Economic Freedom: Essential Principles

Introduction

Few political theorists today contest the historical connection between a free (or market-based) economy and a free political system. In the 17th, 18th and 19th centuries in Europe, political and economic liberalism were intertwined philosophies that fostered individual freedom and property rights, representative government, and the free trade and exchange of goods. Uniting these together were associated with the rise of democracy.

The rise of democracy, however, is also associated with a second main political current, social democracy. In the 19th to early 20th centuries, social democratic, democratic socialist and other worker-based movements arose in opposition to both economic and political liberalism both in Europe and the Western Hemisphere.

What constitutes economic freedom? Is there a tension between economic freedom and democratic governance? What degree of economic freedom is needed for democracy to flourish?

One reason for this counter-movement was that political liberalism at first generally limited the right to vote to those possessing property, meaning a minority of the population. Among British republicans and the Founders of the United States, it was thought that natural rights derived partly from ownership of property. Many believed only those with property should vote since only they would have sufficient self-interest, as well as education, to represent the people as a whole (see also History in Consent of the Governed).

Another reason for the counter-movement was that economic liberalism — which fostered government policies protecting private property rights and industrial production of goods — led to extreme worker exploitation, high concentrations of wealth and power, and lack of protection of consumers and the environment. Self-interested owners of property and industry, it turned out, did not necessarily represent the interests of the people as a whole.

Still, if political liberalism at first was at odds with a fuller expression of popular sovereignty, its basic principle was not. The foundational assertion of political liberalism ─ “all men are created equal and endowed by their Creator with inalienable rights” ─ was not tied to property ownership. This belief led necessarily, if slowly, toward universal suffrage (see also History in Free Elections). Indeed, social democratic and socialist movements would often ally with liberal parties toward that end.

As well, economic freedom cannot be considered separate from larger economic policy. Economists widely attribute the causes of catastrophes like the Panics of the 19th century, the Great Depression of the 1930s and the Great Recession of 2008-09 to a lack of government intervention and proper regulation of the economy. Absent such intervention and regulation, there has been a natural tendency of market economies to concentrate ownership and wealth leading ultimately to economic contractions. Such contractions, by collapsing economic activity, act against general economic freedom.

More significantly, such economic catastrophes give rise to anti-liberal and anti-democratic political forces denying all freedom. The worldwide Great Depression and the political consequences that followed ─ most notably, the Nazi takeover in Germany and the cataclysm of World War II ─ led center-left and center-right political parties in Europe alike to adopt broad social democratic policies with the aim of preventing economic catastrophes and war in the future. These policies included:

• state intervention and public investment to stimulate the economy;
• empowering trade unions and workers’ councils to balance the power of employers and improve workers’ wages and working conditions;
• regulations on banks, corporations, businesses and stock trading to prevent harmful speculation;
• progressive tax policies to limit disparities of wealth;
• nationalization of essential industries and public services (like education); and
• adoption of social and economic rights or standards by providing basic supports like health care, unemployment insurance and pensions.

European democracies, the United States and other democracies adopted such policies to varying degrees. They were widely seen to have established greater economic and world stability and also to have extended democratic principles beyond politics to the economy.

In the 1980s, and then after the fall of Soviet communism in 1989–91, many of these democracies turned back toward policies more favorable to free market capitalism aimed at improving economic growth. These included: deregulation, reducing government programs, tax policies favoring business, privatizing industries and public goods, and fostering free trade. This trend was a political reaction to social democracy commonly called neo-liberalism.

Still, many elements of a welfare and regulatory state remained in place. In most democracies there continued to be regular transfers of political power between parties or coalitions favoring economic liberalism and those favoring social democracy.

What constitutes economic freedom? Is there a tension between economic freedom and democratic governance? What degree of economic freedom is needed for democracy to flourish? Historically, economic freedom, like political freedom, has many definitions tied to different political ideologies. Below and in History is a fuller exploration of this Essential Principle.

Adam Smith and The Wealth of Nations

Adam Smith is recognized as having first woven together the ideas of economic liberalism in his work The Wealth of Nations, written at the dawn of the capitalist age in the late 18th century.

Adam Smith is recognized as having first woven together the ideas of economic liberalism in his work The Wealth of Nations, written at the dawn of the capitalist age in the late 18th century.

Adam Smith argued against mercantilism, the economic doctrine practiced by monarchies. Mercantilism dictated accumulation of national wealth through the state’s control over aristocratic privileges, trade and expansion of empire. With the increase of European trade and assertion of individual rights, Smith argued that national wealth was best achieved through private investment, individual labor and a free market in goods and services where prices and wages were determined by supply and demand of goods and labor. In the end, he argued, national accumulation of wealth should be driven by individual self-interest.

