Economic Freedom: Essential Principles

Essential Principles

"[A] free economy is most suitable to a free polity."
Ezra Solomon, The Free Society Papers, 1989

A Migrant Mother and her Children during the Great Depression

Although no international covenants clearly guarantee economic freedom as is the case with political and civil rights, few political theorists today doubt the connection between a free or market-based economy and a free political system. In the late 18th and 19th centuries, political and economic liberalism were intertwined philosophies that heralded the expansion of both individual freedom and property ownership. These two characteristics have been generally associated with the rise and success of democracies in the 19th and 20th centuries.

Yet, the strict application of economic liberalism — the absence or withdrawal of government interference or involvement in the economy — has generally led to high concentrations of wealth and economic power by private corporations and individuals, high levels of poverty and inequality, and the lack of protection of consumers or the environment. The absence of government regulation or involvement in the economy is widely considered by economists to have brought about economic catastrophes like the Panics of the 19th century and the Great Depression of the 1930s. In Europe and the United States, social democratic parties responded to such economic conditions and catastrophes by placing greater regulations on corporations and businesses, fostering trade unions for workers, enacting more egalitarian tax policies, and establishing social and economic rights through a welfare state in which government provides basic economic and social support to different groups, especially the poor and unemployed. Such parties, however, still accepted basic aspects of a free market economy (private property, banking, and commerce; market-driven prices for goods and services; the accumulation of private wealth). Conservative parties in Europe have retained classical economic liberalism as their guiding philosophy (advocating less state regulation of labor and markets, free trade, and privatization of most government services) but in turn generally have accepted the basic foundations of a welfare state and restrictions on corporations to prevent malfeasance, protect the environment, and safeguard consumers from harmful products. In the United States, however, the conservative Republican Party has split on the issue of whether to accept the basic foundations of a welfare state and many adherents, adopting a more absolutist philosophy (see below), now reject government intervention in most or all aspects of the economy.

What constitutes economic freedom? Is there an inherent tension between economic freedom and democratic governance? What degree of economic freedom is needed for democracy to flourish? Is it like freedom of speech, a principle that should be restricted only minimally, or is it more akin to the framework of representative government — with many different types and variants?

Absolutist Principles and Smithian Economics

Economic freedom, like political freedom, has many definitions tied to different political viewpoints or ideologies. Adam Smith is generally recognized as having first woven the ideas of political and economic liberalism together in his work The Wealth of Nations, written in the late 18th century. He argued against the state’s dominant control over trade and the accumulation of economic wealth practiced by most monarchies — mercantilism  — in favor of individual commerce and the private determination of prices through “the invisible hand” of a free market governed by supply and demand. Smith generally advocated a laissez faire (“let to do”) policy by the state towards private economic activity, but also put forward a broader social theory that corporations and individuals should be restrained in their tendency to monopolize or collude, to pay low wages (he supported “combinations of workers” for purposes of bargaining with employers for better wages), and the over-accumulation of profit and wealth. In general, Smith advocated a society in which there was general prosperity. (“No society,” Smith wrote, “can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”)

But most famous modern free-market theorists, such as Milton Friedman, Friedrich Hayek, and Ludwig von Mises, generally ignore Smith's broader theories and focus on his advocacy of laissez-faire and advocate an economic philosophy of minimal or no government involvement the economy. For these later theorists, any state intervention in the economy (such as establishing a minimum wage, instituting environmental controls, or guaranteeing the right of collective bargaining) is considered to be a harmful infringement on economic freedom and the first step to “economic slavery.”  Reflecting this laissez faire philosophy, the Heritage Foundation, a conservative think tank that conducts an annual survey of economic freedom, states:

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 other words, individuals are free to work, produce, consume, and invest in any way they please, and that freedom is both protected by the state and unconstrained by the state.

On its own, this may seem a compelling statement of economic freedom. But most democratic governments routinely violate its absolutist proscriptions and intervene in the economy in many ways that today are considered basic protections of workers and society: establishing a minimum wage, controlling the levels of pollutants by industry, safeguarding consumers from harmful products, preventing monopolization over commerce, regulating the trade of stocks, futures, and bonds to prevent manipulation of prices by “insiders,” among many other actions that the broader society has determined is appropriate in a democracy to protect itself from exploitation by individuals and corporations with too much accumulated economic power. Perhaps, some less absolutist principles are thus in order.

More Common Principles

One approach has been to look at the clash between democracy and Communist dictatorship in the 20th century, which highlighted the profound importance of both economic and political freedom. Under communism, state control over property and the economy was essential to totalitarian political control. The state's economic tyranny restricted individual freedom and thwarted any development of opposing power to the Communist Party.

Drawing on this experience and its contrast with democratic societies, economist Ezra Solomon, a former member of the U.S. president's Council of Economic Advisers, proposed an alternative approach to thinking about economic freedom, reconnecting it to a political foundation. In his essay "The Economy in a Free Society," he 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 do 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.

