Economics: Economic Freedom


Figure 1.--This remarable satellite photograph was taken in 2006 showing the world at night. It is an eloquent statement of economic freedom. Nothing could so dramatically show the impact of economic freedom around the world. Compare vibrant South Korea to the virtally medieval darkness of North Korea. (Some areas like Mongolia and Tibet are dark because of low population density, but North Korea is a densly populated country.) Also notice Communist Vietnam and Laos. Compare India and Pakistan. And notice the difference between Russia (even European Russia) and the brilliantly lit rest of Europe. The Trans-Siberian railroad is the thin line stretching from Moscow through the Asia to Vladivostok and the Pacific. And notice how the Nile River and Israel stand out in the Middle East. Source: U.S. Defense Meteorological Satellite Program (DMSP) Operational Linescan System (OLS). Click on the image to see what this means in human terms.

Economic conditions and living standards vary immensly around the world. Of course the destribution of resources vary. But one of the most prosperous countries in the world is Japan, a country virtually without resources. And Russia, a country with vast resources, has a virtually Third World economy. Prosperous countries are concentrated in Western Europe and North America. Here the Industrial Revolution and technology have transformed socities. And now there are also increasingly prosperous countries now found in Asia. Africa continues to be a weak spot as does the Middle East unless the country is lucky enough to have oil. The question arises as to why economic conditions are so varied around the world. The Communists claimed it was because evil capitalists were exploiting their own workers as well Third World countries. Many people bought this and other Socialist tenants, especially on the heels of the Great Depression. The only thing is that in the later part of the decade several surprising economic trends emerged which not only undermined, but disproved the Marrxist thesis. Others argued that natural resources were critical. Again we see countries disproving this thesis, Japan, Taiwan, South Korea, Singapore, Taiwan, and other countries proved that suceesful ecomomies can be built by countries without notable resources if the country develops its human capital. Increasingly it is becoming obvious, much to the dismay of Socialist acolytes around the world is that the key to economic success is economic freedom. And to test out that theory, one has to compare indices of economic feeedom with actual economic conditions. The Wall Street Journal andThe Heritage Foundation, a respected free market think tank, have tracked the economic freedom trends around the world with its Index of Economic Freedom. They define economic freedom as "the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself." You can go to their site to see the country rakings and a detailed duiscussion of conditions in each country. While one can debate the precise findings and individual country assessments, the basic findings are unmistakable. Countries high on the economic freedom list are successful countries with high living standards. Countries ranking low on the economic freedom list are countries with failed economies with a population condemned to poverty. What the index does not measure very well is the ability of countries with oil-based economies to avoid freeing their economies. A variety of cultural factors can also affect economic conditions.

Economic Variation

Economic conditions and living standards vary immensly around the world. Of course the destribution of resources vary. But one of the most prosperous countries in the world is Japan, a country virtually without resources. And Russia, a country with vast resources, has a virtually Third World economy. Prosperous countries are concentrated in Western Europe and North America. Here the Industrial Revolution and technology have transformed socities. And now there are also increasingly prosperous countries now found in Asia. Africa continues to be a weak spot as does the Middle East unless the country is lucky enough to have oil. Until World War II, many countries in the Third World were living in virtually medieval conditions. Many countries have since made progress, but many other countries are today less prosperous than they were as European colonies. In many of these countries people are hard pressed to even obtain the minimal amount of food to sustain life. Perhaps the most remarkable gvariation was between countries divided by World War II. The German Economic Miracle brought prosperity to German achiving living stndards far beyound pre-War Germany. In contrast East Germany labguished. Even more remarkable is that of Korea. North Korea was the most prosperous part of the country before the War. Today it the poorest country in the world where people starve to death. Across the DMZ to the south is prosperous South Kora one of the most vibrant erconomies in the world.

