Poverty

Does Economic Freedom Yield Prosperity?

Date:
Journals

Advocates of the freedom movement are well acquainted with classical liberal scholars—including Adam Smith, F. A. Hayek, and Milton Friedman, among many others—who have argued that economic systems based on private property, competitive markets, and free trade will yield prosperity. Critics of classical liberalism have countered with the argument that economic freedom can lead to negative consequences in the business cycle, increased income inequality, and adverse impacts on the environment.

The Fraser Institute, an Atlas Network partner based in Canada, argues that whether economic freedom yields positive or negative outcomes is ultimately an empirical question. The Fraser Institute publishes an index in their annual Economic Freedom of the World (EFW) report, which measures the degree of economic freedom in countries around the world based on five focus areas: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation. Between 1996 and 2022, over 1,300 peer reviewed journal articles have been published citing the EFW index. From this total, over 700 studies have found a positive connection between economic freedom and gains in prosperity, whereas fewer than one in 20 studies found negative consequences.

Robert Lawson, a senior fellow at the Fraser Institute and clinical professor in economics and director of the Bridwell Institute for Economic Freedom at Southern Methodist University, conducted a meta-analysis of 721 of the aforementioned journal articles to assess the impact of economic freedom as documented by academic literature. These articles were included based on the criterion of using a conventional empirical model, citing the EFW index in a substantial way, and including the index as an independent explanatory variable.

Lawson coded journal articles “positively” if they demonstrated outcomes including increased prosperity, human rights, or social development, and “negatively” if outcomes included increased poverty, conflict, or reduced life expectancy. Of the analyzed articles, just over half (50.6%) found that economic freedom was related to positive outcomes, while only 4.6% demonstrated negative outcomes. The remaining 44.8% did not reveal a clear relationship between economic freedom and either positive or negative outcomes.

Although the extremely wide range of dependent variables analyzed in the articles makes it difficult to summarize findings, Lawson classified the papers into broad categories to enable more precise evaluation. These categories included conflict, corruption and shadow economy, entrepreneurship and innovation, environmental outcomes, economic growth, human rights and social development, immigration and travel, income and productivity, inequality, investment, labor market outcomes, and trade.

The top categories that revealed a positive relationship with economic freedom included immigration and travel, income and productivity, economic growth, and entrepreneurship and innovation. With the exception of four categories, fewer than 5% of relevant studies in each group revealed negative relationships.

Economic Freedom

This assessment clearly demonstrates a strong case that economic freedom, as measured by the EFW index, corresponds with positive outcomes. The study was published as a pre-release of chapter 3 from the Fraser Institute’s now released Economic Freedom of the World: 2022 Annual Report. Eight other organizations, many of which are Atlas Network partners, were involved in the international release. These include Libertad y Desarrollo (Chile), Liberalni Institute (Czech Republic), Centre for Social and Economic Research (Iceland), Centre for Market Education (Malaysia), Instituto +Liberdade (Portugal), Fundación para el Avance de la Libertad (Spain), Bridwell Institute for Economic Freedom (U.S.), Centro de Divulgación del Conocimiento Económico para la Libertad (Venezuela), and the Free Market Foundation (South Africa).

Click HERE to read the full study.