The political and democratic struggle for economic freedom
Studies have shown that economic freedom remains a major determinant of living standards, economic growth, and other indicators of social and economic well-being in a country. The level of economic freedom is the product of fights between politicians on one side, who attempt to buy votes by providing interest groups with special benefits through subsidies, regulation, and tax-breaks, and politicians on the other side, who appeal for votes by making the public aware of the cost of the policies advocated by their opponents.
Those looking to buy votes often hide the costs of these special benefits by using deficit financing, which passes the costs on to non-voting future generations. Inflation caused by deficit-financing often leads to the development of new opportunities for vote-buying policies from interest groups suffering from the consequences of the inflation.
In well-functioning democracies, the fight for (and against) economic freedom often leads to political standoffs and equilibrium levels of economic freedom, determined by the country’s history, culture and institutions. Since these determinants change only slowly, equilibrium levels of economic freedom tend to change at the same pace.
However, equilibrium levels can be changed more quickly through the development of new political paradigms of the government’s role in the operation of the economy. Examples of such changes in paradigms are the Marxist-inspired use of economic planning, the social-democratic agenda for income redistribution and regulation, and the free-market agenda emphasizing freedom and the role of market incentives.
Such paradigms often emerge in the wake of major economic and political crises such as those that followed the collapse of the Czarist regime in Russia at the end of the First World War, which produced the Marxist revolution. The Great Depressionin the United States caused American voters to elect Franklin Roosevelt, who promised voters more government activism to end the economic crisis. The stagflation in the late 1960s and early 1970s resulted in a new paradigm favouring markets that led to the election and policies of President Ronald Reagan and Prime Minister Margaret Thatcher.
New paradigms can also be forced upon governments by external forces such as international organizations and financial institutions, which in recent decades attached paradigm-changing conditions for the disbursement of financial aid to Greece in 2012/13 and a number of other countries.
Earlier this year, a Fraser Institute study spotlighted the burgeoning literature around the measures of economic freedom that have entered the public domain since about 1990. The study finds that fights between political parties are a sign of a well-functioning democracy that should be encouraged rather than deplored. The study also implies that parties engaged in these fights should be required to support their policy proposals by benefit/cost calculations reviewed by independent agents; that media should better inform voters about party platforms in the run-up to elections; that prohibitions against deficit financing be created and enforced, and that all new regulations be approved by legislatures rather than adopted by autonomous regulatory authorities.
