices which attempt to measure the degree of economic freedom in the world's nations. The EFW index, originally developed by Gwartney, Lawson and Block at the Fraser Institute
Fraser Institute
The Fraser Institute is a Canadian think tank. It has been described as politically conservative and right-wing libertarian and espouses free market principles...
was likely the most used in empirical studies as of 2000. The other major index, which was developed by The Heritage Foundation
The Heritage Foundation
The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...
and The Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
appears superior for data work, although as it only goes back to 1995, it is less useful for historical comparisons.
According to the creators of the indices, these rankings correlate strongly with higher average income per person, higher income of the poorest 10%, higher life expectancy, higher literacy, lower infant mortality, higher access to water sources and less corruption. The people living in the top one-fifth of countries enjoy an average income of $23,450 and a growth rate in the 1990s of 2.56 percent per year; in contrast, the bottom one-fifth in the rankings had an average income of just $2,556 and a -0.85 percent growth rate in the 1990s. The poorest 10 percent of the population have an average income of just $728 in the lowest ranked countries compared with over $7,000 in the highest ranked countries. The life expectancy of people living in the highest ranked nations is 20 years longer than for people in the lowest ranked countries.
Higher economic freedom, as measured by both the Heritage and the Fraser indices, correlates strongly with higher self-reported happiness.
Erik Gartzke of the Fraser Institute estimates that countries with a high EFW are significantly less likely to be involved in wars, while his measure of democracy
Democracy
Democracy is generally defined as a form of government in which all adult citizens have an equal say in the decisions that affect their lives. Ideally, this includes equal participation in the proposal, development and passage of legislation into law...
had little or no impact.
The Economic Freedom of the World score for the entire world has grown considerably in recent decades. The average score has increased from 5.17 in 1985 to 6.4 in 2005. Of the nations in 1985, 95 nations increased their score, seven saw a decline, and six were unchanged. Using the 2008 Index of Economic Freedom methodology world economic freedom has increased 2.6 points since 1995.
Members of the World Bank Group
World Bank Group
The World Bank Group is a family of five international organizations that makes leveraged loans, generally to poor countries.The Bank came into formal existence on 27 December 1945 following international ratification of the Bretton Woods agreements, which emerged from the United Nations Monetary...
also use Index of Economic Freedom as the indicator of investment climate, because it covers more aspects relevant to the private sector in wide number of countries.
The nature of economic freedom is often in dispute. Robert Lawson, the co-author of EFW, even acknowledges the potential shortcomings of freedom indices: "The purpose of the EFW index is to measure, no doubt imprecisely, the degree of economic freedom that exists." He likens the recent attempts of economists to measure economic freedom to the initial attempts of economists to measure GDP: "They [macroeconomists] were
scientists who sat down to design, as best they could with the tools at hand, a measure of the current economic activity of the nation. Economic activity exists and their job was to measure it. Likewise economic freedom exists. It is a thing. We can define and measure it."
Thus, it follows that some economists, socialists and anarchists contend that the existing indicators of economic freedom are too narrowly defined and should take into account a broader conception of economic freedoms.
Critics of the indices (e.g. Thom Hartmann
Thom Hartmann
Thom Hartmann is an American radio host, author, former psychotherapist and entrepreneur, and progressive political commentator. His nationally-syndicated radio show, The Thom Hartmann Program, airs in the United States and has 2.75 million listeners a week...
) also oppose the inclusion business-related measures like corporate charters and intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
protection. John Miller in Dollars & Sense
Dollars & Sense
Dollars & Sense is a magazine dedicated to providing left-wing perspectives on economics.Published six times a year since 1974, it is edited by a collective of economists, journalists, and activists committed to the ideals of social justice and economic democracy.It was initially sponsored by the...
has stated that the indices are "a poor barometer of either freedom more broadly construed or of prosperity." He argues that the high correlation between living standards and economic freedom as measured by IEF is the result of choices made in the construction of the index that guarantee this result. For example, the treatment of a large informal sector (common in poor countries) as an indicator of restrictive government policy, and the use of the change in the ratio of government spending to national income, rather than the level of this ratio. Hartman argues that these choices cause the social democratic European countries to rank higher than countries where the government share of the economy is small but growing.