Instead of states’ chartering monopolist colonial trading companies, Smith advocated for laissez faire (“let to do”), namely state policies protecting and fostering private economic activity and trade (see also History).

Smith advocated for laissez faire as a means to general prosperity. Anticipating debates to come, he wrote, “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

Smith is often presented by economic liberals today as a free market absolutist (see below). In fact, he proposed a broader social theory placing private economic activity within constraints. Smith wrote that corporations and individuals should be restrained in their tendency to monopolize or collude in controlling the market, pay lower wages, and accumulate excessive profit and wealth. He supported what today would be called anti-trust laws as well as trade unions so that workers could bargain for better wages with employers.

Smith advocated for laissez faire as a means to general prosperity. Anticipating debates to come, he wrote, “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

Laissez-Faire, But Not Smithian

The most famous 20th century free-market theorists, Friedrich Hayek and Ludwig von Mises, abandoned Adam Smith’s broader social theory. In response to the rise of communism (see below), they advocated a laissez-faire economic philosophy of minimal government involvement in the economy. Both served as the philosophical pillars for a revival of free market ideology, now commonly called neo-liberalism.

For these theorists, state interventions in the economy to address economic downturns (such as those taken in response to the Great Depression) infringed on property rights and were the first step towards what they considered the “economic slavery” of communism. Later in the century, a third economist, Milton Friedman, took this thinking to an extreme and argued against unions, public education, minimum wages and any restrictions on corporations from engaging in what he considered their sole purpose: the pursuit of profit.

The Heritage Foundation, a right-wing think tank, reflects Friedman’s thinking. It bases its annual survey of economic freedom on the following:

The highest form of economic freedom provides an absolute right of property ownership, fully realized freedoms of movement for labor, capital and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself.

In practice, absolutist assertions of . . . “economic liberty” justified oligarchy, the exploitation of workers and child labor, environmental degradation, racial discrimination and segregation, and in the early stages of democracy’s development even the right to “property in man.”

On its own, this may seem a compelling statement. In practice, absolutist assertions of property rights and “economic liberty” justified oligarchy, the exploitation of workers and child labor, environmental degradation, racial discrimination and segregation, and in the early stages of democracy’s development even the right to “property in man” or slavery. Over time, democracies generally rejected such absolutist assertions, considering that economic activity had social and environmental consequences affecting the public good. Economic freedom is an essential principle, but as Adam Smith himself recognized not an absolute one. Other essential principles (consent of the governed, free elections, constitutional limits, rule of law and freedom of association) define and constrain economic freedom.

Another Kind of Absolutism

A major influence on thinking about economic freedom in the 20th century was the rise of communist dictatorship and its clash with Western democracies. This clash was often characterized as one between two economic systems (communism and capitalism) and highlighted for many — not just free market theorists — the interconnection of economic and political freedom.

As a theory, communism was put forward by Karl Marx and Frederick Engels in their mid-19th century critiques of capitalism. Their theory of historical determinism, presented in The Communist Manifesto, held that social and economic relations dictated the course of political history in a dialectic of class conflict. In their view, this conflict led invariably from feudalism (a system of monarchical and aristocratic control over territory and agricultural labor), to capitalism (a system of a property-owning or bourgeois class exploiting a larger working class), and finally to communism (with social ownership of property and worker ownership of the means of production).

The theories of Marx and Engels, along with other socialist thinkers in the 19th century, gave rise to two major political currents: social democracy (or socialism) and communism. The former is described in the introduction above. It was committed to confronting the monopolist and exploitative character of capitalism and achieving greater economic equality for workers by democratic means. Communism emerged from a faction within the Russian socialist movement called Bolsheviks. They believed in achieving the end point of the “dialectic” (communism) by anti-democratic and violent means.

In November 1917, after the fall of Russia’s monarch, or tsar, the Bolsheviks took advantage of unstable political conditions to seize power by force of arms. They established a “dictatorship of the proletariat.” In practice, this meant a monopoly over state power by a “vanguard party” governed by democratic centralism, a principle of strict adherence to decisions of the party leadership. The Bolshevik Red Army imposed communist dictatorship throughout the former Russian Empire to create the Union of Soviet Socialist Republics (USSR). Under the Communist Party leadership of Vladimir Lenin and Joseph Stalin, the USSR was made a totalitarian police state.

The USSR was the model for many countries where similarly disciplined communist parties seized power. . . . [N]ationalization of property and forced collectivization of agriculture resulted in famine and mass death as well as general poverty.

