The Rosetta Stone of Development Economics: Economic Freedom and How Much Money You Can Make from It

By Stocker, Marshall L. | Review - Institute of Public Affairs, December 2006 | Go to article overview

The Rosetta Stone of Development Economics: Economic Freedom and How Much Money You Can Make from It


Stocker, Marshall L., Review - Institute of Public Affairs


What is 'Socially Responsible'? In 1970, the late Milton Friedman, the Nobel laureate economist, wrote that 'the social responsibility of business is to increase profits'. In contrast, NGO Oxfam's Website uses 'socially responsible' as an adjective to describe manners, values, and decisions, without defining what exactly it is. Tellingly, Oxfam's career page provides the most concrete description for those seeking 'an ethical career, where the emphasis is less on income than on social responsibility and a warm feel-good glow'.

Rather than a 'warm feel-good glow', an advocate of economic and individual freedom should argue that socially responsible conduct is that which allows one to improve his/her living standards at no coerced expense to anyone else. By extension, socially responsible economic policies create an environment for individuals to improve their lot without a coerced expense to others. This begs the question, are policies that promote capitalism socially responsible?

To answer this question, in the late 1980s, economists set out to create the Rosetta stone of development economics: an objective measure of economic freedom. The group defined economic freedom as secure rights to property, freedom to engage in voluntary transactions (domestically and internationally), freedom from government control over contractual terms, and freedom from governmental expropriation by confiscatory taxation or unanticipated inflation. Using this definition, the Fraser Institute annually publishes the Economic Freedom of the World (EFW) survey, an ordinal ranking and numerical score of economic freedom for 130 countries.

Early studies using the EFW survey showed that high levels of economic freedom correlated with higher per capita income, higher real per capita GDP growth and longer life expectancies. Later, low unemployment rates and child participation in the work force were tied to high levels of economic freedom. As for poverty, countries with the highest level of economic freedom recorded per capita incomes for the poorest 10 per cent of citizens that were eight times those of the poorest 10 per cent in countries with the least economic freedom.

By 2004, the academy had spoken. Empirical evidence overwhelmingly confirmed what classical liberals had for years proffered: the absence of government interference in private economic transactions, a strong rule of law to enforce contracts and property rights, a sound money supply, the freedom to trade internationally, and a government of limited size were conditions necessary for economic prosperity. Simply, the empirical evidence unquestionably demonstrates: life is better in a market-based economy dian a highly regulated social-democratic economy.

If economic freedom is good for a country's citizens, what about for those who stoke the fire of free-market economies-capitalists? 'Equity Returns and Economic Freedom,' published in Cato Journal in 2005, demonstrates that the same increase in economic freedom associated with improved socio-economic well-being also provides investors with above-average investment returns. Countries that underwent economic liberalisation, shifting from centrally planned economies to free-market economies experienced an annual equity return 11 per cent greater than those countries whose governments moved to exercise greater control over their domestic economies during the years 1970-2000.

Rather than the ethical investment fad of a few years ago, investments made on the basis of economic freedom are both proven to be ethical-they encourage policies which improve standards of living-and proven to be wise investments.

Consider Estonia. After completing comprehensive economic reforms rhat included privatisation of state-owned enterprises, development of capital markets, price control liberalisation, balancing of the fiscal budget and implementation of the flat-tax, Estonia is now reaping the reward of improved socio-economic well-being.

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The Rosetta Stone of Development Economics: Economic Freedom and How Much Money You Can Make from It
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