Economists Dani Rodrik
Dani Rodrik
Dani Rodrik is a Turkish economist and Rafiq Hariri Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University, teaching in the School's MPA/ID Program. He has published widely in the areas of international economics, economic development, and...
and Jeffrey Sachs
Jeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...
have separately noted that there appears to be little correlation between measured economic freedom and economic growth when the least free countries are disregarded, as indicated by the strong growth of the Chinese economy in recent years. Morris Altman found that there is a relatively large correlation between economic freedom and both per capita income and per capita growth. He argues that this is especially true when it comes to sub-indices relating to property rights and sound money, while he calls into question the importance of sub-indices relating to labor regulation and government size once certain threshold values are passed. John Miller further observes that Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
and Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, both only "partially free" according to Freedom House
Freedom House
Freedom House is an international non-governmental organization based in Washington, D.C. that conducts research and advocacy on democracy, political freedom and human rights...
, are leading countries on both economic freedom indices and casts doubt on the claim that measured economic freedom is associated with political freedom. However, according to the Freedom House, "there is a high and statistically significant correlation between the level of political freedom as measured by Freedom House and economic freedom as measured by the Wall Street Journal/Heritage Foundation survey."
Choice sets and economic freedom
Amartya SenAmartya Sen
Amartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...
and other economists have considered economic freedom in terms of the set of economic choices available to individuals.
Positive and negative freedom
The differences between alternative views of economic freedom have been expressed in terms of Isaiah BerlinIsaiah Berlin
Sir Isaiah Berlin OM, FBA was a British social and political theorist, philosopher and historian of ideas of Russian-Jewish origin, regarded as one of the leading thinkers of the twentieth century and a dominant liberal scholar of his generation...
's distinction between positive freedom and negative freedom. Classical liberals favour a focus on negative freedom as did Berlin himself. By contrast Amartya Sen
Amartya Sen
Amartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...
argues for an understanding of freedom in terms of capabilities to pursue a range of goals. One measure which attempts to assess freedom in the positive sense is Goodin, Rice, Parpo, and Eriksson's measure of discretionary time, which is an estimate of how much time people have at their disposal during which they are free to choose the activities in which they participate, after taking into account the time they need to spend acquiring the necessities of life.
Freedom from want
Franklin D. RooseveltFranklin D. Roosevelt
Franklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...
included freedom from want in his Four freedoms
Four Freedoms
The Four Freedoms were goals articulated by US President Franklin D. Roosevelt on January 6, 1941. In an address known as the Four Freedoms speech , he proposed four fundamental freedoms that people "everywhere in the world" ought to enjoy:# Freedom of speech and expression# Freedom of worship#...
speech. Roosevelt stated that freedom from want "translated into world terms, means economic understandings which will secure to every nation a healthy peacetime life for its inhabitants-everywhere in the world". In terms of US policy, Roosevelt's New Deal
New Deal
The New Deal was a series of economic programs implemented in the United States between 1933 and 1936. They were passed by the U.S. Congress during the first term of President Franklin D. Roosevelt. The programs were Roosevelt's responses to the Great Depression, and focused on what historians call...
included economic freedoms such as freedom of trade union
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...
organisation, as well as a wide range of policies of government intervention and redistributive taxation aimed at promoting freedom from want. Internationally, Roosevelt favored the policies associated with the Bretton Woods Agreement which fixed exchange rates and established international economic institutions such as the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
and International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
.
Herbert Hoover
Herbert Hoover
Herbert Clark Hoover was the 31st President of the United States . Hoover was originally a professional mining engineer and author. As the United States Secretary of Commerce in the 1920s under Presidents Warren Harding and Calvin Coolidge, he promoted partnerships between government and business...
saw economic freedom as a fifth freedom, which secures survival of Roosevelt's Four freedoms. He described economic freedom as freedom "for men to choose their own calling, to accumulate property in protection of their children and old age, [and] freedom of enterprise that does not injure others."
