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The Bright Future of Economic Freedom

Judge Glock

The erosion of economic freedom in many places has been as real and as destructive as the erosion of political freedom. Countries that once seemed to be marching towards free-market capitalism, including two of the West’s former foes, Russia and China, have now readopted dirigiste economic models. Across much of the developed world, the liberalization of economies at the end of the 20th century has stalled, and the state is capturing an ever-larger share of economic output.

Yet it is important to remember the victories that free market economics has achieved and is continuing to achieve. While some measures of freedom have gone into reverse, by many others we are living in one of the most economically open times in human history. The success of the free-market economic model over its alternatives is clearer now than it has ever been. Similarly, the success of free-market policies in many spheres of life, in privatized industries, in price deregulation, and others, shows little sign of abating, and these and other market reforms have continued to spread.

If one was surveying the world from the 1940s to the 1970s, one could be forgiven for believing that socialism and communism were ascendant, that top-down planning would be the essential part of all economies, and that private entrepreneurs were nearing extinction. Now, in the early 2020s, it would be foolish to believe these things. Despite real, and in many places growing, threats, the future of economic freedom looks brighter than its past.

The Commanding Heights of Economic Freedom

In 2013, deep in U.S. President Barack Obama’s budget proposal for the following year, the President suggested privatizing the Tennessee Valley Authority (TVA), a government-run electric utility. To students of American liberalism, this quiet abnegation came as a surprise. President Franklin Delano Roosevelt thought that the TVA was one of the most important achievements of his administration. In 1963 President John F. Kennedy said the TVA was “a dream came true” and “one of the most unique legislative accomplishments in the history of the United States.” President Lyndon Johnson proposed a version of the TVA for the Mekong Delta in Vietnam as a paradigmatic case of how modern liberalism could help uplift impoverished people. To many, the TVA defined modern economic policy: government-ownership of the base industries that would propel the economy forward.

If one had to articulate the most destructive economic policy of the 20th century, though, government-ownership of industry would top the list. The preeminent goal of socialism throughout its history was for the government to control “the means of production” and for a while the entire world looked to be heading in this direction. From the communist economies of the USSR, China, and their satellites, to the pervasive nationalized industries of Western Europe, to the state-owned enterprises of the recently liberated colonies (often encouraged and funded by the World Bank on the TVA model), government-ownership was ascendant. Even in the non-communist countries, massive swathes of electric, airline, railroad, steel, automobile, housing, oil, coal, healthcare, banking, telecommunication, and other industries were owned and run by the state.

Although Obama’s privatization plan was not consummated, its proposal demonstrated the widespread acceptance of the failure of government ownership, even among former advocates. Now almost all countries and parties, including those that march under socialism’s banner, reject the idea of nationalizing most industries. The British Labour Party in 1995 removed the part of its infamous Clause IV that demanded “the common ownership of the means of production, distribution, and exchange.” Even Jeremy Corbyn, the most left-wing Labour Party chief of recent memory, was forced to deny he wanted to bring back the original goal.

Privatization, a term which was unknown as recently as the 1970s, has continued flourishing for decades. In 2015 and 2016, the last two years for which we have reliable data, countries made a record almost $300 billion in annual revenue from the sales of government companies. Even still-nationalized industries are subject to more market forces. About 60% of the largest state-owned enterprises now have some private investment, and, as opposed to being insulated domestic industries as in the past, many live off competitive exports. The triumph of private over government ownership is the most potent example of the success of economic freedom in modern times.

Government control of prices would rank next to government-ownership as the next most destructive legacy of 20th century economic policy. Despite periodic attempts to limit prices in one or another sector, the contemporary world has not witnessed the pervasive controls common in the past. Countries across the globe put in economy-wide price controls in the Great Depression and World War II and some continued to do so in the 1970s. It was Republican President Richard Nixon, himself a former low-level administrator of price controls in World War II, who declared a freeze to all U.S. prices in August of 1971. C. Jackson Grayson led the subsequent price limit program and later wrote of his frustrations in Confessions of a Price Controller, where he described futile attempts to regulate the price of everything from coal to canned peas. The US, UK, France, Canada, Spain, and other countries attempted several variations of powerful “price commissions” in this era, which led to everything from shortages on supermarket shelves to long gas lines. The once commonplace strategy of nationwide price controls has become almost unthinkable, even during the recent inflation.

If one is a fan of economic freedom, the privatization of nationalized industries and the end of pervasive price controls should give one hope. In most of the world, the free market has seized these “commanding heights” of the economy.

Data on Economic Freedom

There are two main indexes of global economic freedom and both show the modern world as being close to a historic peak. In the Fraser Institute’s report of Economic Freedom of the World, the average country’s economic freedom “score” increased from 6.6 in 2000 to 6.8 in 2020 . The Heritage Foundation’s Index of Economic Freedom has also shown a general upward trend since 1995.

Both indexes saw a slight drop after the financial crisis of 2008, followed by a rise again, and then a sharper drop during 2020 pandemic. But the most recent decline only set economic freedom back to either the level of the early 2010s or, at worst, the early 2000s, which is sometimes considered the pinnacle of the open economy. The irony is that both those who are celebrating and those who are bemoaning the end of the neoliberal era that arrived after the Cold War ignore the continued gains in freedom since then. When economists take the analysis of economic freedom back further and look at the world before the fall of the Berlin Wall, there is no comparison to the freedoms of today.

There are several other measures of economic liberty that show continued improvement. For years one of the most closely surveyed was the ability of entrepreneurs to start new businesses. The World Bank’s Doing Business report showed continued reductions in burdens on entrepreneurs over the first two decades of the current millennium. In 2004 the cost of starting a business in the developed world was about 12% of average annual income. By 2020 this had dropped to less than 4%. The decline in the developing world was even starker. In 2004 it cost over 140% of average income in developing countries to start a new business, but just sixteen years later it had dropped to less than a fifth of that amount, 25% of income. This rapid triumph of entrepreneurial freedom likely has no parallel in human history.

