Arnold Kling  

Economic Freedom and Divergence

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A just-concluded conference in honor of Milton and Rose Friedman produced some interesting papers. For example, James D. Gwartney and Robert A. Lawson find that an index of economic freedom helps to account for the failure of the standard of living of underdeveloped countries to converge toward that of developed countries.

when the consistency of a nation’s institutions and policies with economic freedom is held constant, lower income countries grow faster than higher income countries, providing empirical support for models that predict convergence.

For Discussion. Is there an issue of possible reverse causality at work--that countries with more economic development are in a better position to maintain institutions that are consistent with economic freedom?

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COMMENTS (6 to date)
Mats writes:

"are countries with more economic development in a better position to maintain institutions that are consistent with economic freedom?" Yeah, Why? Don't you think so?

Lawrance George Lux writes:

I would suggest the International Corporate structure has more to do with the lower standard of living, than does the effective lack of economic institutions. Corporations make their Profits by buying cheap labor and materials to make Finished Products, which they sell in nations with high Standards of Living. Corporations have been major instruments of destroying the Labor Movement in Chile, bringing down a Liberal government in Venezuela, leading the funding to destroy Liberal candidates from the United States to Outer Mongolia. Corporate Profits schedules are the greatest impairment to economic institutions in the World. lgl

Ray Gardner writes:

Of course.

Economic freedom will tend to maintain the institutions that lend themselves to such freedom because of what many call the NIMBY syndrome. The ‘not-in-my-backyard’ effect means that everyone thinks the egalitarian nonsense emanating from Washington D.C. over the last 70 years is great, but not in my neighborhood or not from my paycheck.

Without completely rewriting any text books here, why the free market works is because in the end, economics is always a very personal thing. Price controls, confiscatory taxes, open space preservation etc, all of these are great on paper but ultimately fail in the arena of public opinion because sooner or later, individuals realize that their own personal freedoms are being skewered by such collective ideals.

Collectivism remains alive and a constant threat to our standard of living because it does appeal so strongly to our emotional nature. Thus we will never be free of the parasitic affect of collectivism so we’re always striving to reach some kind of equilibrium but, nonetheless, economic freedom will tend to perpetuate itself.

Lawrance George Lux writes:

I was disappointed with the Niskanem article on the Economic Burden of Taxation at the Freidman conference. Supply-Side Economists insist on removing Defense spending from calculations, even though Expenditures for Defense are not static, and excessive expenditure for equal defense ratios can vitally affect GDP per potential worker values. None take into account the elasticities based upon upon average Profit ratios, with consistent hard capital construction values. They refuse to admit Profit ratios (real) above 12% with consistent hard capital construction values is worse than the effect of excessive Government spending. lgl

Eric Krieg writes:

>>Is there an issue of possible reverse causality at work--that countries with more economic development are in a better position to maintain institutions that are consistent with economic freedom?

I don't see it. I see countries like Korea, that have made almost superhuman progress economically speaking, going down the rathole of European style welfare statism, rather than emulating the economic dynamism that is the US.

It is my theory that nation states naturally gravitate towards the welfare state. After all, in the end, all the Swedes are related, all the Koreans are related, all the Japanese are related, all the Franch are related, etc. etc. Almost literally, they are their brothers' keepers. So it is hard not to develop the nanny state.

I think Korea is showing that you hit a certain level of economic freedom, resulting in a certain level of economic development, but then issues like "inequality" become much more important to the population. In solving these "problems" economic freedom wanes, as does economic development.

Inequality is no worse in Korea than it has ever been, and it is order of magnitudes better than the US. Yet it is a really big issue there, and they seem to be going down the Social Democrat road that the Europeans know so well.

Lawrance George Lux writes:

I think you are right about the homogenity of cultures impacting the attraction for Welfare programs. I also think an Economic Study should be initiated, to study the influence Population Density has upon institutions of Social Welfare programs.

I lean to the proposition Social Welfare programs denote a level of Economic development, where Economic levels of performance allow for their introduction, in order to establish a capitalized Labor force. The development of an efficient Central Banking system generates actual Capital Aggregation needs, Social programs continuing until an improved Standard of Living is accomplished. This Process continues until the development of a new Wealthy class, based upon the new economic technology. lgl

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