Economic Freedom: History

Before Liberalism

For most of human history, there was not economic freedom as most political scientists or economists would define it today. Democratic Athens and Republican Rome had relatively greater freedom, with many citizens owning property and engaging in trade through contracts. Yet, even these states depended largely on slaves for farming and basic industries.

For most of human history, there was not economic freedom as most political scientists or economists would define it today.

Many Indigenous Nations considered land and Earth a common inheritance to cultivate and preserve. But in more  populated areas on most continents, the large majority of people were formally or informally considered bound to a ruler, property owner or employer. They were slaves considered a form of property; serfs contractually tied to specific landholdings through obligatory labor and rent; indentured servants tied to employers for fixed periods; or, even if they were independent craftsmen, farmers or merchants, subjects owing their allegiance to a monarch or other type of autocrat.

In most regions, private property and economic exchange or trade existed. But property was largely distributed by a monarch or autocratic ruler, who held dominion over a given realm's territory and set the laws over exchange and commerce. The monarch divided his dominion (the territory he ruled) by parceling it out to sub-rulers or nobles. This gave rise in many regions to hereditary landowning aristocracies. When large land-holders became more assertive of their rights and privileges, they obliged dynastic rulers to limit their powers through such means as the Magna Carta Libertatum in England or the Henrician Articles in Poland (see History in Constitutional Limits).

Under the European feudal system, where most work related to agriculture, towns and cities came to enjoy special rights as distinct units. Town merchants and artisans often organized themselves into collective entities to hold wealth, conduct business or defend economic rights in common. These became known as corporations since they were legally considered a single person (the word derives from corpus, meaning “body” in Latin). Towns, corporations and regions expanded commerce through initiatives such as the Hanseatic League in the Baltic region.

With the rise of nation states, European monarchs granted charters of incorporation to encourage groups of merchants to undertake risky or expensive explorations to benefit their kingdoms. Among the most famous were the East and West India Companies of Great Britain and Netherlands, chartered for purposes of engaging in oceanic trade and establishing outposts for the two empires in Asia and the Americas. These companies seized territory, helped to found colonies, engaged in the slave trade, and sought to monopolize trade in the Americas, Africa and Asia.

Mercantilism and Colonialism

From Portugal’s Henry the Navigator in the mid-15th century on, colonial expansion relied on control of the seas, conquest of new territory and enslaved labor.

Chartered trading companies were a key component of mercantilism, the dominant economic system for much of Europe from the mid-15th to the late 18th centuries. Mercantilism encouraged national wealth through the accumulation of gold, other minerals and agricultural products for trade, all of which required colonial expansion to secure exclusive sources for each.

From Portugal’s Henry the Navigator in the mid-15th century on, colonial expansion relied on control of the seas, conquest of new territory and enslaved labor. The purposes were to find and extract minerals and produce agricultural products for expanding markets in Europe.

The introduction of sugar, tobacco and cotton added to mineral extraction as the basis for expanding wealth in Europe and for developing wealth in the Americas and Asia. The resulting need for enslaved labor, meant expanding the forced trade in Africans. Introduced first by Portugal in the sea isles off the African coast in the late 15th century, slavery was expanded to the Caribbean and Americas by the major empires in the 16th century. Spain, Portugal, Great Britain, France and the Netherlands traded for and transported ten to twelve million Black Africans to these lands as slaves from the early 16th to 18th centuries (an estimated 15 to 25 percent died in the horrific conditions of passage).

In the Americas, slavery evolved as a chattel system, meaning it was both life-long and inheritable by birth and thus self-perpetuating. (Slavery in other parts of the world, including in Africa, was often a more temporary condition, the result of conquest, and not passed on to progeny.)

The Wealth of Nations

In Europe and Eurasia, mercantilism allowed the accumulation of wealth and development of domestic and overseas commerce, manufacturing and uniform economies in nation-states. This set the stage for the emergence of a new form of political economy, capitalism, based on private investment in the production of goods, free markets and trade.

