Economic freedom takes force off the table, creates mutually beneficial incentives

Why is economic freedom important? Is it intrinsically valuable or is it valuable because of the outcomes it produces?

That was a key question when then-Fraser Institute executive director Michael Walker and Milton and Rose Friedman launched the economic freedom project in the mid-1980s. Economic freedom clearly has intrinsic value—people have the right to make their own decisions and choices no less in matters economic than in matters personal, political or social.

This might even be particularly true for economic freedom since it arguably occupies more of our waking hours than other freedoms.

But for economic freedom to be robust, people also have to believe that it improves their lives. Through the 20th century, many were all too ready to give up their freedom for the siren songs of fascism and communism, which falsely promised increased prosperity, opportunity and fairness.

Fortunately, the Economic Freedom of the World Index provides a freedom measure that can be tested against other outcomes. Since the launch of the index, more than 600 fact-based, peer-reviewed academic and policy articles have found that economic freedom leads to increased prosperity and a broad range of non-economic positive outcomes.

It’s easy to see how economic freedom promotes well-being. First, in a vast array of human interactions, economic freedom takes force off the table. Any transaction freely entered into must benefit all parties; any transaction that fails this would be rejected by the disadvantaged party. This has consequences throughout the economy.

Second, it creates mutually beneficial incentives. Consumers who are free to choose will only be attracted by superior quality and price. Producers and sellers, including new ones, are welcome to the market place and face incentives to constantly improve the price and quality of their products. Billions of mutually beneficial transactions occur every day to power this dynamic and spur increased productivity and prosperity, job-creation and reduced poverty.

Restrictions on freedom prevent people from making mutually beneficial transactions. Free transactions are replaced by government action or restricted, un-free markets often controlled by government-connected elites. These transactions are marked by coercion in collecting taxes and lack of choice in accepting goods and services; instead of gains for both parties, citizens pay whatever bill is demanded in taxes and are forced to accept the limited choices offered by crony capitalists.

While the incentives of producers in a competitive market revolve around providing superior goods and services in order to attract consumers, the public sector and crony capitalists face no such incentives. Instead, incentives often focus on excluding competition—keeping others out of the market place and on rewarding interest groups, seeking political advantage, and penalizing unpopular groups.

Because of this, when governments—or government friends under crony capitalism—dominate the economy, it grows slowly or not at all. Individuals and groups battle one another for wealth and privilege. All too often, the individual gains not as an individual but as a member of rent-seeking group, whether economic, ethnic, political or religious. Groups stand against each other, creating a breeding ground for hate and distrust. Without economic freedom, the biggest gains accrue to those who cut a bigger slice of a limited pie for themselves to the disadvantage of others.

Economic freedom transforms the dynamics of society. Without economic freedom, people gain by making others worse off; with economic freedom, people gain only when they produce products or services desired in free exchange—in other words, by making people better off. Those in other groups become customers, suppliers, clients.

Thus, economic freedom is valuable both intrinsically and for its positive outcomes. With economic freedom, the biggest gains are achieved by people who increase the size of the pie for everyone. This boosts trust and tolerance and is why economic freedom has been shown to promote non-economic positive outcomes, such as democracy and other freedoms. It’s a dramatic change in dynamics that not only increases prosperity but over time transforms society.

Check out our new Economic Freedom website.