In chapter 1 of Capital and Freedom (1962), Milton and Rose Friedman made the argument that, instead of being antithetical to political freedom, economic freedom is compatible with political freedom. Their argument was reasonable, engaging and accessible to a wide audience. It came at a time when many intellectuals were inclined to believe that economic freedom ran contrary to political freedom. At the time, differences of opinion on the relationship between political and economic freedom were due in part to a lack of measurement of these phenomena. Today, with the accumulation of vast data sets of measures of political and economic freedom, it should be possible, empirically, to resolve the argument as to what is the relationship.1
While it may appear obvious and well-established empirically, that economic freedom furthers economic growth,2 there remain concerns about the casual relationship between the two. De Hann et al (2006, 176) argue that the possibility that economic freedom is co-determined along with economic growth "casts considerable doubt" on many of the studies of the effect of economic freedom on economic growth. The accumulation of additional years of data has enabled the application of so-called Granger (1969) or Granger-Sims (1980) casuality tests to investigate this matter. Farr (1998) and Dawson (2003) have done just this, Dawson using data through 2000, finding that economic freedom is indeed a cause of economic growth.3
The effects of political freedom on economic growth, and of political and economic freedom on each other are less well developed than the effect of economic freedom on economic growth. De Vanssay, et al (2004) find some evidence that governments that are more accountable to the people are more likely to adopt economic freedom. Wu and Davis (2004), while arguing that economic freedom leads to economic development, and that economic development leads to political freedom, indicate that studies of a direct relationship between economic freedom and political freedom have not been conclusive. Furthermore, they say (p. 170), "Empirical analyses on the possible reverse relationship between political freedom and economic freedom are largely lacking."
As will be shown below, measures of political and economic freedom through 2005 indicate that political and economic freedom are positively correlated; and, that there is strong evidence that political freedom causes economic freedom, but only weak evidence that economic freedom causes political freedom. In addition, there is strong evidence that both political and economic freedom further economic growth. These results confirm and reinforce prior findings with regard to the relationship between economic freedom and economic growth, and add to our understanding of the relationships between economic and political freedom, and these and economic growth.
The rest of this paper is organized as follows: The next section describes the measurement of political and economic freedom. Then, the paper looks at the correlation of the two across countries, and their trends over the past thirty years. Then, some econometric analyses is conducted in which political and economic freedom and real GDP per capita are regressed against lagged values of these three variables and certain other variables, in order to explore the possible cause and effect relationships that bring about the observed correlation.
The Measurement of Freedom
In 1972, Freedom House, an independent think-tank based in New York, began an annual assessment of political freedom and civil liberty in the world. For the first several years, the report was essentially the work of Raymond Gastil. Subsequently, Freedom House developed a team of analysts, including both in-house and outside experts. At first, the annual report of Freedom House's project was published in the organization's magazine. Later, the report was also published in book form (e.g., Freedom House, 2005). …