The ability of people to trade across borders has been a litmus test of economic freedom since Adam Smith. Yet many have bemoaned the putative decline in free-trade sentiment since the financial crisis. The truth is that global trade has stayed fairly stable, at around 60% of global Gross Domestic Product (GDP), since that time, which was itself a global historical peak and more than double the level of just a few decades earlier.

“Stagnating” near a peak in trade hardly gives reason for pessimism. Services trade, which is more difficult in many respects than goods trade, has continued hitting new peaks in the years since the financial crisis, and constituted around 14% of global GDP before the pandemic. Tariffs between nations have kept declining. The World Bank estimates that the average tariff rates in the early 1990s got as high as 8%. These kept falling even after the supposed anti-trade backlash of the financial crisis and by the late 2010s had dropped below 3%.

The fact that there are remarkably clear correlations between all of these measures of economic freedom and prosperity means that only the most obdurate now tout the virtues of socialist or dirigiste economic systems. While many economists, including Nobel Prize winners such as Paul Samuelson, once could argue that socialist and communist countries were outgrowing and outcompeting the West, such a view is laughable today. Empirical evidence, although rarely decisive in policy debates, has convinced most of the world that the path to prosperity is freedom.

Threats to Economic Freedom

Despite continued successes, there are growing threats to economic liberalism, including burgeoning trade wars, real shooting wars, and increased government intervention brought about by the pandemic. But the foremost threat internationally is named China. As Nicholas Lardy writes in The State Strikes Back, since 2008, this once liberalizing economy has seen more government spending and more state credit control. Today more than 10% of the largest corporations on Earth are Chinese government corporations. These corporations went from contributing less than 1% to closing in on 5% of global GDP. Although not a communist country in the mold of the 1970s or ‘80s, China is no longer a liberalizing one.

The combination of decreasing economic liberty and decreasing political and civil liberties (and, despite the doubters, the evidence shows that these liberties continue to be intimately related both in China and at a global level) means a sixth of the world’s population is already enduring lower growth and more poverty than they otherwise would. Yet China has been touting and spreading its new economic model. Hong Kong, which long topped the ranks as one of the economically freest places on Earth, is now just adjunct of ever-less open China.

In the developed world, new groups and parties from both the right and the left have called the premises of economic liberalism and globalization into question, often by claiming it has immiserated middle-income families. While it is inaccurate to say that the middle-class in these countries is worse off materially than in the past, it is accurate to say that this middle-class has seen less of the benefits of growth than the global poor, and that in much of the developed world income growth has stalled for over a decade. Rising costs in areas such as health care, housing, and education and the decline of manufacturing have undoubtedly caused hardships for many and increased the appeal of these new groups.

Although few of the nominally anti-liberal groups have advocated for a return to the once common socialism or mixed economy nostrums of an earlier era, they have advocated for increased industrial policy, decreased trade, and increased transfer payments to support those hurt by “unfettered” capitalism. There has been less interest among these groups in looking at how government intervention is most extensive in exactly those sectors about which they express the most concern. American healthcare, for example, is hardly a bastion of “pure laissez-faire”, as Nobel laureate Angus Deaton recently suggested.

One unambiguous example of decline in economic freedom, and one which parties both old and new and on both the right and the left have facilitated, is the growing percent of GDP spent by government. This has occurred even though global military spending, once the main purpose of national governments, has declined from 4% of global GDP in the early 1980s to 2% today. Although the tendency of the growth in government spending to accompany the growth in prosperity, sometimes called “Wagner’s Law,” has been strong for over a century, government spending everywhere is hitting unprecedented levels. Most of this growth is from increasing transfer payments. Many developed countries, such as Britain, Italy, Spain, and Canada, which managed to reduce spending burdens in the 20th century fin de siècle period, have been increasing the size of the state, most especially during the pandemic. Even India, which ended the long “license Raj” and liberalized much of its economy after a 1991 economic crisis, has increased government spending from around 25 to 30% of GDP. This ever-growing spending, especially when, as now, it is ever more likely to be deficit financed, and when it is tied to rapidly aging societies with rapidly increasing entitlements, remains the greatest threat to economic freedom in the developed world.

Reasons for Continued Hope

Even if governments are spending more, there are a number of ways in which government intervention is more market-oriented than in the past. Schemes like tradable pollution permits, tradable catch limits for fishing, open auctions of radio spectrum, variable congestion prices for toll roads, premium support for health insurance, vouchers for schools, and so forth, were once confined to the minds of free-market academics. They are now common tools of governments everywhere. Even if the U.S. government hasn’t cut the budget of the Department of Housing and Urban Development, the gradual replacement of government-owned and operated public housing projects by housing vouchers and tax credits has turned places of unmitigated horror into mere examples of waste. These and other semi-privatizations can be counted as successes.

One of the most common errors of social commentators is to evaluate conditions by their rate of change rather than by their levels. That’s why people can still think of the 1920s as an era of unparalleled prosperity when by today’s standards it was impoverished. That’s why we can think of the 1990s as a period of peak economic freedom, when by most measures we are living through an even more economically free age today. Recent worrisome trends in some areas should give fans of economic liberty pause, but they should not cause anyone to doubt its long-term success. Economic freedom is still a winning strategy, and over the last few decades, it has continued winning.

Judge Glock is the director of research and a senior fellow at the Manhattan Institute. He is author of The Dead Pledge: The Origins of the Mortgage Market and Federal Bailouts, 1913-1939.

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