Economic freedom
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Economic freedom is freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft. Economic freedom is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative.[1][2]. In the present the concept, as it is most used, is usually associated with a free market system. Many rankings try to measure it, such as the Index of Economic Freedom. Empirical studies have found that, among other beneficial effects, economic freedom promotes economic growth and poverty reduction.[3][4]
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[edit] Institutions of economic freedom
[edit] Rule of law
One of the prerequisites for economic freedom is the rule of law; fundamentally, the government must be ruled by the law and be subject to it.[6] The rule of law requires the existence of widely shared cultural values and ethical norms; in the absence of a widespread social concept of justice, the state, or people in power, can violate the rights of citizens, sometimes by turning one group against another. In such conditions government can issue arbitrary and inconsistent decrees that dissimulate individuals by creating uncertainty about consequences of their actions. However, the certainty of law does not mean absence of any change but absence of perpetual and unpredictable changes in laws. Absence of such changes is highly important for the efficient running of a free society and economic coordination. For example, prominent economist and political philosopher Friedrich Hayek had argued that the certainty of law contributed to the prosperity of the West more that any other single factor. Other important principles of the rule of law are the generality and equality of the law, which require that all legal rules apply equally to everybody. These principles can be seen as safeguards against severe restrictions on liberty, because they require that all laws equally apply to those people who have political and coercive power and to those who are governed. Principles of the generality and equality of the law exclude special privileges and arbitrary application of law, i.e. favoring one group at the expense of other citizens.[7] According to Friedrich Hayek, equality before the law is incompatible with any activity of the government aiming to achieve the material equality of different people. He asserts that a state's attempt to place people in the same (or similar) material position leads to an unequal treatment of individuals and to a compulsory redistribution of income.[8] Both of those actions are contributing to a decline in economic freedom.
[edit] Private property rights
Secure system of private property rights is an essential part of economic freedom. That system is represented by two main rights, the right to control and benefit from property and the right to transfer property by voluntary means. These rights offer people the possibility of autonomy and self-determination according to theirs personal values and goals.[10] Milton Friedman sees property rights as "the most basic of human rights and an essential foundation for other human rights."[11] With property rights protected, people are free to choose the use of their property, earn on it, and transfer it to anyone else, as long as they do it on a voluntary basis and do not resort to force, fraud or theft. In such conditions most people can achieve much greater personal freedom and development than under a regime of government coercion. Secure system of property rights also reduces uncertainty and encourages investments, creating favorable conditions for economy to be successful.[12] Empirical evidence suggests that countries with strong property rights systems have economic growth rates almost twice as high as those of countries with weak property rights system, and that a market system with significant private property rights is an essential, although not only, condition for democracy.[13] According to Hernando De Soto, much of the poverty in the Third World countries is caused by the lack of Western systems of laws and well-defined and universally recognized property rights. De Soto argues that because of the legal barriers poor people in those countries can not utilize their assets to produce more wealth.[14]
[edit] Freedom of contract
Freedom of contract is the right to choose one's contracting parties and to trade with them on any terms and conditions one sees fit. Contracts permit individuals to create their own enforceable legal rules, adapted to their unique situations.[15] Parties decide whether contracts are profitable or fair, but once a contract is made they are obliged to fulfill its terms, even if they are going to sustain losses by doing so. Through making binding promises people are free to pursue their own interest. Main economic function of contracts is to provide transferability of property rights. Transferability largely depends on the enforceability of contracts, which is enabled by the judicial system. In Western societies the state does not enforce all types of contracts, and in some cases it intervenes by prohibiting certain arrangements, even if they are made between willing parties. However, not all contracts need to be enforced by the state. For example, in the United States there is a large number of third-party arbitration tribunals which resolve disputes under private commercial law.[16] Negatively understood, freedom of contract is freedom from government interference and from imposed value judgments of fairness. Notion of 'freedom of contract' was given one of its most famous legal expression in 1875 by Sir George Jessel MR:[17]
