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Economic freedom

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Title: Economic freedom  
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Economic freedom

Economic freedom or economic liberty or right to economic liberty is the ability of members of a society to undertake economic direction and actions. This is a term used in economic and policy debates as well as a politico economic philosophy.[1][2] One approach to economic freedom comes from classical liberal and libertarian traditions emphasizing free markets, free trade, and private property under free enterprise. Another approach to economic freedom extends the welfare economics study of individual choice, with greater economic freedom coming from a "larger" (in some technical sense) set of possible choices.[3] Other conceptions of economic freedom include freedom from want[1][4] and the freedom to engage in collective bargaining.[5]

The free market viewpoint defines economic liberty as the freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft. This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative.[3][6][7] There are several indices of economic freedom that attempt to measure free market economic freedom. Empirical studies based on these rankings have found higher living standards, economic growth, income equality, less corruption and less political violence to be correlated with higher scores on the country rankings.[8][9][10][11][12] It has been argued that the economic freedom indices generally lump together unrelated policies and policy outcomes to conceal negative correlations between economic growth and EF in some subcomponents.[5]


  • Classical liberal viewpoint 1
    • Institutions of economic freedom 1.1
      • Rule of law 1.1.1
      • Private property rights 1.1.2
      • Freedom of contract 1.1.3
    • Economic and political freedom 1.2
    • Indices of economic freedom 1.3
  • Choice sets and economic freedom 2
    • Positive and negative freedom 2.1
  • Freedom from want 3
  • Freedom of association and unions 4
  • Socialist views 5
  • See also 6
  • References 7
  • Further reading 8
  • External links 9

Classical liberal viewpoint

Magna Carta marks one of the earliest attempts to limit a sovereign's authority and it is seen as a symbol of the rule of law.[13]

Institutions of economic freedom

Rule of law

Free market advocates argue both that the rule of law requires economic freedom, and that economic freedom requires the rule of law. Friedrich Hayek argued that the certainty of law contributed to the prosperity of the West more than any other single factor. Other important principles of the rule of law are the generality and equality of the law, which require that all legal rules apply equally to everybody. These principles can be seen as safeguards against severe restrictions on liberty, because they require that all laws equally apply to those with political and coercive power as well as those who are governed. Principles of the generality and equality of the law exclude special privileges and arbitrary application of law, that is laws favoring one group at the expense of other citizens.[14] According to Friedrich Hayek, equality before the law is incompatible with any activity of the government aiming to achieve the material equality of different people. He asserts that a state's attempt to place people in the same (or similar) material position leads to an unequal treatment of individuals and to a compulsory redistribution of income.[15]

Private property rights

In the 1960s Alan Greenspan argued that economic freedom requires the gold standard for protection of savings from confiscation through inflation.[16]

According to the free market view, a secure system of private property rights is an essential part of economic freedom. Such systems include two main rights: the right to control and benefit from property and the right to transfer property by voluntary means. These rights offer people the possibility of autonomy and self-determination according to their personal values and goals.[17] Economist Milton Friedman sees property rights as "the most basic of human rights and an essential foundation for other human rights."[18] With property rights protected, people are free to choose the use of their property, earn on it, and transfer it to anyone else, as long as they do it on a voluntary basis and do not resort to force, fraud or theft. In such conditions most people can achieve much greater personal freedom and development than under a regime of government coercion. A secure system of property rights also reduces uncertainty and encourages investments, creating favorable conditions for an economy to be successful.[19] Empirical evidence suggests that countries with strong property rights systems have economic growth rates almost twice as high as those of countries with weak property rights systems, and that a market system with significant private property rights is an essential condition for democracy.[20] According to Hernando de Soto, much of the poverty in the Third World countries is caused by the lack of Western systems of laws and well-defined and universally recognized property rights. De Soto argues that because of the legal barriers poor people in those countries can not utilize their assets to produce more wealth.[21] One thinker to question private property was Pierre-Joseph Proudhon, a socialist and anarchist, who argued that property is both theft and freedom.[22]

Freedom of contract

Freedom of contract

is the right to choose one's contracting parties and to trade with them on any terms and conditions one sees fit. Contracts permit individuals to create their own enforceable legal rules, adapted to their unique situations.[23] Parties decide whether contracts are profitable or fair, but once a contract is made they are obliged to fulfill its terms, even if they are going to sustain losses by doing so. Through making binding promises people are free to pursue their own interests. The main economic function of contracts is to provide transferability of property rights. Transferability largely depends on the enforceability of contracts, which is enabled by the judicial system. In Western societies the state does not enforce all types of contracts, and in some cases it intervenes by prohibiting certain arrangements, even if they are made between willing parties. However, not all contracts need to be enforced by the state. For example, in the United States there is a large number of third-party MR:[25]

[I]f there is one thing more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by courts of justice. Therefore, you have this paramount public policy to consider – that you are not lightly to interfere with this freedom of contract.

