Years of data show that economic freedom is a key ingredient in promoting economic growth. Edward Stringham, Hackley endowed chair for capitalism and free enterprise studies at the Fayetteville State University business school, recently discussed economic freedom with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: First of all, let’s get to the basic question: Economic freedom — just how important is it?
Stringham: Economic freedom is extremely important. Economic freedom is defined by how much you can do with your business what you want, whether you can keep money that you make, whether you can trade with others, whether you can invest where you want to invest. Or, conversely, a lack of economic freedom would be if government made those decisions for you — if government decided what companies to invest in, if government decided where your money got spent, if government decided how much of your money you got to keep — that would be a lack of economic freedom.
And the overall message from this research is economic freedom is extremely important. Countries with more economic freedom have greater economic output, higher income, better amenities in the society. And countries with lower levels of economic freedom have greatly higher rates of poverty, rates of infant mortality, and all of the bad things that we don’t want to see in the world are associated with less economic freedom. All the good things that we want to see in the world are associated with more economic freedom.
Kokai: So this is not just a philosophical issue that more freedom is better. If you actually look at tangible results, more freedom is better.
Stringham: That’s right. Adam Smith, the first economist, came up with some theories and some analysis of why markets and freedom in general are good and beneficial. And over the past couple decades, some economists have been trying to quantify this in coming up with an index of economic freedom among many different countries looking at many different variables, adding them together, and then looking at how these variables correlate with different economic outcomes. So it’s putting some numbers on the theories of people like Adam Smith or Milton Friedman.
Kokai: When we talk about economic freedom, I think a lot of people would have a general sense of what we mean, but let’s give them some specifics. How would a society that wants to be as economically free as possible treat businesses in terms of the amount of taxation and regulation? Fairly low, I would suspect.
Stringham: That’s right. So if a country taxes businesses, it’s going to decrease their economic freedom. If a country regulates business choices — who they hire, who they can fire, different labor regulations, capital market regulations — the more interference government has in the everyday operation of a business means there is less economic freedom in a society.
So the ideal from my perspective is to have a free market — a complete free market — which means people have to respect the rights of those around them. And from there they should be able to do whatever they want as long as it’s peaceful. And business is inherently peaceful if they’re getting their money voluntarily from the customer. They’re hiring their employees through the marketplace. What they’re doing is not only peaceful, it’s beneficial to those around them.
Kokai: Now there may be a few people who will say, “I hear what you’re saying, and it sounds so 2006 or 2007. We saw based on the economic slump that capitalism doesn’t work as people have proclaimed for years that it does. The government needs to get involved to help our economy.” Are people who say this approaching this question in the right way?
Stringham: I think that approach would be to miss why we got into this mess. I would argue that government got us into this mess to begin with, and then what do they do? They want to point the blame on everyone else — it’s markets, it’s Wall Street, they did it to us, let’s go after them. So it’s a typical witch-hunt mentality that they’re doing right now. All of their proposed solutions, from my perspective, make no sense whatsoever, such as programs like Cash for Clunkers. Using tax money to destroy cars is a bad idea. Taking tax money to buy General Motors, to bail out Chrysler, to bail out Fannie Mae [and] Freddie Mac, these are just bad ideas. They’re taking money out of the productive sector of the economy and giving it to the people who’ve made bad mistakes, and it’s just going to encourage more bad decision making in the future.
Kokai: You mentioned some of the things that our government has done. You could also talk about things like ObamaCare or the financial regulations. With all of these things happening, how much less free is the United States becoming, and what sort of impact might that have?
Stringham: Unfortunately, it’s becoming a lot less free. If you look at the history of the United States, it was largely completely free market. If you look at the countries that had the most vibrant financial sectors — historically Amsterdam, London, New York City — those countries had very unregulated financial markets. Countries with highly regulated financial markets, the government just pushed out all investment.
And what the government is doing now is they are basically trying to centrally plan financial markets in many ways that’s going to make it too onerous for people to want to invest and conduct financial dealings in the United States. So you’re already seeing a lot of investments and investment banking going to other countries. The United States no longer is the leader in initial public offerings as it was for decades, and I would say this is a direct result of these regulations, which are continuing to strangle the financial sector.
If we look at the health sector as well, we have historically had some of the most innovative health care and doctors and procedures compared to other countries. where it is centrally planned and people end up with, for example, bad teeth, such as in England because the government is providing all dentistry. I would say it’s a bad idea to move to any system that’s going to be taking the decisions away from doctors, away from customers, away from health care customers, and putting it into the hands of bureaucrats.