Without economic freedom, we cannot exercise our other freedoms. The freedom to speak is meaningless if the government prevents us from traveling from our homes or paying for a phone call. The freedom to write is meaningless if the government prevents us from selling newspapers. The freedom to worship is meaningless if the government forces us to behave immorally. The violations of freedoms of speech and press and religion are why we resist government. But the violation of economic freedom is what we resist.
The data bear this out. In its Economic Freedom of North America and Economic Freedom of the World indices, the Fraser Institute rates societies on economic freedom according to the size of their governments (as measured by government spending and transfers, and the prevalence of government-owned enterprises), the extent of taxation (as measured by tax revenue, the top marginal tax income rate, and other taxes), and labor market restrictions (as measured by minimum wage legislation, and the prevalence of government-employed workers).
Fraser does not consider household income, unemployment, poverty, inequality, or any other environmental or social metric when rating societies for economic freedom. Cross-referencing Fraser’s data with these socioeconomic outcomes is revealing.
Consider the United States. In every year from 1987 through 2009, the 25 U.S. states that scored above the median on the economic freedom index also exhibited greater per-capita income than did the 25 U.S. states that scored below the median.
The 25 more economically free states also experienced a lower unemployment rate than did the 25 less economically free states.
They also experienced lower poverty rates. In fact, if the less free states had had the same unemployment rates as the more free states, there would have been 5 million fewer Americans living in poverty.
Certainly, economic freedom must come at a price. Advocates of controlled economies will argue that the price is inequality. Yet, the data suggest the opposite. Comparing available data from the Census Bureau to economic freedom reveals that the states that are more economically free actually experienced lower levels of income inequality than did the states that are less economically free. [A possible exception appears to be 2009. However, the difference in 2009 is not statistically significant (the other differences are), and 2009 was atypical in that it was the height of the Great Recession.]
People themselves appear to realize that life is better in more economically free states because migration data show a clear exodus of people out of less free states and into more free states.
A reasonable counterargument is that freedom might work for Americans, but that’s because Americans themselves tend to be atypically obsessed with doing as they please. A comparison of socioeconomic outcomes to Fraser’s Economic Freedom of the World index is telling.
Among the 79 reporting countries, those that are more economically free enjoy lower poverty rates.
Of course, this is likely due to the “rich country effect.” That is, rich countries tend to be more economically free and also have higher incomes with which they can provide social and economic infrastructure with which to fight poverty. Yet, the same pattern appears when we restrict our view to the 25 poorest countries. Poor economically free countries have lower poverty rates than do poor economically unfree countries.
Interestingly, the inequality phenomenon also appears at the country level. Among the 123 reporting countries, those that are most economically free exhibit less income inequality than do those that are least economically free.
Why would this be so? With economic freedom comes the ability to earn profits from one’s talents and circumstances, and some people are born with more talents and better circumstances than others. So, certainly, economic freedom should generate inequality. While true, the data suggest that the mechanisms governments use to reduce inequality actually promote more inequality than they correct. In other words, economic freedom may yield inequality, but it yields less inequality than arises when governments attempt to restrict economic freedom.
For the 75 reporting countries, child labor rates are lower among those that are more economically free.
Again, this could simply be the rich country effect. Rich countries tend to be economically free, and rich countries can afford to protect their children by instituting child labor laws. In fact, rich countries can benefit from child labor in other countries by importing cheaper goods that are made in countries that do not have child labor laws. Yet, if we look at the 26 poorest reporting countries, we find the same result. Although the child labor rates are incredibly high, they are lower among the poor economically free countries than they are among the poor economically unfree countries.
So what is worse with economic freedom? Not air pollution.
And not deforestation.
Of course, this might be another instance of the rich country effect. Rich countries can afford to preserve their forests while buying products from poor countries that have no choice but to cut down their trees. While we tend to see deforestation across the board for poor countries, poor countries that are economically free experience significantly less deforestation than do poor countries that are economically unfree.
Not only do more economically free countries enjoy more healthy economies and environments, they are also more peaceful. Countries that, according to Fraser, are more economically free are also, according to the Institute for Economics and Peace, more peaceful.
The evidence for the benefits of economic freedom doesn’t just show up at the country and state levels. It also shows up at the city level. U.S. cities (metropolitan statistical areas – MSAs) that are more economically free suffer less unemployment.
They enjoy higher median household incomes.
And they suffer less poverty.
A reasonable counterargument is that correlation is not causation and all we’ve seen here is that economic freedom is correlated with good outcomes. While true that correlation does not imply causation, also true is that the absence of correlation does imply the absence of causation. Nowhere here have we seen evidence that economic freedom is correlated with bad outcomes. Therefore, we can conclude – pending further evidence – that economic freedom does not cause bad outcomes.
What we do know is that across countries, states, cities, and time, the data tell a consistent and compelling story. Societies that are more economically free are also socioeconomically healthier.
Antony Davies is an associate professor of economics at Duquesne University and a Mercatus Affiliated Senior Scholar at George Mason University. His primary research interests include econometrics and public policy. Dr. Davies has starred in Learn Liberty programs and videos dispelling policy myths, protecting the environment, alcohol laws, government spending, immigration, and social security.