The doctrine of freedom of contract received one of its strongest expressions in the US Supreme Court case of Lochner v New York which struck down legal restrictions on the working hours of bakers. [6]

Critics of the classical view of freedom of contract argue that this freedom is illusory when the bargaining power of the parties is highly unequal, most notably in the case of contracts between employers and workers. As in the case of restrictions on working hours, workers as a group may benefit from legal protections that prevent individuals agreeing to contracts that require long working hours. In its West Coast Hotel Co. v. Parrish decision in 1937, overturning Lochner, the Supreme Court cited an earlier decisions

From this point on, the Lochner view of freedom of contract has been rejected by US courts.[27]

Economic and political freedom

Some free market advocates argue that political and civil liberties have simultaneously expanded with market-based economies, and present empirical evidence to support the claim that economic and political freedoms are linked.[28][29]

In Capitalism and Freedom (1962), Friedman further developed Friedrich Hayek's argument that economic freedom, while itself an extremely important component of total freedom, is also a necessary condition for political freedom. He commented that centralized control of economic activities was always accompanied with political repression. In his view, voluntary character of all transactions in a free market economy and wide diversity that it permits are fundamental threats to repressive political leaders and greatly diminish power to coerce. Through elimination of centralized control of economic activities, economic power is separated from political power, and the one can serve as counterbalance to the other. Friedman feels that competitive capitalism is especially important to minority groups, since impersonal market forces protect people from discrimination in their economic activities for reasons unrelated to their productivity.[30]

Austrian School economist Ludwig von Mises argued that economic and political freedom were mutually dependent: "The idea that political freedom can be preserved in the absence of economic freedom, and vice versa, is an illusion. Political freedom is the corollary of economic freedom. It is no accident that the age of capitalism became also the age of government by the people."[31]

In The Road to Serfdom, Hayek argued that "Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends."[32] Hayek criticized socialist policies as the slippery slope that can lead to totalitarianism.[33]

Gordon Tullock has argued that "the Hayek-Friedman argument" predicted totalitarian governments in much of Western Europe in the late 20th century – which did not occur. He uses the example of Sweden, in which the government at that time controlled 63 percent of GNP, as an example to support his argument that the basic problem with The Road to Serfdom is "that it offered predictions which turned out to be false. The steady advance of government in places such as Sweden has not led to any loss of non-economic freedoms." While criticizing Hayek, Tullock still praises the classical liberal notion of economic freedom, saying, "Arguments for political freedom are strong, as are the arguments for economic freedom. We needn’t make one set of arguments depend on the other."[34]

Indices of economic freedom

The annual surveys Economic Freedom of the World (EFW) and Index of Economic Freedom (IEF) are two indices which attempt to measure the degree of economic freedom in the world's nations. The EFW index, originally developed by Gwartney, Lawson and Block at the Fraser Institute[35] was likely the most used in empirical studies as of 2000.[36] The other major index, which was developed by The Heritage Foundation and The Wall Street Journal appears superior for data work, although as it only goes back to 1995, it is less useful for historical comparisons.[36]

According to the creators of the indices, these rankings correlate strongly with higher average income per person, higher income of the poorest 10%, higher life expectancy, higher literacy, lower infant mortality, higher access to water sources and less corruption.[37][38] The people living in the top one-fifth of countries enjoy an average income of $23,450 and a growth rate in the 1990s of 2.56 percent per year; in contrast, the bottom one-fifth in the rankings had an average income of just $2,556 and a -0.85 percent growth rate in the 1990s. The poorest 10 percent of the population have an average income of just $728 in the lowest ranked countries compared with over $7,000 in the highest ranked countries. The life expectancy of people living in the highest ranked nations is 20 years longer than for people in the lowest ranked countries.[39]

Higher economic freedom, as measured by both the Heritage and the Fraser indices, correlates strongly with higher self-reported happiness.[40]

Erik Gartzke of the Fraser Institute estimates that countries with a high EFW are significantly less likely to be involved in wars, while his measure of democracy had little or no impact.[41]

