Economic Freedom

Freedom is a potent word that evokes strong emotions and motivates major upheavals in human society. The degree of freedom around the world that humans enjoy has been steadily on the rise, although with the occasional temporary declines.

It’s worth noting that not all societies have the same attachment to freedom. Some societies systematically value freedom a lot more than others. That presents us with an empirical fact: the positive correlation between freedom and human flourishing. If one assumes that all humans value flourishing, then the question arises why some societies appear to not value freedom, even though they suffer as a consequence of a lack of freedom.

Certainly, a society that is ruled by external forces is constrained from choosing the degree of freedom it wishes to grant itself. But what about societies that appear to deny themselves freedom that they could have had? In the absence of external coercion, it is puzzling that people would deliberately choose to deny themselves freedom. Perhaps the answer lies in Nietzsche’s observation that “Madness is something rare in individuals — but in groups, parties, peoples, and ages, it is the rule.” It would be insane for an individual to deny himself freedom but as a group, people quite often do what is individually irrational.

Just to be clear, the concept of freedom is simply this: the absence of coercion by other humans. Which means of course that the concept is limited to human beings, and not to other animals since they don’t have the equivalent of human free will. Also, the notion of freedom has content only in a society. It has no meaning for a solitary person on an island because freedom entails the absence of constraints imposed by the will of others; if there are no others, then it is meaningless to ask if a person is free or not. By context, a solitary existence is maximally free. You don’t have any human imposed limitations if you are alone.

There are a variety of freedoms — sometimes categorized as civic, political and economic. Civic freedom has to do with the freedom to choose what one does in one’s private capacity — whom one associates with, what one believes, etc. Political freedom implies the freedom to read, write, speak and listen; and to participate in collective-decision making and choose the structure of one’s society. Economic freedom has to do with production and consumption decisions of people. What you do with your property, what you produce, what you exchange, what you consume — if no one interferes in those decisions, you have economic freedom.

As mentioned before, different societies have chosen over different periods different degrees of freedom, across time and space. It’s a collective choice that is largely endogenous — meaning, it mainly arises from within the collective, with due regard to externally imposed constraints.

Colonized countries generally have less freedom than self-ruled ones. But even among self-ruled countries, there are wide variations. This fact that there are variations enables us to reach an important generalization, which is that freer societies are more prosperous compared to less free societies. Furthermore, societies with greater economic freedom (as distinguished from civic and political freedoms) do better than their equivalents with lower economic freedom.

Those generalizations are easily verifiable. Scores of easily accessible studies are available on the web. See the reports published by the Fraser Institute. For 2019, here is the Economic Freedom Ranking of 165 countries. At the top are Hong Kong, Singapore, New Zealand and Switzerland; at the bottom are Algeria, Libya, Sudan and Venezuela. The generalization supported by the data is that economic freedom is correlated with economic prosperity. The countries at the top are significantly wealthier than those at the bottom.

We should ask what is the causal direction that explains the correlation. Analysis supports the claim that prosperity is a consequence of economic freedom. That is, prosperity is downstream of freedom, and particularly that of economic freedom.

Economic freedom is vitally important. This is not really esoteric knowledge denied to anyone. Unfortunately, most people are quite ignorant of this fact, although not deliberately so. People have more pressing concerns than to ask what appear to be academic questions. But the public’s understanding of economic freedom means and why it matters is essential for public well-being. Why so? Because, as mentioned before, freedom is endogenous. How much freedom people grant themselves depends on how much they value freedom. If a society systematically misunderstands the value of freedom, it is unlikely that they’d want much of it.

Let’s define economic freedom a bit more. Here’s how the Fraser Institute describes the basics of economic freedom:

The cornerstones of economic freedom are (1) personal choice, (2) voluntary exchange coordinated by markets, (3) freedom to enter and compete in markets, and (4) protection of persons and their property from aggression by others. Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. Individuals are free to choose, trade, and cooperate with others, and compete as they see fit.