Causes

The question arises as to why economic conditions are so varied around the world is one economists have been struggling with for some time. Economic writers have offered a range of explanations for this variation. The Communists claimed it was because evil capitalists were exploiting their own workers as well Third World countries. Many people bought this and other Socialist tenants, especially on the heels of the Great Depression. The only thing is that in the later part of the decade several surprising economic trends emerged: 1) European countries became richer after losing their colonies, 2) Many colonies became poorer after independence, 3) The Soviet Union and its satellites as well as China and other Communist countries were unable to compete economically with the Western capitalist countries, 4) Free market reforms in China, India, and other countries turned torpid economies into engines for economic growth, and 5) Socialist policies in Western Europe and America are being exposed as being both unsustainable and counter productive. Others argued that natural resources were critical. Again we see countries disproving this thesis, Japan, Taiwan, South Korea, Singapore, Taiwan, and other countries proved that suceesful ecomomies can be built by countries without notable resources if the country develops its human capital. Increasingly it is becoming obvious, much to the dismay of Socialist acolytes around the world is that the key to economic success is economic freedom. And to test out that theory, one has to compare indices of economic feeedom with actual economic conditions. The Wall Street Journal and the Heritage Foundation, a respected free market think tank, have tracked the economic freedom trends around the world with its Index of Economic Freedom. They define economic freedom as "the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself." They measure ten components of economic freedom, assigning a grade in each using a scale from 0 to 100, where 100 represents the maximum freedom. The ten component scores are then averaged to give an overall economic freedom score for each country. You can go to their site to see the country rakings and a detailed duiscussion of conditions in each country. While one can debate the precise findings and individual country assessments, the basic findings are unmistakable. Countries high on the economic freedom list are successful countries with high living standards. Countries ranking low on the economic freedom list are countries with failed economies with a population condemned to poverty. What the index does not measure very well is the ability of countries with oil-based economies to avoid freeing their economies. A variety of cultural factors can also affect economic conditions.

Economic History


Fairness

Marxists see the economic freedom of the free market as a dangerous concept leading to economic disparity and thus unfairness. Our contention is that the free market is an economic construct and fairness is a moral or religious construct. Milton Friedman argues that concepts like fairness have no place in economics. What the market produces is by definition fair. And applying moral constructs to economics has many unintended, adverse consequences. This is especially the case because politicans are prone to demagogue the issues. One does not have to go far to find examples, A good example is President Obama who is making fairness (especially increased taxes on millionaires and billionaires) a cornerstone of his reelection campaign. What he does not mention is that significantly increased income can only be obtained by taxing the much larger population making between $0.2-1,0 million annually. And cthat this group includes many of the small businessmen that are needed to create jobs. The president has admitted that for gim fairness was central regardless of the economic consequences. You no longer hear this as now he tells us that jobs are his central concern. Countries that have increased taxes on the rich have generally experienced adverse economic consequences, such as America during the New Deal and Britain after World War II. Is it true that Socialist economics have reduced economic disparities, but this has generally been accomplished by reducing the earnings of everyone. Thus the socitities with the least economic disparities are China (before the free market reforms), Cuba, North Korea, and Vietnam. Whether one would call this fairness is an open question. Milton Friedman has best captured the fairness debate. He points out, "... scrutinize word for word the Declaration of Independence, the Constitution, and the Bill of Rights, and you will not find the word 'fair'." Free and freedom are used, but not fair and fairness, And as Friedman points out, freedom has a very specific meaning. Firness on the other hand is a very subjective concept. He discusses how the popular tebndency has been to substitute 'free' for fair'. He explains, "If we applied the present doctrine of 'fairness' to a football game, the referee would be required after each play to move the ball backward or forward enough to make sure that the game ended in a draw!" [Friedman] Freeman sees how basic economic policy on 'fairness' results in a lot of unintended adverse consequences, In contrast, economic policy based on freedom will eventually result in fairness.