Freedom of association and unions
The Philadelphia Declaration (enshrined in the constitution of the International Labour OrganizationInternational Labour Organization
The International Labour Organization is a specialized agency of the United Nations that deals with labour issues pertaining to international labour standards. Its headquarters are in Geneva, Switzerland. Its secretariat — the people who are employed by it throughout the world — is known as the...
) states that "all human beings, irrespective of race, creed or sex, have the right to pursue both their material well-being and their spiritual development in conditions of freedom and dignity, of economic security and equal opportunity". The ILO further states that "The right of workers and employers to form and join organizations of their own choosing is an integral part of a free and open society."
See also
- Economic liberalismEconomic liberalismEconomic liberalism is the ideological belief in giving all people economic freedom, and as such granting people with more basis to control their own lives and make their own mistakes. It is an economic philosophy that supports and promotes individual liberty and choice in economic matters and...
- Economic Freedom of the World
- Index of Economic Freedom 2003-2006Index of Economic Freedom 2003-2006The Index of Economic Freedom 2003-2006 rankings show the historical development of Economic Freedom as gauged annually by the Heritage Foundation and the Wall Street Journal.Current ratings are .Countries that shared the same rank received a tie score...
- Index of Economic Freedom historical rankings
- List of indices of freedom
- Laissez-faireLaissez-faireIn economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
- List of countries by economic freedom
- Four Freedoms (European Union)Four Freedoms (European Union)The European Union's Internal Market seeks to guarantee the free movement of goods, capital, services, and people – the EU's four freedoms – within the EU's 27 member states.The Internal Market is intended to be conducive to increased competition, increased specialisation, larger...
- Capitalism and FreedomCapitalism and FreedomCapitalism and Freedom is a book by Milton Friedman originally published in 1962 by the University of Chicago Press which discusses the role of economic capitalism in liberal society. It sold over 400,000 copies in the first 18 years and more than half a million since 1962. It has been translated...
- Free to ChooseFree to ChooseFree to Choose is a book and a ten-part television series broadcast on public television by economists Milton and Rose D...
Further reading
- Friedrich Hayek, The Constitution of LibertyThe Constitution of LibertyThe Constitution of Liberty is a book by Austrian economist and Nobel Prize recipient Friedrich A. Hayek. The book was first published in 1960 by the University of Chicago Press and it is an interpretation of civilization as being made possible by the fundamental principles of liberty, which the...
- Friedrich Hayek, The Road to SerfdomThe Road to SerfdomThe Road to Serfdom is a book written by the Austrian-born economist and philosopher Friedrich von Hayek between 1940–1943, in which he "warned of the danger of tyranny that inevitably results from government control of economic decision-making through central planning," and in which he argues...
- Milton Friedman, Capitalism and FreedomCapitalism and FreedomCapitalism and Freedom is a book by Milton Friedman originally published in 1962 by the University of Chicago Press which discusses the role of economic capitalism in liberal society. It sold over 400,000 copies in the first 18 years and more than half a million since 1962. It has been translated...
- Ludwig von MisesLudwig von MisesLudwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
, Economic Freedom and Interventionism - Amartya SenAmartya SenAmartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...
, Development as FreedomDevelopment as FreedomDevelopment as Freedom is a book focused on international development written by economist Amartya Sen.-Background:Amartya Sen posits that all individuals are endowed with a certain set of capabilities while it is simply a matter of realising these capabilities that will allow a person to escape...
External links
- Economic Freedom by Robert A. Lawson of the Fraser InstituteFraser InstituteThe Fraser Institute is a Canadian think tank. It has been described as politically conservative and right-wing libertarian and espouses free market principles...
at the Concise Encyclopedia of EconomicsConcise Encyclopedia of EconomicsThe Concise Encyclopedia of Economics is a widely-used encyclopedia of economics. It is used by students and teachers from high school to college to graduate school, and is one of the most popular worldwide resources for researching and understanding topics in economics.Articles are written by... - John Miller, "Free, Free at Last" in Dollars & SenseDollars & SenseDollars & Sense is a magazine dedicated to providing left-wing perspectives on economics.Published six times a year since 1974, it is edited by a collective of economists, journalists, and activists committed to the ideals of social justice and economic democracy.It was initially sponsored by the...
magazine - The Protection Of Economic Rights & Freedoms