Economic Freedom and Economic Privilege

Since at least the days of Adam Smith, economists have suspected that economic freedom was a necessary, if not sufficient, condition for human prosperity. Smith wrote of freedom as a “system of natural liberty” and declared that “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”For most of the two centuries since Smith wrote and lectured about freedom, however, economists have had few tools to systematically test his claim. Now, with the advent of objective measures of “natural liberty” such as the Index of Economic Freedom, we have those tools, and scores of economists have employed them to test the relationship between freedom and prosperity.Overwhelmingly, these researchers have reached the same conclusion: Economic freedom is indeed positively associated with economic prosperity. Consider, for example, a recent survey of the literature by Chris Doucouliagos and Mehmet Ali Ulubasoglu. After reviewing 45 separate peer-reviewed academic studies, the authors concluded that, “regardless of the sample of countries, the measure of economic freedom and the level of aggregation, there is a solid finding of a direct positive association between economic freedom and economic growth.”Despite the manifest evidence that freedom and prosperity are linked, an appallingly large number of people lack basic economic freedoms. In the latest edition of the Index, for example, 92 countries — home to nearly 70 percent of all of humanity — were listed as “mostly unfree” or “repressed.” Even among the freer nations such as the United States, economic freedom in recent years has been declining.Why is this so? One answer is that ideas matter and that in many places throughout the world, the right ideas are simply not prevailing.3 This answer is the raison d’etre of organizations like The Heritage Foundation and the Mercatus Center at George Mason University. These groups exist — as the Mercatus mission puts it — to bridge the gap between academic ideas and real-world problems. I get up and go to work every day because I believe that there is at least some truth to this.But there is another, far more difficult explanation for why so many humans lack economic freedom. Put simply, some entrenched interests benefit from the current lack of economic freedom and are prepared to go to great lengths to maintain the unfree status quo.If this is not immediately obvious, it may be because the advocates of economic freedom often fail to emphasize it. Too often, those of us who argue for freedom highlight the fact that taxes are crushing, that regulations are burdensome, and that government involvement in the economy is an impediment to progress. While this is typically true, it is also true that tax dollars line the pockets of some well-connected companies, that regulations often allow some firms to profit at the expense of customers and competitors, and that almost every intervention in the market creates both losers and winners.If we are to advance economic freedom, I believe it is imperative that we understand how special interests benefit from its absence. In the pages that follow, I will talk about the winners — those firms that are inevitably privileged when economic freedom is curtailed.