Are We All Capitalists Now?
Hanson, John R., II, Independent Review
According to conventional wisdom, collectivism has been vanquished in all but a few infirm nations, and hence long-run economic prospects are far brighter for most of the world. The Wall Street Journal rejoices: "Capitalism is triumphant. Market forces have spread to every corner of the globe. National boundaries seem to be dissolving" (Wessel and Harwood 1998). A recent book by the distinguished economist and former U.S. Treasury official Paul Craig Roberts and Karen LaFollette Araujo, The Capitalist Revolution in Latin America (1997), also exudes optimism about capitalism's prospects. Yet free-market momentum has slowed because of the global financial crisis, widely publicized economic troubles in transitional economies, the electoral success of the Left in Europe and elsewhere, and similar events. Multilateral institutions based on the presupposition of market failure, such as the International Monetary Fund, have expanded their roles in coping with global economic problems, to the disappointment and consternation of pro-market politicians, economists, and pundits.
Are the free-market reforms of recent times secure? Are they vulnerable to reversal? These are urgent questions, although admittedly hard ones to answer, given the diversity of local politics throughout the world. It is regrettable that journalistic and other impressionistic, albeit expert, commentary dominates public discourse on these questions. A comprehensive but succinct summary of the state of economic liberalism around the world at the height of the reform movement would be helpful as we assess the vitality of the fledgling world order. Quantitative indexes of the international commitment to Smithian policies would shed light on the collective ideological mood, about which only piecemeal impressions currently exist.
The means with which to make a quantitative assessment are available in the numerical ratings of economic freedom published by the Heritage Foundation (Johnson and Sheehy 1996), the Fraser Institute (Gwartney and Lawson 1997), and Freedom House (Messick and Kimura 1996). These new indexes permit the extent of diversity in economic regimes in the modern world to be described with great precision and, I believe, with enough accuracy for present purposes. In the light of this evidence, the world's commitment to economic liberalism appears more tenuous than is commonly believed.
The methodologies of the Heritage Foundation, Fraser Institute, and Freedom House studies have been compared in a valuable survey by Hanke and Walters (1997), whose article may be consulted for details. Hanke and Walters have shown not only that all three indexes are thoughtfully and meticulously prepared but also that, despite their differences, they are highly correlated with one another. For the purposes of this essay, I need only mention some basic information and make a few supplemental observations on the approaches and methodologies of the indexes.
To measure economic liberty, the Heritage and Fraser reports concentrate on official economic policy and practice. Equating economic liberty with procapitalist policies, their implicit standards of evaluation most closely resemble those of a foreign investor. Freedom House takes a legalistic approach, defining economic freedom in terms of an individual's constitutional right to undertake certain activities, such as owning a business or engaging in foreign trade, regardless of the official policies of the moment. Although an independent scholar, Gerald Scully (1992), employed a slightly different approach in his valuable study of economic growth under various constitutional regimes during the 1980s, the Heritage, Fraser, and Freedom House indexes represent the current frontiers of the field.
The Heritage index, which is cosponsored by the Wall Street Journal and is influential in official Washington, compresses into a single number its assessments of local conditions in ten areas of economic life: official trade policy, taxes, government consumption of output, monetary policy, foreign investment policy, banking policy, wage and price controls, property rights, economic regulation, and black market activity. …