[Part 1 is here.]
Even a cursory look at the annual list of the freest and least free economies in the world suggests a strong correlation between economic freedom and the prosperity of its citizens, including its poorest citizens. But there’s another correlation that tends to capture the attention of those making a cultural critique of the free economy. They note that America is economically free, and that it’s experiencing cultural decay, so they conclude the first causes the second. The conclusion isn’t absurd, but it also doesn’t follow necessarily. Sometimes correlation is due to causation, and sometimes it isn’t. To avoid confusion and false conclusions, we need to distinguish the idea of economic freedom from some things it isn’t.
A lot of people view economic freedom as synonymous with big corporations cutting sweetheart deals with politicians to suppress competitors and consumer choice. This stuff goes on all the time, of course, but it isn’t economic freedom. It’s the leviathan state and big business colluding to manipulate the market, to stack the deck in favor of political insiders. Every market economy on the planet has some of this sort of thing, since economies are operated by fallen human beings. The question is, where does cronyism tend to be the worst?
Think about modern day economies famous for their endemic cronyism—countries such as Venezuela and Russia. They’re planned and regulated to the hilt. This pattern shouldn’t surprise us. The more economic planning and manipulation a government performs on a market, the more Big Business X will be tempted to lobby its government to plan things in its favor. Or to come at it from the other direction, the more politicians and government bureaucrats an entrepreneur has to get past in order to launch or grow a business, the more opportunities there are for politicians and government bureaucrats to insist on special favors or outright bribes.
Now imagine an economy where the citizens limit the government to its core roles of protecting people’s life, liberty, and property, and of bringing criminals to justice. Picture an economy where people are free to make voluntary exchanges, and because of the robust rule of law, are able to do so confident that theft, fraud, or government shakedowns will be rare exceptions and not the norm.
In a fully free economy, there isn’t a government bureaucrat insisting you not buy sugar from that business over there, or that if you want to buy from this fishing boat maker, you’ll have to pay a hidden fee called a tariff, some of which will be used to pay a government salary and some of which will be used to prop up two of the boat-makers you decided not to buy from. That’s a planned or mixed economy, and it creates incentives for businesses to lobby and even bribe political players for special favors and protections.
A free economy in the strict sense of the term is one where the government fulfills its core role of enforcing laws against things like theft, fraud, violence and toxic waste dumping, and refuses to get involved in picking winners and losers in the marketplace. In that sort of economy, businesses have strong incentives to avoid theft, fraud and the like, and to focus on meeting the wants and needs of customers better than their competitors do.
Notice what this also entails. Economic freedom doesn’t mean a lawless, anything-goes economy. The free economy is characterized by the rule of law, that is, by an ongoing commitment to justice for all classes and members of society.
It isn’t that we need a little freedom and a little law—a compromise where both are compromised. It’s that freedom is diminished without the rule of law. This is what the American Founders recognized and emphasized: there is a positive link between freedom and morality.
Think of driving a car. How free would any of us be to drive where we wanted to go if others on the road insisted that, in the interest of freedom, the traffic laws didn’t apply to them? Sprinkle enough of that kind of freedom into the traffic mix and soon you’re not free to drive anywhere without risking life and limb.
This lawless roadway can serve as a metaphor for what many poor people in the developing world face as a daily reality beyond the roadway, a lack of basic justice that is the subject of the 2014 book The Locust Effect by Gary Haugen and Victor Boutros. The work details how “most of the global poor lack the most basic ingredient of forward progress: personal security” and are forced to struggle “outside the protection of rudimentary law enforcement … utterly vulnerable to the locusts of violence that can come on any given day and sweep all other good efforts to improve their lives away.”
It may be hard to digest this point about freedom vs. chaos when considering it on a global scale, so consider it on the scale of a neighborhood farmer’s market. The freest farmer’s market isn’t the one where the police sleep through an endless series of muggings. It’s the one characterized by ordered liberty, where buyers and sellers generally behave themselves, the law punishes the rare instances of overt criminal behavior (e.g., fraud and muggings), and intervenes when, for instance, the workers from the biggest produce stand try to threaten and harass from of the marketplace a new vendor offering better prices or tastier produce.
When the government consistently enforces the rule of law in this robust but limited way, economic freedom increases and, along with it, the capacity for entrepreneurs to create new wealth and better meet the wants and needs of customers. This is economic freedom, a crucial component of capitalism rightly understood.
[Part 4 of 12 is here.]
Hernando de Soto takes up the question that, more than any other, is central to one of the most crucial problems the world faces today: Why do some countries succeed at capitalism while others fail?