The Economic Freedom of the World score for the entire world has grown considerably in recent decades. The average score has increased from 5.17 in 1985 to 6.4 in 2005. Of the nations in 1985, 95 nations increased their score, seven saw a decline, and six were unchanged.[42] Using the 2008 Index of Economic Freedom methodology world economic freedom has increased 2.6 points since 1995.[43]

Members of the World Bank Group also use Index of Economic Freedom as the indicator of investment climate, because it covers more aspects relevant to the private sector in wide number of countries.[44]

The nature of economic freedom is often in dispute. Robert Lawson, the co-author of EFW, even acknowledges the potential shortcomings of freedom indices: "The purpose of the EFW index is to measure, no doubt imprecisely, the degree of economic freedom that exists."[45] He likens the recent attempts of economists to measure economic freedom to the initial attempts of economists to measure GDP: "They [macroeconomists] were scientists who sat down to design, as best they could with the tools at hand, a measure of the current economic activity of the nation. Economic activity exists and their job was to measure it. Likewise economic freedom exists. It is a thing. We can define and measure it." Thus, it follows that some economists, socialists and anarchists contend that the existing indicators of economic freedom are too narrowly defined and should take into account a broader conception of economic freedoms.

Critics of the indices (e.g. Thom Hartmann) also oppose the inclusion of business-related measures like corporate charters and intellectual property protection.[46] John Miller in Dollars & Sense has stated that the indices are "a poor barometer of either freedom more broadly construed or of prosperity." He argues that the high correlation between living standards and economic freedom as measured by IEF is the result of choices made in the construction of the index that guarantee this result. For example, the treatment of a large informal sector (common in poor countries) as an indicator of restrictive government policy, and the use of the change in the ratio of government spending to national income, rather than the level of this ratio. Hartmann argues that these choices cause the social democratic European countries to rank higher than countries where the government share of the economy is small but growing.[47]

Economists Dani Rodrik and Jeffrey Sachs have separately noted that there appears to be little correlation between measured economic freedom and economic growth when the least free countries are disregarded, as indicated by the strong growth of the Chinese economy in recent years.[48][49] Morris Altman found that there is a relatively large correlation between economic freedom and both per capita income and per capita growth. He argues that this is especially true when it comes to sub-indices relating to property rights and sound money, while he calls into question the importance of sub-indices relating to labor regulation and government size once certain threshold values are passed.[50] John Miller further observes that Hong Kong and Singapore, both only "partially free" according to Freedom House, are leading countries on both economic freedom indices and casts doubt on the claim that measured economic freedom is associated with political freedom.[47] However, according to the Freedom House, "there is a high and statistically significant correlation between the level of political freedom as measured by Freedom House and economic freedom as measured by the Wall Street Journal/Heritage Foundation survey."[51]

Choice sets and economic freedom

Amartya Sen and other economists have considered economic freedom in terms of the set of economic choices available to individuals.

Positive and negative freedom

The differences between alternative views of economic freedom have been expressed in terms of Isaiah Berlin's distinction between positive freedom and negative freedom. Classical liberals favour a focus on negative freedom as did Berlin himself. By contrast Amartya Sen argues for an understanding of freedom in terms of capabilities to pursue a range of goals.[52] One measure which attempts to assess freedom in the positive sense is Goodin, Rice, Parpo, and Eriksson's measure of discretionary time, which is an estimate of how much time people have at their disposal during which they are free to choose the activities in which they participate, after taking into account the time they need to spend acquiring the necessities of life.[53]

Freedom from want

Bretton Woods Agreement which fixed exchange rates and established international economic institutions such as the World Bank and International Monetary Fund.

Herbert Hoover saw economic freedom as a fifth freedom, which secures survival of Roosevelt's Four freedoms. He described economic freedom as freedom "for men to choose their own calling, to accumulate property in protection of their children and old age, [and] freedom of enterprise that does not injure others."[54]

Freedom of association and unions

The Philadelphia Declaration (enshrined in the constitution of the [56]

Socialist views

The socialist view of economic freedom conceives of freedom as a concrete situation as opposed to an abstract or moral concept. This view of freedom is closely related to the socialist view of human creativity and the importance ascribed to creative freedom. Socialists view creativity as an essential aspect of human nature, thus defining freedom as a situation or state of being where individuals are able to express their creativity unhindered by constraints of both material scarcity and coercive social institutions.[57] Marxists stress the importance of freeing the individual from what they view as coercive, exploitative and alienating social relationships of production they are compelled to partake in, as well as the importance of economic development as providing the material basis for the existence of a state of society where there are enough resources to allow for each individual to pursue his or her genuine creative interests.[58]