Among the nations emerging as leading world powers, Netherlands initiated a number of innovations during its “Golden Age” in the 17th century that were soon adopted by other countries (see Country Study). These included public stock companies, share trading, a stock exchange, banking and insurance, among other standard tools of commerce.

In Great Britain, Adam Smith's The Wealth of Nations, published in 1776, put forward a new economic theory related to evolving industrial and commercial practices. He argued against mercantilism as the means for national wealth accumulation and instead for open competition based on self-interest, efficiencies in production, and free markets where supply and demand in private transactions determined prices. Smith advocated laissez-faire ("let to do" in French), meaning the government should restrict itself mostly (but not exclusively) to protecting property rights (see also Essential Principles).

Just as John Locke's Two Treatises of Government spoke to the needs of a growing land-owning class for political representation (see "Consent of the Governed"), The Wealth of Nations spoke to the policy needs of an emerging manufacturing class having to compete with monopolist state-chartered companies. It became the basis for free-market theory (also called Smithian economics), which acted to foster free trade and (to some degree) encourage decolonization through a cessation of monopolist trade charters.

Paradoxes of Democracy’s Rise

Starting from the English Civil Wars in the mid-17th century, economic freedom, or the expansion of property rights and private business, was associated with political freedom and the rise of representative government.

Yet, the period of mercantilism’s dominance also created entrenched systems contrary to notions of both political and economic liberalism. Enduring paradoxes arose. As the political theorist Jamelle Bouie has written, “Ideas of human freedom and individual rights took root in nations that held other human beings in bondage.” Such contradictions would be enduring causes of political conflict within countries establishing representative democracy.

The gradual abolition of serfdom occurred in connection with political revolutions or foreign wars. . . . These events also propelled the gradual emergence of varying forms of representative government and self-governance.

The gradual abolition of serfdom occurred in connection with political revolutions or foreign wars. These events also propelled the gradual emergence of varying forms of representative government and self-governance. The 1848 Revolutions brought an end to serfdom in much of continental Europe as well as an expansion of suffrage. In Russia, Alexander II emancipated serfs from contractual service as part of a reform movement following defeat in the Crimean War. Nicolas II established a Duma (a form of parliament) after Russia’s defeat in its war with Japan, which sparked the 1905 Revolution.

The abolition of slavery had similar historic drivers. The US War for Independence (1775-83) and then the Wars for Independence in South America (1808-33) began political processes for ending chattel slavery in the Western Hemisphere. In the United States, however, only a civil war from 1861 to 1865 would finally put an end to slavery.

Still, a basic contradiction endured into the 20th century. Nation-state empires on several continents would depend on colonialism for land, trade routes, exploitation of resources and markets.

Other Paradoxes

Two other paradoxes were evident. The beginnings of representative government generally limited suffrage (the right to vote) to property holders. This was based on the aristocratic belief that only those with property or wealth had an enlightened self-interest and also education to represent the people as a whole.

Over 250 years, starting from the English Civil Wars in the mid-17th century, political liberalism would adopt a broader understanding of suffrage to include all men and women of adult age. The French Revolution even established general male suffrage for a brief period in its 1791 Constitution. Thereafter, adoption of general or universal suffrage was often due to political pressure organized by socialist and social democratic movements representing workers and peasants (see also below).

A fourth paradox emerged. Capitalism entailed new forms of labor exploitation that conflicted with individual rights — the basis for political liberalism. Industrialists on all continents, drawing upon the masses of people displaced from the countryside by more efficient methods of farming, paid as low wages as possible and operated unsafe workplaces. Using their economic power, business tycoons denied workers the possibility of joining unions to improve wages and working conditions. Using their political power, businessmen enjoined government to crush strikes and work actions (a common occurrence wherever capitalism emerged).

[T]rade unions succeeded in achieving major gains in industrializing nations, including the 8-hour work day and 40-hour work week, an end to child labor, higher wages and improved working conditions.

