Academic journal article Independent Review

Prosperity and Economic Freedom

Academic journal article Independent Review

Prosperity and Economic Freedom

Article excerpt

A Virtuous Cycle

That economic freedom promotes affluence is Adam Smith's most important principle, but as the new millennium arrives, contrary attitudes are in vogue around the world. The early post-World War II ideal of a Third Way between socialism and the market has been revived by such world leaders as Bill Clinton and Tony Blair and has been at least tentatively embraced by electorates in a number of countries.

The recent publication of several statistical analyses of the relation between economic freedom and national prosperity is therefore timely. The most statistically rigorous of these studies, by Steve Hanke and Stephen Walters (1997), discovers close correlations between economic freedom and income per capita for a large cross section of countries in 1995, using the measures of economic freedom developed by Freedom House, the Heritage Foundation, and the Fraser Institute, the current leaders in the measurement effort.(1) Each of these organizations independently reaches the same conclusion, as do several academic studies using different proxies for institutional conditions or the policy regime.(2) These studies interpret their findings as confirmations of Smith's principle.

Normally, however, the public is encouraged to concentrate on and believe the converse: affluence promotes economic freedom, whereas poverty incubates revolution, usually of the anti-market variety, this idea was an early rationale for expanded American foreign aid to poor countries. Seeking support to establish the Agency for International Development, John F. Kennedy extolled the ameliorative possibilities of foreign assistance. He exhorted, "I urge those who want to do something for the United States ... to channel their energies behind the new foreign-aid program to help prevent the social injustice and economic chaos upon which subversion and revolt feed" (Eberstadt 1988, 33). Kennedy, who was aware of communism's political gains in the United States during the Great Depression of the 1930s and recognized its dangerous potential in the less developed world, thus announced and endorsed what has since become a familiar explanation of left-wing political movements. One scholar writes, for example, that "economic hardship may have helped precipitate the [1970] Lon Nol coup" in Cambodia (Harff 1991, 232-33). Many historians explain in similar terms the independence movements in European colonies and the allure of the Third Way for many of the newly independent nations (Hopkins 1974).

The unresolved coexistence of these competing doctrines is confusing and potentially dangerous because they have contrasting policy implications for poor countries and because each point of view is identified with particular interest groups and political programs. The absence of consensus also implies that in this case the personal impressions of experts and other informed persons, enlightening as their views may be, will not suffice to settle the issues.

Fortunately, the new economic freedom measurements of the Fraser Institute, combined with simple statistics, provide a succinct, original alternative to the argument from authority. Not only does this evidence confirm the empirical findings of Hanke and Walters and others, but it also describes a virtuous spiral of economic freedom and income in the developing world during the final quarter of the twentieth century. Retreat from free-market philosophy in favor of interventionism packaged as a Third Way therefore runs the risk of interrupting the virtuous cycle of economic freedom and prosperity and, in the worst case, replacing it with a vicious cycle of repression and poverty.

Statistical Tests

Official economic policies influence a nation's future economic performance through their effect on incentives for production and consumption. Furthermore, economic regimes tend toward stability in the short run and often in the long run as well. Therefore, we can express Smith's principle by postulating that, other things being equal, the rate of change of income per capita in poor countries during a given period depends on the level or degree of economic freedom at the start of the period. …

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