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Economic Freedom in the Literature: What Is It Good (Bad) For?

18 August 2022

Summary

Hundreds of studies in top-ranked academic journals show that economic freedom leads to positive outcomes for people, whether in increased prosperity, reduced conflict, or stronger human rights. Scholars such as Adam Smith, David Ricardo, Ludwig von Mises, F.A. Hayek, Milton Friedman, among others, argue that an economic system based on private property, competitive markets, and free trade would yield good outcomes: not only prosperity but human flourishing in many dimensions. Other scholars, among them Karl Marx, J.M. Keynes, Abba Lerner, and Joseph Stiglitz, argue that economic freedom leads to bad, or at least sub-optimal, outcomes. Ultimately, whether economic freedom yields positive or negative outcomes is an empirical question. This chapter examines over 1,300 peer-reviewed journal articles that have cited the index published in Economic Freedom of the World: 2022 Annual Report (EFW) . Of these, over 700 articles looked at the impact of economic freedom on the human condition and most find a link between high or increasing levels of economic freedom with gains in prosperity and other measures of well-being; less than one in 20 find negative consequences. The study uses the Fraser Institute’s EFW index as its measure of economic freedom. It measures limits to freedom whether caused by overly powerful government or crony elites. The determination of “positive” outcomes—such as increased prosperity, human rights, and social development—and “negative” outcomes—such as poverty, conflict, and reduced life expectancy—is based on 721 papers in academic journals between 1996 and early 2022 that undertook fact-based studies of the impact of economic freedom, as listed in the Social Science Citations Index (SSCI). Just over half, 50.6%, found economic freedom was related to “positive” outcomes while only 4.6% found “negative” outcomes; 44.8% did not find a clear relationship between economic freedom and either “positive” or “negative” outcomes. Economic benefits were particularly pronounced. Two thirds of the relevant studies found that economic freedom was positively related to economic growth, 72.5% to increased incomes and productivity, and 62.9% to increased entrepreneurship. Broad areas examined by the literature under review

  • Immigration & Travel:of the 10 relevant studies, 90% found economic freedom was related to increased immigration and tourism while 10% found no clear relationship.
  • Income & Productivity:of the 51 relevant studies, 72.5% found economic freedom was related to increases in income or productivity and 27.5% found no clear relationship.
  • Economic Growth:of the 92 relevant studies, 66.3% found economic freedom was related to increased economic growth, 32.6% found no clear relationships, and only 1.3% found a negative relationship.
  • Entrepreneurship & Innovation:of the 35 relevant studies, 62.9% found economic freedom was related to increased entrepreneurship and innovation, 34.3% found no clear relationship, and 2.9% found a negative relationship.
  • Conflict—wars, civil unrest, and terrorist attacks:Of the 10 relevant studies, 60% found economic freedom was related to reduced conflict and 40% found no clear relationship. None found economic freedom increased conflict.
  • Investment:of the 65 relevant studies, 58.5% found economic freedom was related to increased investment, 38.5% found no clear relationship, and 3.1% found a negative relationship.
  • Labor Market Outcomes:of the 10 relevant studies, 53.3% found economic freedom produced improved labor market outcomes, such as reduced unemployment and increased wages and participation, 42.2% found no clear relationship, and 4.4%, a negative relationship.
  • Human Rights & Social Development—papers using the UN’s Human Development index and other indicators like life expectancy and social trust:of the 68 relevant studies, 52.9% found economic freedom was related to improved human rights and social development, and 38.5% found no clear relationship, and 4.4% found a negative relationship.
  • Trade:of the 28 relevant studies, the verdict was split down the middle with half finding economic freedom increased trade and half finding no clear relationship.
  • Corruption & Shadow Economy:of the 30 relevant studies, 43.3% found economic freedom was related to reduced corruption and a smaller shadow economy, 50% found no clear relationship, and 6.7% found economic freedom was related to increases in corruption and the shadow economy.
  • Environmental Outcomes—CO2 emissions and other measures of pollution as well as environmental outcomes like biodiversity:of the 24 relevant studies, 41.7% found economic freedom was related to improved environmental outcomes, 41.7% found no clear relationship, and 16.7% found a negative relationship.
  • Inequality:of the 50 relevant studies, 26% found economic freedom was related to reduced inequality either in income or wealth, 54% found no clear relationship, and 20% found economic freedom related to increases in inequality.

Authors

Robert A. Lawson
Clinical Professor in Economics and Director, Bridwell Institute for Economic Freedom, Southern Methodist University

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