Such practices went against Adam Smith’s broader social theories that argued against monopolization of industries and in favor of “combinations” (trade unions) for workers. Starting in the early 19th century, it was the exercise of political freedoms, as demonstrated by the Chartist Movement in the United Kingdom and trade unions generally, that gave rise to expanded suffrage and stronger worker representation.

Over a century, trade unions succeeded in achieving major gains in industrializing nations, including the 8-hour work day and 40-hour work week, an end to child labor, higher wages and improved working conditions. Workers expanded their political representation through Labor or Social Democratic parties to limit corporate power, expand worker and voting rights, and generally serve worker interests.

Rival Political Trends

For nearly 200 years, democracies have seen two competing sets of economic principles and views regarding economic freedom.

For nearly 200 years, democracies have seen two competing sets of economic principles and views regarding economic freedom: economic liberalism and social democracy or socialism

Economic liberalism asserted individual self-interest, property rights and the liberty to accumulate personal wealth as essential to freedom. Liberals promoted laissez-faire policies to encourage greater market freedom and economic growth, together with free trade to expand both.

Social democracy or socialism arose in the mid-18th century in reaction to the severe exploitation of workers and growing inequality emerging under capitalism. This movement favored expansion of political rights, industrial or economic democracy, the regulation of markets to safeguard consumers, and government intervention in response to economic downturns.

As noted in Essential Principles, political liberalism and social democracy at times had common interests (such as expanding suffrage and representation to break the power of the landed aristocracy). Mostly, however, they competed politically. Pro-business parties acted to constrain worker interests and labor parties acted to constrain exploitative business practices. Economic liberalism was dominant in Europe, the United States and the Americas at first, but its dominance was interrupted by periods of “progressivism” such as President Theodore Roosevelt’s trust-busting administration and the adoption of progressive taxation in the United States.

In Europe, social democratic parties grew in strength and even gained political majorities and leadership, as in Sweden and Weimar Germany. In the former, the Social Democratic Party established a successful approach to the failures of the free market that brought about shared prosperity and created a model for the post-World War II period (see below and also Essential Principles). In the latter, the German Social Democratic Party succeeded in creating a strong democracy and welfare state but failed in meeting the challenge of political extremism that emerged at the onset of the Great Depression.

The Great Depression

The failure to regulate monopolies and economic speculation had led to a number of Panics in the 19th century in industrializing countries. A more significant economic collapse was The Great Depression sparked by the stock market crash of 1929 in the United States. Worldwide, there was widespread unemployment (30 percent in Germany and 25 percent in the United States), along with a severe contraction of individual savings. Mass poverty was common.

The Great Depression did not create political extremism. Already by 1920-21, the Bolsheviks had consolidated power in Russia and most of its empire. 1920 was the year the Nazi Party formed in Germany. Bennito Mussolini led his fascists to power in 1922. Still, most historians consider the Great Depression to have contributed to political extremism, especially in Germany, and to a broader sympathy worldwide for both fascism and communism.

Two significant counter-models to these totalitarian ideologies emerged. One was the New Deal of President Franklin Delano Roosevelt in the United States. The second was the fokhemmet (“people’s home”) policy of the Swedish Social Democratic Party.

Two significant counter-models to these totalitarian ideologies emerged. One was the New Deal of President Franklin Delano Roosevelt in the United States. The second was the fokhemmet (“people’s home”) policy of the Swedish Social Democratic Party. Both entailed government regulation of banks and industry, public investment, empowering trade unions and creation of a welfare state to provide for the social needs of workers, the poor, the infirm and the elderly.

The US and Swedish models were contrary to free market economics and especially contrary to the absolutist form of free market theory being proposed by intellectuals like Friedrich Hayek (see Essential Principles). The New Deal and “people’s home” policy are instead associated with the theories of economist John Maynard Keynes (or Keynesianism). They are largely seen as bringing the United States and Sweden out of economic depression. (See Resources.)

A New Concept of Economic Freedom

The cataclysm of World War II was followed by the success in free elections of many social democratic parties in post-war Europe. A consensus emerged among both left- and right-wing political parties (such as the Christian Democrats in Germany and Italy) of the need for common policies mirroring Sweden’s fokhemmet and America’s “New Deal.” This consensus helped establish a new concept of economic freedom approximating Adam Smith’s own idea (quoted above) of fostering “general prosperity.”