Rather than social or worker ownership, the USSR instituted state ownership of property and state planning over the economy. All other features of capitalism, such as a free market or price system, were eliminated. The USSR was the model for many countries where similarly disciplined communist parties seized power (with the USSR’s support). These included the People’s Republic of China, North Korea, Vietnam and Cuba (the Country Study in this section). In all communist countries, nationalization of property and forced collectivization of agriculture resulted in famine and mass death as well as general poverty. The lack of economic freedom combined with stifling systems of political repression, forced labor camps and mass execution of opponents.

Toward Common Principles

The 20th century example of communist regimes, as well as of fascist states, demonstrated the importance of both political and economic freedom to prevent the concentration of state power in one party or one individual. Yet, as noted above, concentrations of wealth in an unregulated market economy led to economic depressions, which itself proved dangerous to political freedom by helping give rise to totalitarian political movements.

Drawing on the experiences of both anti-democratic and democratic societies in the twentieth century, the economist Ezra Solomon, a former member of the US president's Council of Economic Advisers, asserted Smithian principles differently. He argued that laissez faire was a means of preventing centralized power. In an essay prepared for the American Federation of Teachers, "The Economy in a Free Society" (see Resources), Solomon writes,

[A] free economy is most suitable to a free polity for it allows the broadest scope of liberty in the free exchange of goods and services between individuals and groups. . . . Private property and free markets limit the power of the state by diffusing its control over the economic lives of its citizens. Individual liberty in making economic decisions limits the power of the state to control the political lives of the citizenry.

Violations of economic and political freedom occur both in conditions of excessive state control and when the state allows privileged elites to amass great fortunes that threaten social well-being.

Solomon argued that diffuse ownership of property and the broad engagement of citizens in private economic transactions limits the accumulation of economic and political power by one individual or group (an oligarchy). Violations of economic and political freedom occur both in conditions of excessive state control and when the state allows privileged elites to amass great fortunes that threaten social well-being. In democracies, he argued, the people choose how to balance these two basic considerations.

While Solomon re-asserts Smithian economics to address new types of absolutist state power (communism and fascism), he does not fully address what Smith stated was the tendency of a market-based economy to foster exploitation and inequality. As noted above, democracies addressed these issues by expanding the meaning of economic freedom to include what US President Franklin Delano Roosevelt called “freedom from want.”

Embedding Common Principles

Such considerations were embodied as principles within the Universal Declaration of Human Rights (UDHR) adopted in 1948 (see Resources). The UDHR asserts a set of political freedoms as well as economic, social and cultural rights. The latter include “the right to own property alone and in association with others” (Article 17), the right to form and join trade unions, and the rights to education, social security, employment, equal pay, limitation of work hours and “a standard of living adequate for the health and well-being of oneself and one’s family” (Articles 22-26). In democracies, some of these rights were more universally fulfilled (such as education and social security); others were less so (such as health care and an adequate standard of living).

At the time, one reason for the inclusion of economic and social rights was the insistence of the USSR in the deliberations of the UN Commission on Human Rights (UNHCR), which debated the text of the Universal Declaration of Human Rights. The USSR claimed that political rights were inferior to economic ones. But, as noted in the introduction, democratic nations on the UNHCR themselves accepted and asserted economic and social rights in the aftermath of World War II. These countries did not see political freedoms and economic rights as being in conflict (see, for example, President Roosevelt’s “Economic Bill of Rights” in Resources).

Economic Freedom, Democracy & Development

The methodology of Freedom House’s annual Freedom in the World survey is based on the Universal Declaration of Human Rights and reflects this twinning of political and economic freedoms. Freedom House’s measurements are more heavily weighted towards political freedoms and civil liberties, but the annual survey includes two basic measurements for economic freedom. The first is the right to property and to engage in business (Article 17 of the UDHR). The second is the general concept of freedom from exploitation (comprising Articles 22-26).

[P]olitical freedoms and civil liberties undergirding democracy tend to benefit economic development. . . . Majorities tend to favor policies benefiting the public welfare, which in turn lead to greater economic growth.

There is a strong correlation between measurements of economic freedom and economic development and assessments of political freedom and civil liberties. One example is comparing the 2015 United Nations Human Development Index (see Resources) and the Freedom in the World survey.

Forty-one of the forty-nine countries and territories in the “Very High Development” category in the UN index have the status of “free” in the Freedom House survey. Only two have the status of “partly free” (Hong Kong and Singapore) and six are “not free” (the oil-dominated economies of Saudi Arabia, four other Gulf states and Brunei). While that comparison includes many European and North American countries, the correlation is also strong when broadened beyond the richer northern countries to the Global South. Of the top 105 countries having “very high” or “high” development, fully two-thirds, have the status of “free.” Those at the “low” development level are all “not free” or “partly free.”

