5.5. SOCIALISM (IN AMERICAN POLITICS), THE MEANING OF ECONOMIC FREEDOM AND THE EMPIRICAL EVIDENCE OF ITS POWER, FROM EUROPE



Introduction

Now that both, charges of socialism have entered the American political lexicon and economic freedom is under attack, it seems to be an excellent time to:

- Reflect on the concept of economic freedom; and
- analyze some (European) data on its power.

The Concept

Economic freedom finds its counterpart, its equivalent, in the political arena, in democracy.

That is why economic democracy is frequently a synonym for economic freedom.

Democracy means essentially power to the people. Economic freedom, signifies power to the consumer.

In politics, we have parties. In the market, there are firms. In politics we must have free flow of information. In markets, we require transparency, that is competition based on 1) price and/or 2) quality and/or 3) delivery and not on other factors: “reasons that reason ignores”, as Camões, the Portuguese national poet said. In politics we have % of votes. In the economy, the name of the game is market share. Political parties gain power. Companies seek profits.


 
Democracy, economic freedom and regulation

Since my freedom ends where that of others start, it is rather obvious that in order to have political freedom we need a minimum of laws and rules. Otherwise the strong will have more freedom than the weak. Power will concentrate. Power will lead to power. And dictatorship (or dominant power) will follow.

Thus, the old saying that “eternal vigilance is the price of freedom” (Wendell Phillips).

Vigilance in the economic arena receives the name of (a certain degree of) regulation (and antitrust). Simply, to assure 1) high levels of competition; 2) with transparency (based on price/quality/delivery).

So, hands off does not guarantee either political or economic freedom.

Sure, that too much regulation will stifle both. Just as too little will replace democracy and markets with jungles. Where everything goes.

Here, as frequently (Aristotle) “the virtue lies in the middle: not at either extremes”. In just the enough amount of regulation (for economic freedom) and laws (for political democracy).

And of course that, when thinking about the recent financial crisis, we should always keep in mind that banks are very special institutions. Different from all others. From consumer products companies to industrial goods manufacturers. Banks create (and destroy) money: the so called money/credit multiplier. Then they also receive deposits. And they manage pensions. Not like my beer supplier or favorite hotel chain. That is, banks are different institutions and different institutions require different policies.


The sources of economic freedom

So, what does economic freedom (democracy) depend upon? (Just) enough regulation. Low state and taxation (both are coercive powers). Free labor markets. A good justice system (a country without a fast justice is not free). Free international trade. Low corruption. Low black markets.

All these variables are summarized in the Economic Freedom Index (of the Heritage Foundation). That index rates countries all over the world in terms of economic freedom. The 2016 index has Hong Kong as the freer and North Korea as the worst (178th).


The power of economic freedom

But does (economic) freedom really work? Does it pay off? What does the empirical data say?

Figure one, next, shows the relation between economic democracy and GDP per capita. The relation is statistically significant. As can be seen, freer countries are also richer.



And what about if we compare (economic) freedom with (country) competitiveness (not GDP per capita as above).

The International Institute for Management Development in Switzerland publishes a list of the more and less competitive countries in the world. The relation between this (competitiveness index) and the (economic freedom index) of Heritage Foundation is also statistically significant as the figure two, next, shows, meaning that the (economic) freer and most competitive countries share the top of both indexes. Just as the less free and less competitive are the same, are at the bottom in both indexes, too. Thus, the conclusion: competitiveness and economic freedom are related.





Small countries? Take Portugal, Ireland, Iceland and Luxembourg. Again there is a strong relation between economic democracy and GDP per capita (figure three).




And if we compare just two countries? Portugal and Ireland, for instance? Well twenty-three years ago both those countries had similar GDPs per capita. Then Ireland underwent a freedom revolution in the middle and late nineties. Portugal on the contrary passed from a ranking of 38th (in 1995) to 46th (in 2004) to 64th (in 2016) in the economic freedom index. The result? Figure four speaks for itself: the GDP per capita of Ireland is now 227% that of Portugal.




 

Comparing industry to industry? Well, let’s take the case of the pharmaceutical industry where Ireland has lower taxation, companies enjoy greater freedom in setting the prices, etc. Again twenty eight years ago the pharmaceutical industry of both countries, Portugal and Ireland, were similar. Today? Let us just let figure five speak.




Conclusion

I do not wish to burden your time, so let’s just extract together a few major conclusions.

First: economic freedom is not zero regulation, but rather high levels of competition in the markets. With transparency what requires a minimum amount of regulation. Just as political democracy in order to work demands a few laws.

Second: economic freedom works. It pays off. It creates wealth. Where freedom is scarce, prosperity is absent.

Third: consequently, economic freedom is a supreme (important) value. But that does not mean that it is the only, single, one. Stability is also important. Just as solidarity. So, after a certain (high) level of the first, room must be made for the latters.

Fourth: Capitalism has defects? My friends: please..., tell me something perfect in this world.

The bottom line is simple. As the data (that is, reality) shows, we better rather live with the defects of capitalism than with the virtues (?) of state economies.

In other words, capitalism is the worst economic system, with the obvious exception, of all others. Of course.