In this approach, property rights and individual freedom to engage in economic activity guards against the tyranny of the state, but diffuse ownership of property and the broad engagement of citizens in private economic transactions also has the effect of preventing too great accumulation of power by ownership by one individual or group (an oligarchy). Violations of economic freedom can occur both due to the state’s excessive control or its failure to prevent corporations or privileged elites who have amassed great fortunes from using their economic power to threaten individual freedoms or social well-being. In theory, democracy enables voters to choose how they wish to adjust the balance both between state intervention and economic freedom and the balance between economic freedom and the broader well-being of society as well as workers’ rights to form trade unions and bargain collectively (see Freedom of Association section). Over the last 70 years, most democracies have alternated between the political party ideologies described above: on the one side parties that favor greater state intervention in the economy and on the other, political parties advocating a more laissez faire policy. Generally, however, developed countries with democracies (such as members of the Organization for Economic Cooperation and Development) have mixed economic systems and policies that prevent economic monopolization and private concentration of economic power.

Property rights and individual freedom to engage in economic activity not only guard against the tyranny of the state but also the abuse of power by privileged economic elites.

Economic and Political Correlations

In the last 40 years, basic principles of economic liberalism have generally advanced together with those of democracy and political freedom. In some cases, economic liberalism followed the achievement of political freedom (as in most countries of Eastern Europe), while in others economic liberalism has propelled political change (as in Taiwan and South Korea). Yet, in all these countries, some of the basic concepts of economic freedom as defined by Ezra Solomon above — less state dominance over individual decision making and the ability of free markets to diffuse state power — played a key role in political transitions. Seymour Martin Lipset, the renowned American sociologist, proposed that economic development, modernization, and a rise of a middle class being able to exercise greater economic power through its ownership of property helped increase people's expectations for both economic improvement and political freedom, thereby helping to bring about democratic transition (see his articles in Resources).

The connection between some degree of economic freedom and democracy can be made by a comparison of economic and political conditions. In the 2015 United Nations Human Development Index, of the forty-nine countries and territories in the category “Very High Development,” forty-one have the status of “free” in Freedom House’s 2015 Survey of Freedom in the World and most have the highest freedom ranking of 1. Only two “Very High Development” countries have Freedom House’s status of “partly free” (Hong Kong and Singapore) and six are designated “not free” (the Gulf oil states and Brunei). Even when one broadens the scope of comparison, the correlation between political and economic freedom is quite strong. Of the top 105 countries having “very high” or “high” development, 68 have the status “free” by Freedom House, 20 “partly free,” and 17 “not free” (most of the “not free” countries are energy states whose economies are based on oil and gas resources). There are some countries categorized as “free” by Freedom House that are at the lesser developed or bottom levels of the Human Development Index, but most countries at these lower levels are in Freedom House’s “not free” or “partly free” category.

There are some clear reasons for this general correlation (which, it should be noted, is also found using the Heritage Foundation’s index of economic freedom survey). One is that the political freedoms and civil liberties that undergird democracy tend also to benefit economic growth. Freedom of expression, for example, allows the free flow of information needed for rational economic decisions, while state regulations generally punish individuals and corporations for providing false information to investors or buyers (see Section on Freedom of Expression). Freedom of association protects the right of trade unions to represent workers’ interests and to improve their standard of living (see section on Freedom of Association).

Another reason for the correlation, according to economist and Nobel Prize winner Amartya Sen, is that democracies are more likely to develop their human resources through broadly based health and education programs and investment in infrastructure. The tendency is strong for there to be large majorities in democratic societies favoring policies to invest in public goods benefiting the common welfare such as public education and transportation infrastructure — all of which, Sen argues, lead to greater growth. Similarly, democracies are more likely to protect the general society against economic downturns such as the Great Depression through social welfare programs or, as after the Great Recession of 2008-9, enacting greater regulations to help restrict harmful speculation.  The correlations are not exact. And today political parties favoring laissez faire reject such correlations and favor policies to end government protections and allow freer markets without impediments. Particularly in the United States, disagreements between the two main political parties about the government’s size and role in the economy have become increasingly divisive. But what is also generally clear is that democracies offer the political freedoms that allow citizens the possibility to debate the best policies to advance economic freedom and to temper the abuse of economic power by both the state and private actors.

Contrary Phenomenons

Another general phenomenon, however, should not be ignored that contradicts the correlation between economic and political freedom. Today, one sees the rise of an alternate authoritarian model that combines free market capitalism and political dictatorship. The People’s Republic of China is today the leading example of a politically authoritarian regime, in this case a communist dictatorship, adopting a so-called free market economic system (see Country Studies in Freedom of Expression and Freedom of Association). Vietnam has followed China’s model, but in both cases general economic well-being, including per capita income, badly trails democracies with mixed economic systems. Other authoritarian models, such as Malaysia and Singapore, are justified on the theory that “Asian cultural values” are incompatible with democracy. These countries, which have achieved much higher standards of living, also continue to resist any transition to democracy. Analysts, however, tend to ignore the heavy role of the state in each of these countries’ economy and each regime’s reliance on both foreign investment and heavy repression to resolve the clear contradictions of such a model. Regardless, the success of such countries as Japan, South Korea, and Taiwan, all of which have fully developed democratic systems and a mixed free market system, indicate that neither the communist-capitalist hybrid nor the authoritarian-capitalist “Asian” model has any broad applicability for common principles of economic freedom (see also discussion in Human Rights).