| “ | [I]f there is one thing more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by courts of justice. Therefore, you have this paramount public policy to consider – that you are not lightly to interfere with this freedom of contract. | ” |
[edit] Economic and political freedom
Economic and political freedom both include the freedom from coercion from other individuals and the government. The political and civil liberties have simultaneously expanded with market-based economies, and there are growing empirical evidence that economic and political freedoms are linked.[18]
Austro-English economist and philosopher Friedrich Hayek argued thus in The Road to Serfdom that "Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends."[19]
American economist Milton Friedman developped a similar argument in Capitalism and Freedom (1962) : economic freedom, while itself an extremely important component of total freedom, is a necessary condition for political freedom. Friedman has commented that centralized control of economic activities was always accompanied with political repression. In his view, voluntary character of all transactions in a free market economy and wide diversity that it permits are fundamental threats to repressive political leaders and greatly diminish power to coerce. Through elimination of centralized control of economic activities, economic power is separated from political power, and the one can serve as counterbalance to the other. Economic freedom, embodied by impersonal market forces, also protects people from discrimination in their economic activities for reasons unrelated to their productivity, and because of that Friedman feels that economic freedom of competitive capitalism is especially important to minority groups, who could otherwise be too easily affected by the hostility of the majority.[20]
[edit] The constitutional protection of economic freedom
The separation or structural-functional differentiation of the economy and the polity under basic law is equivalent to (say) the constitutional separation of organized religion and the state. It is also analogous to the division of powers within the state between the legislature, the executive, and the judiciary. A superior court will prevent the public authorities from assaulting economic rights and freedoms in the same way that it stops them from curbing freedom of the press or undermining judicial independence and the rule of law (etc.).
In America, liberal political economists such as Milton Friedman have proposed various amendments to the US Constitution and US Bill of Rights not only to better protect basic economic rights and freedoms from official assault but also to prevent the authorities from abusing their monetary and fiscal economic power – and so ensure continuing low inflation (etc.). Specifically with regards to protecting freedom of prices and wages – vital for the efficient functioning and maintenance of a market economy – Milton Friedman and Rose D. Friedman have argued that:
“We need here the exact counterpart of the First Amendment: Congress shall make no laws abridging the freedom of sellers of goods or labour to price their products or services.”[21]
Essentially, the case for the more effective constitutional legal protection of economic rights and freedoms is that this will boost economic growth and prosperity, democracy, and civil rights and freedoms generally in society. This applies to Britain and other countries as much as to the United States. In the UK, the basic (constitutional) legal protection of economic rights and freedoms under a new British Bill of Rights might entail prohibiting elected politicians and bureaucrats from:
- engaging in business enterprise;
- planning or dictating economic output;
- imposing taxes as an instrument of extra-judicial regulation;
- restricting labour market entry;
- curbing rights of independent economic contract-making in general; or
- curtailing free enterprise and markets in various other specified ways.
However, the introduction of a new indigenous Bill of Rights comprehensively upholding economic rights and freedoms in the UK would almost certainly entail British withdrawal from the European Union – because of the numerous official restrictions on free trade, markets, and business enterprise inherent in EU bloc membership.[22]
[edit] Indices of Economic Freedom
The annual surveys Economic Freedom of the World and Index of Economic Freedom are two indices which attempt to measure the degree of economic freedom, using a definition for this similar to laissez-faire capitalism, in the world's nations. These surveys have shown that economic freedom correlates strongly with higher average income per person, higher income of the poorest 10%, higher life expectancy, higher literacy, lower infant mortality, higher access to water sources and less corruption.[23] The people living in the top one-fifth of the most free countries enjoy an average income of $23,450 and a growth rate in the 1990s of 2.56 percent per year; in contrast, the bottom one-fifth in the rankings had an average income of just $2,556 and a -0.85 percent growth rate in the 1990s. The poorest 10 percent of the population have an average income of just $728 in the least economically free countries compared with over $7,000 in the freest countries. The life expectancy of people living in the freest nations is 20 years longer than for people in the least free countries.[24] According to the Economic Freedom of the World 2005, the world economic freedom score has grown considerably in recent decades. The average score has increased from 5.17 in 1985 to 6.4 in 2005. Of the nations in 1985, 95 nations increased their score, seven saw a decline, and six were unchanged.
