Thursday, July 18, 2019

Measuring Economic Freedom and Why It's Important

The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to enter markets and compete, and security of the person and privately owned property. Forty-two data points are used to construct a summary index and to measure the degree of economic freedom in five broad areas.

Area 1: Size of Government
As government spending, taxation, and the size of government-controlled enterprises increase, government decision-making is substituted for individual choice and economic freedom is reduced. 

Area 2: Legal System and Property Rights 
Protection of persons and their rightfully acquired property is a central element of both economic freedom and civil society. Indeed, it is the most important function of government. 

Area 3: Sound Money
Inflation erodes the value of rightfully earned wages and savings. Sound money is thus essential to protect property rights. When inflation is not only high but also volatile, it becomes difficult for individuals to plan for the future and thus use economic freedom effectively. 

Area 4: Freedom to Trade Internationally
Freedom to exchange—in its broadest sense, buying, selling, making contracts, and so on—is essential to economic freedom, which is reduced when freedom to exchange does not include businesses and individuals in other nations. 

Area 5: Regulation 
Governments not only use a number of tools to limit the right to exchange internationally, they may also develop onerous regulations that limit the right to exchange, gain credit, hire or work for whom you wish, or freely operate your business. 

The top 10 countries with the most economic freedom are:

1. Hong Kong
2. Singapore
3. New Zealand
4. Switzerland
5. Ireland
6. United States
7. Georgia
8. Mauritius
9. United Kingdom
10. Australia (tied)
10. Canada (tied)

Concepts of economic freedom is also discussed fully in books such as Why Nations Fail, The Birth of Plenty and The Age of Abundance

See the full report on Economic Freedom here.

Here's a quick video from the Frasier Institute, creator of the index. 

Another video from Learning Liberty by Prof. Joshua Hall, Beloit College:

If you really want to learn more about it, here's an hour-long lecture about the economic principles. I like his introduction about the debate over economic theory. 

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