World Economic Impact

As a result of World War II (1939-45), the Coummunist victory in China (1949), and Decolonization (1960s), the world was split into three sectors. The First World was North America and Western Europe soon to bejoined by Japan. These were the industrialized countries of the world which capitlism and democrcy had turned into highly productive powehouses. And thanks to America power, both Germany and Japan were converted to model democracies. The Second World was the Communist countries, the Soviet Union, the Eastern European satellite countries (essentially the Soviet Empire), China, North Korea, Vietnam, and finally Cuba. The Third World was the newly independent countries that emerged from European colonial empires. The first such country was India (1949), but most of these countries were granted independence a decade later (1960s). Also included were the Latin American countries which had achieved independence from Spain and Portugal after the Napolenic Wars (1810s-20s). Except for the Southern Come, these countries had achieved very limited economic success. Developments in each of these areas contrasted sharply after the War. The First World achieved unprecedented economic sussess. A major actor here was European economic integration. In sharp contrast to what the Communists expected, the loss of colinial empires dis not bring economic decline in Europe, but rather the mixture of capitalism and democracy brought unprecedented ecomonic success and prosperity. America and Europe also established the Breton Woods system that opened up the benefits of interntional trde to every country. The Second World or Communists expeienced economic decline, but such was the effectiveness of their propaganda and the appeal of Socilist theory that this was not immediately apparent. In stark contrast to the stunning success of the First World, the Second World or Communist countries experienced stunning economic failure. Here we are talking about planned rather than market ecinomies as well as totalitarian political organization. In addition, Communist countries sought national autarky rather than international trade and the benefits of evonomic specialization. The divided countries (China, Germany, and Korea) showed the most stark contrast, but so did the contrast between America and the Soviet Union. Communist leaders were shocked with First World success after World War II. Thus rather than compete economically, the Communists souught to compete expand through military means. The Cold War was esstentially a struggle to preserve freedom, both economic and political freedom. The Third World also experienced a high rate of economic failure in the first decades of Decolonization. Many of the new Third World leaders with only limited eductions and lottle business experience were impressed with Socialist thought. The appeal of Socialist theory as well as the popularity of socialism among European acacamic institutions were important factors. The apparent success of the Soviet Union impressed others. The Second World rejected the Breton Woods international system. The result was predictable, wide spread economic failure. The new leaders assumed that throwing off colonial bonds would result in immedite economomic success. This simply did not occur. In favt, living stndards actully declined in many newly independent states. The newly indepebdent states committed virtaly every mistake possible, in addition to Socialism and state econimic planning. many of these states also adopted autarkic policies and regimes pinishing savers and investors and disregard for the rule of law. This did not begin to change until the Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan) began to show case the potential dynamic economic forces that could be unleased by market capitalism. More of the newly indepebdent counties began to participate successfuly in the Breton Woods economic system establisghed by Americaand Europee. Many other Third World countries noteing the success of the Tigers have begun adopting market reforms. Eventually even Chinese Communists saw what could be achieved with market forces. The result has been spectcular. The result is that something like a billion people have escaped poverty and entered the middleclass since the rise of the Asian Tigers--a little more than a generation. That is more people than have escaped poverty in all of human history. Not only is this a stunning development, but shocking it is a devlopment that leftt-wing politicans, journalists, and acadameicans seek to ignore.

Economic Freedom and Affluence

There is a strong association between economic freedom (capitalism) and affluence. The richest countries unless a country sits on a pool of oil are cultries with core capitalist economoies. The countries include Western European countries which call them selves social democracies and have generous social welfare systems. Their core economies are, however, all capitalist, albeit with cary degrees of regulations. Generally speeking, the less inerous the regultions controlig business, the more prosperous the country. Along with economic freedom, political freedom is also involved because the rule of law, te protection of property, a functioning judicial system, and other atributes of a democratic system contribute strongly to the functioining of a capitalist economy. This can be seen visually in the world map here. The countries with the greatest economic and political freedom (Western Europe and North America) are therichest aling with the Asian Tigers and Commonwealth countries (Austrlia and New Zealand). In contrast the countries with the least economic and political feeedom are th pootest countries which can be seen in Latin Ameriva, Africa, and Asia. Here Communism, corruption, poor property rights and investor protection, and weak monetary policies. Here both ountries with socialist poliies as well as Islamic fundamentalsm appear to be factors adversely impairing economic develiment..

Sources

Friedman, Milton. "Fair versus Free," Freedom Daily (February 1992).







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Created: 6:04 AM 1/18/2011
Last updated: 7:36 PM 6/2/2017