It goes on to state that “in an economically free society, the primary role of government is to protect individuals and their property from aggression by others.” That implies that the role of  the government is severely limited  to the protection of property rights, provision of national defense and access to sound money.

It also notes that the government must secure private property right, treat all people equally, enforce contracts, keep taxes low, not create barriers to domestic and international trade, and rely on markets rather than on the government for resource allocation.

Moving on, we have to note two facts about India which are relevant in this context. One, India is not economically prosperous; and two, India is not economically free. The correlation can be explained as a causal link that goes from freedom to prosperity.

One way to think about the matter is by noting the correlation between freedom and prosperity, and then noting that India is not prosperous, and concluding that perhaps that’s so because India is not free.

Prosperity, whether of a collective or an individual, is not mono-causal. Many factors may be necessary, and none of them sufficient for success. Conversely, for failure, any of a number of factors may be sufficient and none necessary.

A quick analogy. For a car to work, the subsystems of the motor, fuel system, transmission and wheels necessarily have to work — none of which are sufficient. But the failure of any of the necessary subsystems of the car is sufficient for the car to fail.

For an economy to work, the necessary bits are the availability of human capital, a decent natural resource base (land, water, minerals), internal and external stability, and economic freedom. In the case of India, we can verify that India has human capital; that there’s adequate natural resources; that it is not ravaged by devastating natural disasters; that it does not suffer extended internal conflicts nor external aggression. So those factors cannot explain India’s lack of prosperity. Therefore we can conclude that perhaps India lacks economic freedom, and that explains the poverty India suffers.

That is my conclusion. Indians are poor because they lack economic freedom, and not because they are stupid, or unlucky, or victims of circumstances.

But let’s inquire if indeed it is true that Indians lack economic freedom. Even a cursory examination of the Indian economy will show that Indians don’t have economic freedom. They are bound by rules and regulations that have no economic justification. They are required to jump through pointless bureaucratic hoops to obtain licenses, quotas, permits and permissions to engage in the most benign of economic activities. Property rights exist only at the whim and pleasures of the politically powerful. Indians are not free to engage in most market transactions.

Indians lack access to markets. That’s their tragedy. Access to the institution of free markets is the most significant factor that determines prosperity and flourishing.

But why are free markets so critical? Aren’t natural resources more important? What about democracy — isn’t that more important? Aren’t markets just impersonal mechanisms that devalue humans and their aspirations? Isn’t the market a mechanism that makes the rich richer and exploits the poor? Don’t markets lack humanity?

The truth is that markets are the most human of human institutions. Nothing is more characteristic of what it means to be a human being, nothing that distinguishes humans from other animals, than the concept of markets. Non-human animals share many features that humans have but no other life-forms have what we humans have — the market. Markets are particularly and peculiarly human.

But wait, you may object, don’t markets lack humanity? Aren’t markets all about profits and narrow selfish interests of owners of capital (whatever that means) and disregard for the well-being of people? Isn’t it all about capitalism and therefore the exploitation of people and the rape of the natural world?

All of that, and more, could be. Maybe markets are inhuman institutions that are diabolical mechanisms designed for the immiserization of the many for the benefit of the few. But I argue that markets are the primary mechanism for human flourishing.

I argue that India is poor because Indians have not realized that economic freedom matters, and therefore they have not ever desired economic freedom. Consequently, they have not enjoyed economic freedom.

But all is not lost. Indians, like the rest of humanity, may be slow on the uptake at times but not eternally so. One of these days, Indians will wake up to realize that what they principally lack is freedom, and that they lack the primary freedom — economic freedom.

I  argue that economic freedom trumps political freedom, and is only a part of civic and human freedom. The most necessary freedom is economic freedom, and every other variety of freedom — civic and political — is downstream of that. If one does not have property rights that is at the core of economic freedom, one does not have civic and political freedom.

The image at the top of the post is what I captured the last time I was at the Malabar Hills in Mumbai a few weeks ago. Amazing, don’t you think?]