The Links between Economic Freedom and Social Cohesion

By Bates, Winton | Review - Institute of Public Affairs, July 1997 | Go to article overview

The Links between Economic Freedom and Social Cohesion


Bates, Winton, Review - Institute of Public Affairs


THE first reaction that some readers will have when they see the title of this article will be to wonder whether links is an appropriate word to use in this context. Economic freedom is usually thought of as having to do with promoting economic efficiency Social cohesion, on the other hand, is usually thought of in the context of distributional equalitythe idea that large and widening disparities in incomes between rich and poor may be socially divisive. This could suggest that it might be more appropriate to think in terms of tradeoffs between economic freedom and social cohesion, rather than in terms of links.

I think we should break out of this 'tradeoff' mentality and consider the possibility that improvements in economic freedom may tend to reinforce social cohesion rather than damage it. The idea of a trade-off between efficiency and equality was popularised in the 1970s by an eminent macro-economist, Arthur Okun, who had specialised throughout his career on the tradeoff between inflation and unemployment. In my view, the parallels between these ideas are indeed quite strong. Neither idea is entirely without merit, but when either idea dominates economic policy it results in poor outcomes.

Politicians are captured by a tradeoff mentality when they argue that social cohesion can be protected by avoiding the shortterm disruption associated with economic reforms. This idea, which appears to have become increasingly popular in Australia over the last couple of years, has a lot in common with a notion that was popular 30 years ago: that lax policies toward inflation were helping to keep unemployment low. Governments subsequently learned the hard way that by allowing inflationary expectations to develop, they made unemployment worse, not better.

By adopting lax policies toward economic reform, governments discourage anticipatory adjustment and make the adjustment process more, rather than less, disruptive. Firms and their employees have an incentive to delay or resist adjustment when they believe that interest groups are likely to be successful in having tariff protection and other restrictions on economic freedom maintained.

What is economic freedom? James Gwartney and Robert Lawson suggest that the central elements of economic freedom are personal choice, freedom of exchange and protection of private property. Their index of economic freedom enables objective international comparisons to be made of the extent to which the policies of individual countries provide:

low and stable inflation (freedom from the inflation tax);

freedom of citizens to decide for themselves what is produced and consumed;

freedom of exchange with foreigners; and

freedom of citizens to keep what they earn.

Social cohesion can mean different things to different people, but there is general agreement that it is lacking when large numbers of people display extreme discontentment with aspects of the society in which they live. In my view, important characteristics of a cohesive society include:

voluntary commitment to constitutional processes and the peaceful coexistence of all groups (reinforced by a sense of belonging and respect for others);

a high degree of personal security for all (protection of children and others unable to fend for themselves, low levels of crime, protection against the arbitrary use of power by those in authority); and

widespread opportunties to participate in and share in the benefits of economic activity and widespread involvement in other forms of voluntary social interaction including membership of community organisations.

Since redistribution of income by government reduces economic freedom, it might be thought that a high level of economic freedom would result in 'the rich getting richer while the poor get poorer'. If this occurred as a general tendency, it would be reasonable to argue that high levels of economic freedom are not consistent with widespread sharing in the benefits of economic activity and hence not consistent with social cohesion. …

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