Friday, 14 March 2008

Why freedom matters

When I decided to attend a discussion of Why Economic Freedom Matters at the International Policy Network, I had no idea that I was going to meet one of the most important figures currently influencing the debate between liberalism and the managed economy. Robert Lawson is not a household name, but his Economic Freedom of the World project, published by The Fraser Institute, is one of the most powerful arguments in favour of economic freedom.

Lawson explained that the idea was born in the hot and alcohol-fuelled debates of his undergraduate days. He was an early adopter of liberal economics, citing Smith and Friedman in the face of his friends’ Marxism and Keynesianism. The result of these debates was one familiar to many of us: not once did he recall changing anybody’s mind, nor did he ever question his convictions. For all the wonders of abstract philosophical debate, none of it proved much.

As a professional academic, his solution to this problem has been empiricism. Rather than debate what the effects of different economic policies should be, he has looked at what they actually are. Unable to conduct laboratory experiments, he has instead gone about grading the countries of the world against 42 different economic indicators in five broad categories

Size of government (the level of tax, government expenditure, state enterprise etc.)
Legal structure and security of property rights (including the rule of law, independence of the judiciary and the role of the military in government)
Access to sound money (mainly the avoidance of inflation, but also freedom to hold foreign currency)
Freedom to exchange with foreigners (tariffs, capital controls, regulatory burdens, black market exchange rates)
Regulation of credit, labour and business (how much government meddles)

The results are quite fascinating, and also quite telling. The ten most free economies in the world are

1. Hong Kong
2. Singapore
3. New Zealand
4. Switzerland
5. United States
6. United Kingdom
7. Canada
8. Estonia
9. Ireland
10. Australia.

By comparison, Germany is 18th, Sweden 22nd and France 52nd. The highest African country is Botswana (38) while the lowest is Zimbabwe (141st), the bottom of the league (with the remaining 50 countries providing too little data for Lawson to make an assessment). Venezuela, which was 11th in 1975, is now 135th. Interestingly, China is only 86th, but Lawson explains that while the Special Economic Zones by the coast (some of which are huge: Hainan is larger than Belgium) are probably the freest places in the world, the hinterland is as backward and restricted as ever.

All interesting stuff, and there were some fascinating case studies, but the real fun starts when one compares the index to other indicators. Firstly, income: there is a clear trend of greater freedom translating to greater income (measured per capita at PPP, for the economists among you); each quartile contained populations approximately twice as wealth as the quartile below. The pattern with regards growth was less clear: while the lowest quartile hardly grew at all, the third and first quartile outperformed the second; the presence of China in that third quartile may have played a part there, however, and its economic status is unclear, as noted above.

Perhaps the most interesting findings relate to the relationship between freedom and poverty, however, for the critics of liberalism usually blame it for impoverishing the poor. This is not what Lawson found, however. Proportionally, the share of national wealth owned by the poorest 10 per cent of the population rose ever so slightly as freedom increased, but not evenly: again, the third and first quartile were more equitable than the second and fourth. But if one looked at the overall wealth of that poorest 10 per cent, it was dramatically apparent that it is better to be the poorest among the rich than the poorest among the poor. While in the poorest economies the average amount held by the poorest 10 per cent was just $905, in the third quartile it was $1,545, in the second $2,656 and in the freest economies even the poorest 10 per cent had $7,337 to call their own. As noted above, these are PPP figures; the extent to which a dollar stretches in each country has been evened out.

A few other factors are worth noting (though many follow from the above): life expectancy and access to clean water and sanitation rise in line with economic freedom. Meanwhile, incidents of tuberculosis decline as economic freedom rises, and so, intriguingly, do abuses of civil rights. For it appears that Hayek was right; economic freedom is directly related to political freedom. It may be that the command economcy needs political oppression to make it work (to silence the critics of failing policies), or conversely that a lack of political freedom stifles economic freedom (who can do business without the rule of law?) but socialism and tyranny go hand in hand.

Finally, and also contrary to popular belief, it appears that economic freedom correlates with care for the environmental. This is again the reverse of what is often said – that without regulation unscrupulous countries will dump their waste on society; and that fast-consuming capitalist societies are raping the planet. If one compares environmental performance indicators (local air quality, water quality and so forth) to economic freedom it is again the free who come out best in a clear ascending curve.

Liberals have long maintained freedom was not merely an end in itself, but a means to help achieve better outcomes for everybody in society, to free everyone to maximise their own potential and gain most out of society. Their “discontents” have countered that liberalism (or “capitalism”) exploits the working masses to benefit a privileged few and that it would be fairer and better for all if the economy were managed, businesses regulated and money-supply served the goal of full employment. They are wrong, and the Economic Freedom of the World project proves it.

If greater wealth, health and prosperity are exploitation, I wish the bosses would come for me!

4 comments:

Jennie said...

"greater freedom translating to greater income"

Hmm... of course it could be that greater income leads to greater freedom. Beware of confusing correlation with causation.

Tom Papworth said...

Jennie,

I'm not, I assure you. At the point that I used that phrase, I was only talking about economic freedom, and one can hardly argue that increasing incomes leads to greater economic freedom.

If anything, the reverse is true. As we become wealthier we become cavalier about what has brought this wealth, and begin to flirt with collectivist responses to the remaining problems.

In so doing, we stifle growth and (where the problems are economic, such as remaining pockets of poverty) make it harder to solve those final problems.

Martin McCallion said...

I get the impression that one of your paragraphs has got a bit mixed up, but maybe it's just me who is.

"incidents of tuberculosis decline as economic freedom rises, and so, intriguingly, do abuses of civil rights."

So you're saying that, as economic freedom increases, abuses of civil rights decrease, right? Political freedom, therefore, is increasing with economic freedom. Your next sentence confirms this:

"For it appears that Hayek was right; economic freedom is directly related to political freedom."

But you go on to say:

"It may be that economic freedom needs political oppression to make it work (to silence the critics of failing policies) or that political freedom stifles economic freedom (who can do business without the rule of law)"

Which contradicts what you said before: economic freedom needs political oppression? If that were the case it wouldn't be worth it. Because, you know, freedom matters.

Finally:
but socialism and tyranny go hand in hand.

I don't see how that follows from any of the above. But in any case, how would we know? As far as I know socialism has never really been tried.

Tom Papworth said...

Martin,

Thank you for pointing that out. That paragraph had become confused. I have now corrected it.

I can't agree with your final statement, however. Socialism has been tried countless times, and every time it fails its ideologues deny that that was an example of socialism.

Simply defining out negative case-studies does not make it so.

It would be more accurate to say that the socialist ideal has never been realised, but that is exactly because it always does, and inevitably must, result in tyranny.