| Worldwide index of economic freedom 2008 - top and bottom 15 rankings published by The Wall Street Journal and the Heritage Foundation[25] |
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[edit] See also
- Capitalism
- Economic liberalism
- Laissez-faire
- Index of Economic Freedom
- Four Freedoms (European Union)
[edit] Further reading
- Friedrich Hayek, The Constitution of Liberty
- Friedrich Hayek, The Road to Serfdom
- Ludwig von Mises, Economic Freedom and Interventionism
- Milton Friedman, Capitalism and Freedom
[edit] References
- ^ Surjit S. Bhalla. Freedom and economic growth: a virtuous cycle?. Published in Democracy's Victory and Crisis. (1997). Cambridge University Press. ISBN 0521575834 p. 205
- ^ David A. Harper. Foundations of Entrepreneurship and Economic Development. (1999). Routledge. ISBN 0415153425 p.57, 64
- ^ Adam Jolly. OECD Economies and the World Today: Trends, Prospects and OECD Statistics. (2003). Kogan Page Business Books. ISBN 0749437812 p.87
- ^ [1]
- ^ Ralph V. Turner. Magna Carta. Pearson Education. (2003). ISBN 0582438268 p.1
- ^ Keith Charles Culver (edt). Readings in the Philosophy of Law. (1999). Broadview Press. ISBN 1551111799 p.14
- ^ David A. Harper. Foundations of Entrepreneurship and Economic Development p.66-71
- ^ Daniel Rauhut, Neelambar Hatti, Carl-Axel Olsson. Economists and Poverty. Vedams eBooks (P) Ltd. ISBN 8179360164, p.204-205
- ^ Addision Wiggin, William Bonner. Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. (2004). John Wiley and Sons. ISBN 0471481300 p.137
- ^ David A. Harper. Foundations of Entrepreneurship and Economic Development. (1999). Routledge. ISBN 0415153425 p.74
- ^ Rose D. Friedman, Milton Friedman. Two Lucky People: Memoirs. (1998). University of Chicago Press. ISBN 0226264149 p.605
- ^ Bernard H. Siegan. Property and Freedom: The Constitution, the Courts, and Land-Use Regulation. Transaction Publishers. (1997). ISBN 1560009748 p.9, 230
- ^ David L. Weimer. The political economy of property rights. Published in The Political Economy of Property Rights. Cambridge University Press. (1997). ISBN 052158101X p.8-9
- ^ Hernando De Soto. The Mystery of Capital. Basic Books. (2003). ISBN 0465016154 p.210-211
- ^ John V. Orth. Contract and the Common Law. Published in The State and Freedom of Contract. (1998). Stanford University Press ISBN 0804733708 p.64
- ^ David A. Harper. Foundations of Entrepreneurship and Economic Development. (1999). Routledge. ISBN 0415153425 p.82-88
- ^ Hans van Ooseterhout, Jack J. Vromen, Pursey Heugensp. Social Institutions of Capitalism: Evolution and Design of Social Contracts. (2003). Edward Elgar Publishing. ISBN 1843764954 p.44
- ^ Freedom in the World. (1999). Transaction Publishers. ISBN 0765806754 p.12
- ^ Friedrich Hayek, The Road to Serfdom, University Of Chicago Press; 50th Anniversary edition (1944), ISBN 0226320618 p.95
- ^ Milton Friedman. Capitalism and freedom. (2002). The University of Chicago. ISBN 0226264211 p.8-21
- ^ Milton Friedman and Rose D. Friedman, Free to Choose, Secker and Warburg, 1980, p.300.
- ^ Lewis F. Abbott, British Democracy: Its Restoration & Extension, Industrial Systems Research Publications, Manchester (UK), 2006. ISBN 978-0-906321-31-7. Chapter Five: “The Legal Protection Of Democracy & Freedom: The Case For A New Written Constitution & Bill Of Rights”. A New British Bill Of Rights: The Case For. ISR Online Guides, Industrial Systems Research, Manchester UK.[2]
- ^ Economic Freedom of the World: 2004 Annual Report (pdf)
- ^ Economic Freedom Needed To Alleviate Poverty
- ^ Index of Economic Freedom - an annual guide published by The Wall Street Journal and The Heritage Foundation
