Rethinking economic freedom

Annually, the Heritage Foundation, an American research and education institute, releases the Index of Economic Freedom. The index endeavors to measure the level of economic freedom across 186 countries relating to four fundamental areas of economic parameters; the rule of law, limited government, regulatory efficiency and open markets. Extending over 20 years, the supporters of the Index espouse the ideas of Adam Smith’s the Wealth of Nations; that greater economic freedom in this form relates to greater opportunity and greater wellbeing for society.

From an economics perspective it is not hard to reconcile these factors with greater performance; control over labour and property are fundamental economic concepts after all.

The right to private ownership creates value in the market system – people can assign prices to resources according to their relative value.  From this concept stems the idea of the Coase Theorem to assign accountability to externalities or the imposition of the policy of intellectual property – generating competition, innovation and hence growth in a variety of industries. Consequently, the rule of law to impose restrictions and framework on the property system – and hence resource allocation – is vital to economic function.

Additionally, the role of labour – being outlined in the Wealth of Nations as the “fund which originally supplies [the nation] with all the necessaries and conveniences of life” – holds equal economic significance, as a means to interact in the market system.

Thus, in an economically ‘free’ society the values of property and labour rights must be maintained to the extent that government intervention is minimal and voluntary exchange is possible.

From the Index of Economic Freedom we can see trends between economic freedom and social wellbeing. Based on the factors identified by the co-authors, “countries with higher levels of economic freedom substantially outperform others in economic growth, per capita incomes, health care, education, protection of the environment, and reduction of poverty….”.

So perhaps the logical conclusion would be that we should endeavour to continue to pursue these economic liberties, given their empirical correlation to what are easily considered economic imperatives. And yet numerous economists would argue against the pursuit of these ‘economic freedoms’. Recently this appears to be the approach of renowned economist Joseph Stiglitz.

In Stiglitz’s recent June 23 Richard Snape Lecture entitled “Creating a Learning Society”, the risks associated with pursuing certain economic freedoms were considered – that is, the potential risks associated with a modern capitalist system based on individual empowerment and incentive.

Stiglitz discussed removing the imposition of intellectual property and moving towards a sharing framework, given (under certain conditions) it is sharing and learning that enhances productivity and hence growth as opposed to any other factor. This I think asks one to question the way at which people go about business. For example, if the sharing of knowledge between corporations (essentially diminishing the role of competitive advantage) enhances overall productivity enhancing growth, and people only generate innovation and knowledge on the basis of competitive advantage, we have a paradox of growth.

Consequently, our social wellbeing could be limited by our perception of these economic freedoms when we rely on the market by itself.

Due consideration must be given to the difference between developing and developed countries in the role of capital accumulation versus technological productivity. Growth models, importantly captured in the Solow Swan residual, identify the increasing influence of productivity in more developed countries over a longer lifespan.

What this culminates in is a questioning of an inflexible set of economic freedoms in a changing environment. Perhaps initially it is more important to take solace in fundamental economic concepts, and we have 20 years of economic trends that point to the benefits of such freedoms. And yet, today, as we increasingly perceive increases in inequality and externality effects, in addition to the polarisation of society in the face of the market framework, we need to consider altering our alignment with these economic freedoms; substituting individual over communal consideration.

History is littered with individuals fighting to control their economic freedom, and hence individual empowerment. And yet none of these endeavors would have been successful had individuals not worked together as a united front. When Patrick Henry cried ‘Give me liberty, or give me death’ it was with the American dream in hand and thousands of colonists by his side. So why then do we support a much more individualistic framework when those freedoms are finally achieved?

No matter what side you align with, perhaps its time for a re-think of the way we consider economic freedom, whether to question or confirm what we’ve long come to accept.

For those interesting in accessing more information on economic freedom, the Fraser Institute and Charles Koch Institute have relevant publications available.