Month: August 2016

What is Economic Freedom?

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The conversation at Mercer University for this new academic year will be centered on economic freedom. This is part of what the university calls the “grand challenge,” a central theme around which the university schedules seminars, conferences, movies, etc, to generate important conversation among students, faculty and staff.

The first thing, of course, is to define economic freedom. Here is where I come in:

Economic freedom is the fundamental right of every person to control his or her own actions and property so long as he or she does not infringe on the economic freedom of others.

It is, as you can see, a simple idea but it has powerful implications. Economic freedom essentially has to do with being able to exercise personal choice over what is yours (your own body/labor and property). In economically free societies, individuals are free to work, produce, consume and invest in any way they please. 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.

And why does economic freedom matter?

It matters first from a moral perspective. Freedom to control what is yours is essential to your pursuit of happiness. It also matters from a utilitarian perspective. It has been largely shown (there are hundreds of papers) that countries in which economic freedom is protected grow faster and reach higher levels of living standards and economic development. Just to mention some comparing cases: the US favored economic freedom, the Soviet Union didn’t; Colombia favored economic freedom, Venezuela didn’t; Chile favored economic freedom, Bolivia didn’t.

What are examples of policies that restrict economic freedom?

Communist and/or socialist regimes have, of course, provided multiple and obvious examples of restrictions to economic freedom. But one can see some of these cases also in democratic countries in the west. Here are some policies that can significantly restrict economic freedom: increasing tax rates, minimum wages, tariffs (which are taxes on foreign goods) and protectionism, buy local or national product campaigns, increasing the provision of public goods (which means increasing the tax burden), bureaucracy, red tape, etc. All of these policies will restrict economic freedom at different levels.

Why is it timely to talk about economic freedom?

Because it is an election year in the US and we have heard some very interesting (scary) proposals from both parties. For example: free college (which obviously means that more taxes are going to be collected to pay for college), a wall between the US and Mexico (which will restrict the free movement of goods and labor), increasing tariffs for Chinese goods and other imports (which will also restrict the free movement of goods and services), etc. By the way, the US used to be among the leading countries in indices of economic freedom. However, the US’ index has been falling over the last few years and now it is only in the top 20.

Can restricted economic freedom be justifiable in some cases?

The typical example is poverty alleviation. While some may recognize that increasing taxes affects economic freedom, they may still argue that if those taxes are used to alleviate poverty, then perhaps lower levels of economic freedom are not such a bad thing. Well, it turns out that they are (again, multiple papers have looked into this). First, is it moral to oblige people to alleviate poverty? After all, taxes are mandatory and, therefore, cannot be considered a “voluntary contribution” to alleviate poverty. But is it moral to forcefully collect money from somebody to give it to somebody else? Second, what are the unintended consequences of collecting taxes to alleviate poverty? Well, companies and individuals may decide that they don’t want to play by those rules and move to other countries where taxes are lower. This will mean that the capacity of the economy for creating goods and services as well as jobs will decrease, and consequently poverty will increase, in the future. The best policy to sustainably alleviate poverty is economic freedom.

 

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