What is economic freedom?

Economic freedom means that people are able to enter into mutually beneficial transactions, that their property is secure from theft or other appropriation, that the same rules are binding for all parties involved and that people can use their property in a way they seem fit, as long as their decisions do not infringe rights of other individuals.

You get richer only if you make other people’s lives better

Economic freedom has long been theoretically identified as one of important drives of economic growth. Since it protects property, economic freedom enhances savings and investment; since it leaves majority of gains in the hands of the market players it encourages entrepreneurial spirit. Most of all, under the regime of high economic freedom only those that make other people better off can benefit and flourish, which encourages competition and innovation. On the other hand, in regimes with the low level of economic freedom the most well off become those that can use their political influence to get market rents. And this makes a great difference, especially in the long run.

Importance of economic freedom for growth

However, since there was no way of measuring it, discussions regarding economic freedom as a source of growth has been seldom properly adressed. However, since two indices that measure precisely the level of economic freedom were set up in 1990-ies: the Economic Freedom of the World by the Fraser Institute and the Index of Economic Freedom by the Heritage Foundation (both of which are used to construct our own index, the Freedom Barometer) there was finally a methodological tool that would enable empirical research. Since then, these indices have been used in almost 2500 studies on all sorts of topics.

A recent meta study found 92 studies that were published in peer reviewed journals that examined the connection between economic freedom and growth. Out of this 92 studies, a predominant majority of 86 studies (or 93.5%) found a statistically significant positive relation between economic freedom and growth, while only 6 (6.5%) came up with a different conclusion – that results are inconclusive for developing countries, that they depend on the exact way freedom is measured, that economic freedom has both growth enhancing and restricting elements while only 1 study found a clear significant relationship between these two variables.

Economists rarely agree – when they do, it is significant

Economists have often been depicted as the people that would during a 10 question long quiz give at least 20 correct answers, or as people that explan why their predictions from the day before have not come to pass. Therefore, there are few cases in which majority of economists tend to come to the same conslusion. The importance of economic freedom for growth is one them. If we want more growth, which is especially significant for less developed and / or low growing economies, we should look to the policy of enhancing the level of economic freedom to obtain it, instead of jumping at popular but bad policies such as trade protectionism, fiscal stimuli or monetary expansion.

More economic freedom does not mean cutting social programs

It is important to stress that many objections to higher economic freedom come from the egalitarian perspective, but this is a false dichotomy. Societies with higher economic freedom have lower poverty rates, and higher income of the poorest 10% of the population, than those with lower economic freedom. Also, countries with lavish welfare state and redistribution programs, such as Sweden, Denmark, Finland, the Netherlands, Germany and Canada score very high on the economic freedom scale. Therefore, increase in economic freedom does not have to entail cutting existing redistribution programs, or level of taxes.