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Economic freedom
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Economic freedom is a controversial term used in economic research and policy debates. As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom. One major approach to economic freedom comes from the libertarian tradition emphasizing free markets 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.
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Economic freedom is a controversial term used in economic research and policy debates. As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom. One major approach to economic freedom comes from the libertarian tradition emphasizing free markets 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.
Today the term is most commonly associated with a classical liberal (or free market) viewpoint, and defined 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.
Indices of economic freedom attempt to measure (free market) economic freedom, and empirical studies based on these rankings have found them to be correlated with higher living standards, economic growth, income equality, less corruption and less political violence. These economic freedom indices are sometimes used to rank countries by economic freedom, and are usually topped by Hong Kong and Singapore. Between 1985 and 2005, only a small number of surveyed countries did not increase their Economic Freedom of the World score. Some empirical analysis suggests that the index is not closely correlated with economic growth, but regression analysis of the disaggregated components suggests that some specific freedoms contribute to economic growth while others hamper it.
Other conceptions of economic freedom include freedom from want and the freedom to engage in collective bargaining.
Classical liberal viewpoint
Institutions of economic freedom
Rule of law
Classical liberals argue that the rule of law both requires, and is required for economic freedom. Friedrich Hayek argued that the certainty of law contributed to the prosperity of the West more that 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.
Private property rights
According to the classical liberal 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 theirs 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.
Freedom of contract
Freedom of contract 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:
Economic and political freedom
Some classical liberals argue that political and civil liberties 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.
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 Europe in the late 20th century. He uses 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." However, according to Robert Skidelsky, Hayek "safeguarded himself from such retrospective refutation." Skidelsky argues that Hayek's argument was contingent, and that, "By the 1970s there was some evidence of the slippery slope…and then there was Thatcher. Hayek's warning played a critical part in her determination to 'roll back the state.'"
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."
Walter E. Williams argues that economic freedom is not necessarily associated with political freedom, noting the example of Singapore, which is highly ranked on measures of economic freedom and little political freedom.
Indices of Economic Freedom
The annual surveys Economic Freedom of the World (EFW) and Index of Economic Freedom (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 major index, which was developed by the Heritage Institute 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.
Worldwide index of economic freedom 2009 - top and bottom 15 rankings
published by The Wall Street Journal and the Heritage Foundation | | Rank | Country | Freedom % |
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| 1 |  | 90 | | 2 |  | 87.1 | | 3 |  | 82.6 | | 4 |  | 82.2 | | 5 |  | 82 | | 6 | | 80.7 | | 7 |  | 80.5 | | 8 |  | 79.6 | | 9 |  | 79.4 | | 10 | | 79 | | 11 |  | 78.3 | | 12 | | 77 | | 13 |  | 76.4 | | 14 |  | 75.9 | | 15 |  | 75.2 |
| | | Rank | Country | Freedom % |
|---|
| 143 |  | 45.4 | | 144 | | 45.4 | | 145 |  | 45 | | 146 |  | 44.6 | | 147 |  | 44.2 | | 148 | | 43.8 | | 149 |  | 43.5 | | 150 | | 43.3 | | 151 | | 42.8 | | 152 |  | 39.9 | | 153 |  | 38.5 | | 154 | | 37.7 | | 155 |  | 27.9 | | 156 |  | 27.2 | | 157 | | 2 |
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The nature of economic freedom is often in dispute. 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, as indicated by the strong growth of the Chinese economy in recent years. 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."
Alternative views of economic freedom
Freedom from want
Franklin D. Roosevelt 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."
Positive and negative freedom
The differences between alternative views of economic freedom have been expressed in terms of Isaiah Berlin'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.
Freedom of association and union organization
The Philadelphia Declaration of the International Labour Organization 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."
Further reading
The Constitution of LibertyFriedrich Hayek, The Road to SerfdomMilton Friedman, Capitalism and FreedomJohn Miller, "" in Dollars & Sense magazineLudwig von Mises, Amartya Sen, Development as Freedom
See also
External links
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