[Robert Lawson’s online course Economic Freedom Around the World begins October 18.]
The key ingredients of economic freedom are
- personal choice,
- voluntary exchange coordinated by markets,
- freedom to enter and compete in markets, and
- protection of persons and their property from aggression by others.
These four cornerstones imply that economic freedom is present when individuals are permitted to choose for themselves and engage in voluntary transactions as long as they do not harm the person or property of others. Individuals have a right to decide how they will use their time, talents, and resources, but they do not have a right to the time, talents, and resources of others. Put another way, individuals do not have a right to take things from others or demand that others provide things for them. Use of violence, theft, fraud, and physical invasions are not permissible, but otherwise, individuals are free to choose, trade and cooperate with others, and compete as they see fit.
In an economically free society, the primary role of law is to protect individuals and their property from aggression by others. The EFW index is designed to measure the extent to which the institutions and policies of a nation are consistent with this protective function. In order to achieve a high EFW rating, a country must provide secure protection of privately owned property, evenhanded enforcement of contracts, and a stable monetary environment. It also must keep taxes low, refrain from creating barriers to both domestic and international trade, and rely more fully on markets rather than the political process to allocate goods and resources.
Why Economic Freedom Is Important
Many scholarly articles have used the EFW data to examine the relationship between economic freedom and various measures of economic and social performance. This research indicates why economic freedom is vitally important to a society in a number of areas.
Economic freedom leads to more investment, higher per capita incomes, and growth rates. Dozens of studies have investigated the relationship between economic freedom on the one hand and investment, economic growth, and per person income on the other. These studies typically control for geographic, locational, political, educational, and numerous other factors. Most of them have found that higher levels of economic freedom, or certain components of economic freedom, exert an independent positive impact on investment, economic growth, and income per capita.
Economic freedom leads to less poverty and improvements in the general living conditions of a society. Critics sometimes charge that economic freedom and market allocation often result in the poor being left behind. The research in this area is inconsistent with this view. Countries with persistently high levels of economic freedom have lower poverty rates. Moreover, those that move toward more economic freedom enjoy better living standards across multiple dimensions.
Economic freedom encourages cooperation, tolerance, and peaceful relations. Voluntary exchange is the centerpiece of economically free economies. Both parties to an exchange gain and therefore buyers and sellers are encouraged to interact with those who give them the best deal, regardless of their racial, religious, ethnic, gender, or tribal characteristics. Markets reward those who serve others, including those they do not necessarily like. When markets thrive, people with vastly different characteristics often interact peacefully with each other. In turn, the peaceful interaction among diverse groups encourages tolerance and promotes understanding. In contrast, political allocation promotes divisiveness and polarization. When resources are allocated politically, individuals and groups get ahead by taking from others or imposing regulations that provide them with an advantage relative to others. This encourages various groups to bind together in order to gain advantages relative to other groups. Thus, political allocation leads to polarization and bitterness toward groups favored by the political process. In cases where a racial, religious, ethnic, or tribal group forms a majority, the political process is often used to oppress the minority. The empirical studies are consistent with this view. Countries with higher levels of economic freedom are less likely to experience both internal and external use of violence.
Economic freedom leads to entrepreneurial business activity; political allocation leads to crony capitalism and political corruption. When the function of government is limited to protection of people and their property and even-handed enforcement of contracts and settlement of disputes, entrepreneurs will get ahead by discovering highly valued products and lower-cost methods of production. Profits will direct resources toward productive projects — those that increase the value of resources. Similarly, losses will channel resources away from wasteful projects that reduce the value of resources. When resources are allocated by political decision-making, a system of crony capitalism will emerge. Predictably, politicians will allocate resources toward the politically powerful — those who can provide them with the most votes, campaign funds, high-paying jobs for political allies, and yes, even bribes. Unlike true entrepreneurs, crony capitalists do not create wealth; instead they form a coalition with political officials to plunder wealth from taxpayers and other citizens.
Will goods and resources be directed by markets or political officials?
This is the great debate of our time.
This debate highlights the importance of an accurate and objective measure of economic freedom. The Economic Freedom of the World index provides a measure that will help one track the direction of this debate, which is sure to affect the prosperity of the world in the years immediately ahead.
