Some important economists have argued that economic liberty improves a country’s economic prosperity. When policymakers secure property rights and stay out of voluntary exchange, the whole society is better off. Bob Lawson works on the Economic Freedom of the World project, where he tests this theory by measuring economic liberty. I speak with him about it for the Overton Window podcast.
“What we’ve lacked in this debate for the last 200-some years is empirical rigor,” Lawson says. He and some of his fellow economists have tried for nearly three decades to measure economic liberty and to score different countries.
It can be a tough thing to measure. “We knew from the get-go that we were going to have to make some compromises. The data that we get for these countries is ugly, it’s messy, it’s polluted by all kind of problems,” Lawson says.
“How do you measure the security of property rights? For a long time, for the first decade of the project, we struggled to find anything that reflected property rights. But now what we have are surveys,” Lawson says. These include surveys about judicial impartiality and security of property rights, which give some measurable indication of a difficult idea to quantify.
Other economists have been able to use the index to test whether economic liberty leads to prosperity. “Countries that are higher on our economic freedom scale have higher incomes,” Lawson says. “They grow faster, invest more, have lower infant mortality, less poverty — pretty much every metric we have of socioeconomic progress correlates in a way that economic freedom looks pretty good.”
Economists have also used careful methods to do more than show simple correlation. “We have these sorts of challenges with empirical work. But I’m an academic and I follow the academic literature related to this index pretty closely. And there are a number of good ways of handling that, and those studies confirm the more correlative studies,” Lawson says.
The critics of economic liberty as the foundation of prosperity were wrong. “The big story is: We pretty much won,” Lawson says. “Having turned the debate into an empirical debate, we won the debate.”
His work also shows that the world has become freer over time. “I know that runs counter to the general malaise and pessimism that we have at any point in time,” Lawson says.
“In the early 70s, we had wage and price controls in the United States. We had borderline hyperinflation in the United States,” Lawson says. “This is the United States. Imagine what it’s like in the rest of the world.”
He cites African nations that have moved away from socialist post-colonial starts to free-market alternatives. “Their ratings were terrible,” Lawson says. “On a ten-point scale, they were two and three and four. Now they’re four and five and six, which isn’t great, but a five is much better than a two.”
The economic freedom index has been connected with many good outcomes for countries, but not many bad ones.
“The one that I think comes close, is there are two or three papers — and I wrote a counter paper, so I don’t think it is settled — but the one that I’ve seen is obesity,” Lawson says. That is, he suggests, as other nations become wealthier, people eat more.
Does greater economic liberty lead to greater economic inequality? Several dozen papers have drawn from Lawson’s index to answer this question.
“It turns out there really isn’t a lot of strong evidence one way or the other on whether economic freedom causes more inequality,” Lawson says. “There are some studies that say it does, some studies that say it doesn’t. But the average study gets no effect, null effect.”
Corrupt elites — even in avowedly egalitarian socialist states — effectively run the government to their own advantage, using bribery to gain wealth and protectionism to avoid competition. This diminishes economic liberty but increases inequality.
“The one percenters in Venezuela, which is the lowest country on our index, are quite well off relative to the 99 percenters in Venezuela,” Lawson says, noting that some countries celebrated for their low economic inequality, like Denmark and Sweden, have high levels of economic liberty. “So, again, when you look at the real data, it’s far from obvious that economic freedom brings along with it a lot of inequality.”
Lawson is encouraged by the number of countries that have tried to improve their rating on their index.
“The country of Georgia, the former Soviet Republic, explicitly references the Economic Freedom of the World Index at the ministerial level,” Lawson says, “It is a ministerial goal to go up in the index. And they have. The Georgian government, especially the previous government but even the current government, has really improved. Georgia’s in the top twenty in the index now. That’s pretty impressive when it was a socialist country as late as 1991.”
Countries that mess up one area of basic economic freedom can pay a big price.
“My coauthor Jim Gwartney and I use a car as a metaphor,” Lawson says. “Ask people, ‘What’s the most important ingredient in a car? Is it the steering wheel, the wheels, or the brakes?’ They’re all important. If you take away any one of those ingredients, the car is either not going to work at all or it’s going to be extraordinarily dangerous. I feel the same way about economic freedom. Tax policy is important. If you mess it up, you will really mess up an economy. Monetary policy is really important. If you mess it up, you can keep everything else perfect and mess up the economy.
“We have the luxury as academics of standing back and looking at the big picture,” Lawson says. “Countries that get most of these policies right do really well. The key is to get most of the policies right.”
Lawson is pleased by the amount of attention his index has received from his fellow economists. “I’m an academic. I work at a university. What makes me happy is when other academics use our work, and we’ve penetrated the academic market quite nicely,” Lawson says.
“We have quite literally thousands upon thousands of academic citations, and I realize that a lot of people think academics are writing papers and no one reads them. If you get thousands of papers written with your data, you are affecting the scholarly climate of opinion.
“And the scholarly climate of opinion does filter down. We’re teaching students, we’re teaching the next generation of congressmen and senators and presidents, and the climate of ideas really matters.”
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