See also


  1. ^ a b  
  2. ^  
  3. ^ a b "Economic Freedom and its Measurement". The Encyclopedia of Public Choice 2.  
  4. ^ """Franklin Roosevelt's Annual Address to Congress – The "Four Freedoms. January 6, 1941. Archived from the original on May 29, 2008. Retrieved November 10, 2008. 
  5. ^  
  6. ^ Surjit S. Bhalla. Freedom and economic growth: a virtuous cycle?. Published in Democracy's Victory and Crisis. (1997). Cambridge University Press. ISBN 0-521-57583-4 p. 205
  7. ^ David A. Harper. Foundations of Entrepreneurship and Economic Development. (1999). Routledge. ISBN 0-415-15342-5 pp. 57, 64
  8. ^ Pei, Minxin (2001). "Political Institutions, Democracy, and Development". Democracy, Market Economics, and Development. World Bank Publications.  
  9. ^ Easton, Stephen T.; Walker, Michael A. (May 1997). "Income, growth, and economic freedom". American Economic Review (American Economic Association) 87 (2): 328–332. 
  10. ^ Ayal, Eliezer B.; Karras, Georgios (Spring 1998). "Components of economic freedom and growth: an empirical study". Journal of Developing Areas (Western Illinois University) 32 (3): 327–338. 
  11. ^ Scully, Gerald (2002). "Economic Freedom, Government Policy, and the Trade-Off Between Equity and Economic Growth". Public Choice (Kluwer Academic Publishers) 113 (1–2): 77–96.  
  12. ^ Berggren, Niclas (1999). "Economic Freedom and Equality: Friends or Foes?". Public Choice (Kluwer Academic Publishers) 100 (3–4): 203–223.  
  13. ^ Ralph V. Turner. Magna Carta. Pearson Education. (2003). ISBN 0-582-43826-8 p. 1
  14. ^ David A. Harper. Foundations of Entrepreneurship and Economic Development pp. 66-71
  15. ^ Daniel Rauhut, Neelambar Hatti, Carl-Axel Olsson. Economists and Poverty. Vedams eBooks (P) Ltd. ISBN 81-7936-016-4, pp. 204–205
  16. ^ Addision Wiggin, William Bonner. Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. (2004). John Wiley and Sons. ISBN 0-471-48130-0 p. 137
  17. ^ David A. Harper. Foundations of Entrepreneurship and Economic Development. (1999). Routledge. ISBN 0-415-15342-5 p. 74
  18. ^ Rose D. Friedman, Milton Friedman. Two Lucky People: Memoirs. (1998). University of Chicago Press. ISBN 0-226-26414-9 p. 605
  19. ^ Bernard H. Siegan. Property and Freedom: The Constitution, the Courts, and Land-Use Regulation. Transaction Publishers. (1997). ISBN 1-56000-974-8 pp. 9, 230
  20. ^ David L. Weimer. The political economy of property rights. Published in The Political Economy of Property Rights. Cambridge University Press. (1997). ISBN 0-521-58101-X pp. 8–9
  21. ^ Hernando De Soto. The Mystery of Capital. Basic Books. (2003). ISBN 0-465-01615-4 pp. 210–211
  22. ^ Pierre-Joseph Proudhon. No Gods, No Masters: An Anthology of Anarchism. Edited by Daniel Guerin, translated by Paul Sharkey. 2005. AK Press. ISBN 1-904859-25-9 pp. 55–56
  23. ^ John V. Orth. Contract and the Common Law. Published in The State and Freedom of Contract. (1998). Stanford University Press ISBN 0-8047-3370-8 p. 64
  24. ^ David A. Harper. Foundations of Entrepreneurship and Economic Development. (1999). Routledge. ISBN 0-415-15342-5 pp. 82–88
  25. ^ Hans van Ooseterhout, Jack J. Vromen, Pursey Heugensp. Social Institutions of Capitalism: Evolution and Design of Social Contracts. (2003). Edward Elgar Publishing. ISBN 1-84376-495-4 p. 44
  26. ^ "West Coast Hotel Co. v. Parrish". 
  27. ^ "The Supreme Court . Capitalism and Conflict . Landmark Cases . Lochner v. New York (1905) |PBS". 
  28. ^ Freedom in the World. (1999). Transaction Publishers. ISBN 0-7658-0675-4 p. 12
  29. ^ Lewis F. Abbott. British Democracy: Its Restoration & Extension, ISR/Google Books, 2006, 2010. Chapter Five: “The Legal Protection Of Democracy & Freedom: The Case For A New Written Constitution & Bill Of Rights”. [7]