One reason for this is that political freedoms and civil liberties undergirding democracy tend to benefit economic development. Freedom of expression, for example, allows the free flow of information needed for rational economic decisions. Accountability and transparency and the rule of law act to prevent individuals and corporations from defrauding investors, buyers and consumers. Freedom of association protects the right of trade unions to represent workers’ interests and achieve better wages and working conditions.

Another reason, writes Amartya Sen, the 1998 winner of the Nobel Prize in Economic Sciences, is that democracies are better at developing their human resources through investments in education, infrastructure and health care. Majorities tend to favor policies benefiting the public welfare, which in turn lead to greater economic growth (see Resources).

Free Markets, Democracy & Dictatorship

The noted American sociologist Seymour Martin Lipset identified economic freedom, modernization and a rise of a strong “middle class” as leading indicators in whether or not democracies achieved stability. Such factors, he argued, increased people's expectations for both economic improvement and political freedom and thus achieved a level of democratic legitimacy among the citizenry. While Lipset was cautious about predicting the future stability of newer democracies, he pointed to older European and post-war East Asian democracies as consistent with his theory (see Resources).

Lipset’s sociological correlations had validity, but some countries today challenge the idea that economic freedom or “market capitalism” that creates a broader middle class bring about democratization or democratic stability.

The leading example is the People’s Republic of China. While adopting aspects of a market economic system to propel growth and bring much of its 1.4 billion people out of poverty, China has remained a political dictatorship. Indeed, in the last decade, it has moved back towards past totalitarian practices as its economy grew close to that of the United States in size and achieved the category of high development. Another example is Singapore, which has one of Heritage Foundation’s highest rankings for economic freedom but remains “partly free” in Freedom House’s survey for its authoritarian political system.

The former Soviet Union, which had been the previous model for communist states, also offers varied experiences following its collapse into 15 independent states. Some countries adopted both political and economic freedoms, joined the EU and NATO, and became stable democracies. The “Free” Country Study in this section, Estonia, is one example. Other states that dismantled state controls and adopted market reforms (such as Azerbaijan, Kazakhstan, Uzbekistan as well as the Russian Federation itself) became autocracies and state-directed kleptocracies.

A Principle in Reverse

Democracies that maintain political freedoms and civil liberties protect the two basic features of a free economy as defined in the Freedom in the World survey: the right to property and to engage in business together with freedom from exploitation.

Given these other experiences, Ezra Solomon’s principle that “[a] free economy is most conducive to a free polity,” which Sidney Martin Lipset also argued, may be stated in reverse. “A free polity is most conducive to a free economy.” Democracies that maintain political freedoms and civil liberties protect the two basic features of a free economy as defined in the Freedom in the World survey: the right to property and to engage in business together with freedom from exploitation. Where political freedoms and the rule of law are challenged, weakened or are removed altogether, there is less economic freedom.

On the other hand, neo-liberalism, which promoted globalization, free trade and free markets as a means of democratization, has had limited and now diminishing success. Many political scientists and economists predicted that the People’s Republic of China would become less repressive and more democratic with the adoption of free market reforms and entry into the World Trade Organization in the late 1990s. The opposite has been true.

A Larger Problem

There has arisen a larger problem regarding economic freedom. Neo-liberalism over the last 40 years failed to address and may have exacerbated the climate crisis. Global warming threatens to reverse many economic gains (such as the reduction in extreme poverty) and ultimately constrict economic and political freedom on a worldwide basis. Some argue that the climate crisis is a classic example of “market failure” similar to the Great Depression and Great Recession.

While the United States has had inconsistent policies on the issue, democracy has proven a significant factor in addressing the climate crisis.

While the United States has had inconsistent policies on the issue, democracy has proven a significant factor in addressing the climate crisis. Democracies have demonstrated a greater capacity to regulate capitalism, limit its harms and adopt policies to reduce carbon emissions. Although they are still top emitters and the previous largest contributors to carbon emissions, the United States after its recent elections and the European Union are now committed to reducing emissions to net-zero in a timeframe consistent with the Paris Agreement, the major global accord attempting to limit climate change. Other democracies, such as Brazil, Chile and Columbia are adopting similar policies after their most recent elections.

On the other hand, authoritarian regimes have not addressed the climate crisis or environmental degradation generally. The largest emitters of greenhouse gasses today are the People’s Republic of China, a “not free” country, and India, a “partly free” country where political freedoms and civil liberties are under threat. Both have agreed to slow emissions only in the future.