Governments took ownership of basic industries (such as mines), invested in public services (such as transportation and education) and established strong welfare states addressing the basic needs of society. Economic growth was fostered through government investment and state-funded infrastructure programs. Emphasis was placed on regulations to protect the environment and the consumer. Progressive taxation redistributed wealth. In the United States, Roosevelt included “freedom from want” among his Four Freedoms and proposed an Economic Bill of Rights (see Resources).

Social democracy, which accepted the basic elements of capitalism and also rejected total state control, was a lasting alternative model not just to economic liberalism but also to communism (see below). From 1946 to 1976, social democratic policies in Europe, Japan, the U.S. and parts of the Americas resulted in the largest expansion of economic growth in world history.

The Communist Model

Communism was established in Russia after the 1917 Revolution and then throughout the Russian empire in 1922 in the form of the Union of Soviet Socialist Republics. Under the leaderships of Vladimir Lenin and then Joseph Stalin, the USSR established a new model that nationalized all industry, forcibly collectivized agriculture, and eradicated private property and forms of commerce. This was done not on the basis of socialist ideas for industrial democracy but on the basis of a Marxist-Leninist theory called “scientific socialism” (see also Essential Principles). To achieve such a drastic transformation, a totalitarian police state was established that extinguished both political and economic freedoms.

After World War II, the Soviet Union imposed its model on eight Central and Eastern European countries that the Red Army occupied as it defeated the Nazi Wehrmacht in 1943-45. Three Baltic States were simply absorbed as republics into the USSR. The Soviet Union also became the model for communist guerilla movements that seized power in Yugoslavia, China, North Korea, North Vietnam and later Cuba. In all cases, both political and economic freedoms were extinguished.

The Expansion of Democracy

The experiences of fascism and communism, together with the failure of economic liberalism in the form of the Great Depression, led to a broad consensus among democracies that economic freedom included both “the freedom to own property alone as well as in association with others" along with freedom from exploitation.

Each set of rights were adopted in articles of the Universal Declaration of Human Rights (UDHR) in 1948 (see also Essential Principles). While the Soviet Union actively sought to establish communism worldwide, the UDHR, with its assertion of political, social and economic freedoms, set the standards not only for post-war industrial democracies but also the period of decolonization.

The experiences of fascism and communism, together with the failure of economic liberalism in the form of the Great Depression, led to a broad consensus among democracies that economic freedom included both “the freedom to own property alone as well as in association with others" along with freedom from exploitation.

In sub-Saharan Africa, there were mixed results of decolonization. Some countries established democracy with both economic and social freedoms (see Country Study of Kenya in this section). In others, enduring dictatorships with limited economic freedom would take form (as in Sudan and Uganda).

In the Middle East and North Africa, there were a range of post-war outcomes. Alone, Israel established a stable democracy with a mixed economy (Tunisia later achieved democracy during the period of 2011-21). In many countries, monarchical dictatorships reigned (as in Morocco and Saudi Arabia), while in others nationalist dictatorships took root (as in Syria and Iraq).

In Asia, decolonization also brought a range of outcomes. In some, incipient democracy was established (as in Indonesia and the Philippines). In some others, there were dictatorships with active democratic reform movements (as in Malaysia and Singapore). In still others, stifling communist dictatorships were formed (as in the People’s Republic of China, North Korea and North Vietnam).

In Latin America, post-war political revolutions brought an end to dictatorships in several countries and new democratic governments introduced policies benefitting workers and peasants. These gains were often interrupted by coups and re-imposition of dictatorship. Still, they set the foundation for future democratic change (see Country Studies of Bolivia, Chile and Guatemala). In 1959, a communist dictatorship took shape in Cuba as a result of armed revolution (this section’s “Not Free” country).

The End of History?

