Economic Freedom: Brief Overview
Economic freedom is simply the ability of individuals and families to make their own economic decisions free of government control or that of crony capitalists. The economic freedom index measures this through 42 variables rated on a scale of 0 (worst policy) to 10 (best policy).
In the world’s top peer-reviewed research journals, economic freedom has been shown to generate positive social and economic outcomes, including higher economic growth, increased political stability, and the peaceful development of other freedoms. (See the Appendix for more details.)
It is easy to see how economic freedom promotes well-being. Any transaction freely agreed to must benefit all parties; any transaction that does not benefit all parties would be rejected by the party that would come up short. This has consequences throughout the economy.
Consumers who are free to choose will only be attracted by superior quality and price. Producers and sellers, including new ones, are welcome to the market place and must constantly improve the price and quality of their products to meet customers’ demands or customers will not freely enter into transactions with them. The billions of mutually beneficial transactions that occur every day power this dynamic and spur increased productivity and wealth, new job creation, and reduced poverty.
Restrictions on freedom prevent people from making mutually beneficial transactions. Such free transactions are replaced by government action or by restricted, unfree markets often controlled by elites connected to the government. These transactions are marked by coercion in collecting taxes and lack of choice in accepting goods and services: instead of gains for both parties arising from each transaction, citizens must pay whatever bill is demanded in taxes or by crony capitalists and make do with whatever good or service is offered in return.
While the incentives of producers in a competitive market revolve around providing superior goods and services in order to attract consumers, the public sector and crony capitalists face no such incentives. Instead, incentives often focus keeping others out of the market place and on rewarding interest groups, seeking political advantage, or even penalizing unpopular groups. This is far different from mutually beneficial exchange, and can set group against group as each seeks advantages for itself at the cost of others.
When governments — or government friends under crony capitalism — control the economy, it grows slowly or not at all. Individuals and groups battle one another for wealth and privilege. People gain by cultivating connections, suppressing the opportunities of others and making them worse off. All too often, the individual gains not as an individual but as a member of rent-seeking group, whether economic, ethnic, political, or religious. Groups stand against each other, creating a breeding ground for hate and hopelessness. Without economic freedom, the biggest gains accrue to those who cut a bigger slice of a limited pie for themselves to the disadvantage of others. That exacerbates existing tensions.
Economic freedom transforms the dynamics of society. When people make their own economic choices, they gain only when they produce products or services desired in free exchange—in other words, by making people better off and increasing prosperity through improved and novel products and higher productivity. Those in other groups become customers, suppliers, clients. Overtime, this builds tolerance and a common sense of citizenship.
Thus, with economic freedom, the biggest gains are achieved by people who increase the size of the pie for everyone. This is a key reason that economic freedom has been shown to promote democracy and other freedoms. It is a dramatic change in dynamics that over time transforms society.
The impact of economic freedom on corruption needs emphasizing. Increasing economic freedom in and of itself will lessen corruption. Lack of economic freedom is the raw material of corruption. If you need to ask someone’s permission to do something, then there is someone to demand payments. If you are economically free and able to make your own economic decisions, if you don’t need someone’s permission to do something, then there is no one to pay-off.