  30. ^ Milton Friedman. Capitalism and freedom. (2002). The University of Chicago. ISBN 0-226-26421-1 pp. 8–21
  31. ^ Ludwig Von Mises. Planning for Freedom. Libertarian Press. 1962. p. 38
  32. ^ Friedrich Hayek, The Road to Serfdom, University Of Chicago Press; 50th Anniversary edition (1944), ISBN 0-226-32061-8 p. 95
  33. ^ Hayek, Friedrich (2007). The Road to Serfdom: Text and Documents. University of Chicago Press. pp. 53–57.  
  34. ^  
  35. ^ Gwartney, L., R. Lawson, and W. Block (1996). Economic Freedom of the World, 1975–1995. Vancouver: Fraser Institute.
  36. ^ a b Heckelman, Jac C.; Stroup, Michael D. (2000). "Which Economic Freedoms Contribute to Growth?". Kyklos 53 (4): 527–44.  
  37. ^ Economic Freedom of the World: 2004 Annual Report (pdf)
  38. ^ Index of Economic Freedom – Executive Summary (pdf)
  39. ^ Economic Freedom Needed To Alleviate Poverty
  40. ^ In Pursuit of Happiness Research. Is It Reliable? What Does It Imply for Policy? The Cato institute. April 11, 2007
  41. ^ Chapter2: Economic Freedom and Peace, Economic Freedom of the World 2005
  42. ^ Economic Freedom of the World: 2005 Annual Report
  43. ^ Economic Freedom Holding Steady
  44. ^ Improving Investment Climates, World Bank Publications, 2006. ISBN 0-8213-6282-8 pp. 221–224
  45. ^ Lawson, Robert A. 2006."'On Testing the Connection between Economic Freedom and Growth." Econ Journal Watch 3(3): 398–406. [8]
  46. ^ option=com_content&task=view&id=183
  47. ^ a b "Free, Free at Last | Dollars & Sense". 
  48. ^ Jeffrey Sachs, The End of Poverty; How We Can Make It Happen In Our Lifetime (Penguin Books, 2005), pp. 320–321.
  49. ^ "Dani Rodrik's weblog: Is there a growth payoff to economic freedom?". 
  50. ^ Morris Altman, "How Much Economic Freedom is Necessary for Economic Growth? Theory and Evidence," Economics Bulletin, Vol. 15 (2008), no. 2, pp. 1–20.
  51. ^ Adrian Karatnycky. Freedom in the World: The Annual Survey of Political Rights and Civil Liberties. Transaction Publishers. 2001. ISBN 978-0-7658-0101-2. p. 11
  52. ^  
  53. ^ Goodin, Robert E.; Rice, James Mahmud; Parpo, Antti; Eriksson, Lina (2008). Discretionary Time: A New Measure of Freedom. Cambridge: Cambridge University Press. pp. 1–54.   Chapter 1 and 2 discusses the context and validity of the new measure.
  54. ^ Whisenhunt, Donald W. (2007). President Herbert Hoover. Nova Publishers. p. 128.  
  55. ^ "Constitution of the International Labour Organization". 
  56. ^ "Freedom of association and the right to collective bargaining – Themes". 
  57. ^ Bhargava. Political Theory: An Introduction. Pearson Education India, 2008. p. 249.
  58. ^ Barbara Goodwin. Using Political Ideas. West Sussex, England, UK: John Wiley & Sons, Ltd., 2007. p. 107.

Further reading

  • Cebula, R., & Clark, J. (2014). Impact of Economic Freedom, Regulatory Quality, and Taxation on the Per Capita Real Income: An Analysis for OECD Nations and Non-G8 OECD Nations, MPRA Paper 56605, University Library of Munich, Germany.
  • Cebula, R. (2013). Effects of Economic Freedom, Regulatory Quality, and Taxation on Real Income, MPRA Paper 55421, University Library of Munich, Germany.
  • Friedrich Hayek, The Constitution of Liberty
  • Friedrich Hayek, The Road to Serfdom
  • Milton Friedman, Capitalism and Freedom
  • Ludwig von Mises, Economic Freedom and Interventionism
  • Amartya Sen, Development as Freedom
  • Li, Kui-Wai (2012). Economic Freedom: Lessons of Hong Kong. Hackensack, New Jersey: World Scientific. p. 804.  

External links

  • Lawson, Robert A. (2008). Economic Freedom.  
  • John Miller, "Free, Free at Last" in Dollars & Sense magazine
  • The Protection Of Economic Rights & Freedoms
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