The post-World War II period (1945 to 1989) is often considered in terms of the Cold War — a global competition between the Soviet Union and the United States and their respective “blocs” (the Warsaw Pact and the North Atlantic Treaty Organization). This narrative tends to paint the geopolitical competition as that between economic systems of communism and capitalism.

Communism meant abolishing" property rights and directing the economy through state planning by means of a police state. Control over the economy functioned as part of the state’s political control.

But communism represented a different economic and political system. Communism meant abolishing" property rights and directing the economy through state planning by means of a police state. Control over the economy functioned as part of the state’s political control. Millions of people were sent to penal labor camps used to fulfill the state's economic plan while workers generally had no protection from exploitation through free trade unions.

The justification of Communist Parties for seizing power — to create freedom from exploitation — proved false. Communist economic systems resulted in chronic shortages of goods and other economic deficits. The Soviet system fell far behind democracies in NATO in both economic and military competition.

In the end, the Soviet Bloc and USSR collapsed in the face of growing demands for democratic change through worker uprisings (as in Poland) and national independence movements (as in Estonia, the “Free” Country Study in this section).

The collapse of communism in the Soviet bloc and Soviet Union from 1989 to 1991 continued a period of worldwide expansion of political and economic freedom that had begun in the 1970s with Portugal, Spain and Greece and that spread to all continents. Nine countries of Central and Eastern Europe, including the three Baltic States, adopted democratic constitutions and free market economies. They also joined NATO and the European Union. Political theorist Francis Fukuyama argued that the defeat of democracy’s main global competitor in the USSR signaled “the end of history” and a dominant period for both economic and political liberalism.

The Continuation of History

This projection proved premature. For one, many countries of the former Soviet Union (like Azerbaijan, Kazakhstan and Uzbekistan as well as the Russian Federation itself) replaced communist dictatorship with autocracy and kleptocracy. Others struggled to achieve stable democratic systems due to the over-arching political influence of corrupt oligarchs who gained control of large economic assets.

While communism receded as a global political challenge to democracy, other forms of state dictatorship and rival authoritarian ideologies have arisen to challenge liberal democracies. The People’s Republic of China and the Russian Federation are two variants on an emerging authoritarian model that join elements of capitalism and political dictatorship (see also Essential Principles).

The Neo-Liberal “Rebalancing”

Before the fall of Soviet communism, political parties emphasizing free market capitalism over social democracy had won elections and gained power in many major world economies after a period of economic stagnation. Two of the largest were the United Kingdom in 1979 with the election of Conservative Margaret Thatcher and the United States in 1980 with the election of Republican Ronald Reagan. Their free market policies included lowering corporate taxes, reducing regulation, cutting welfare payments and privatizing or eliminating government services. Multinational corporations were encouraged to move their manufacturing plants to dictatorships that had low wages and few protections for workers.

Before the fall of Soviet communism, political parties emphasizing free market capitalism over social democracy had won elections and gained power in many major world economies after a period of economic stagnation.

Social democratic parties still competed with neo-liberal parties in most democracies and the overall regulatory and public support framework of a welfare state remained. But the larger trend was the election of pro-business political parties and a revival of economic liberalism, often called neo-liberalism. Economist Ezra Solomon called this a “rebalancing” in economic policy (see also Essential Principles).

But neo-liberal rebalancing tipped quite far. In the last 40 years there has been a trend towards higher concentrations of wealth, monopolization of industries (especially in technology), increased inequality and heightened economic and environmental exploitation. In the United States, for example, one commonly cited statistic is that the three richest billionaires together today have more wealth than the entire bottom 50 percentile of the population.

But neo-liberal rebalancing tipped quite far. In the last 40 years there has been a trend towards higher concentrations of wealth, monopolization of industries, increased inequality and heightened economic and environmental exploitation. There are thus signs that another “rebalancing” back toward social democratic policies may have begun.

A more standard measure is the GINI co-efficient, where 0 represents perfect equality and 100 perfect inequality. The US co-efficient rose from 34 to almost 41.5 between 1980 and 2020 (meaning a large increase in inequality). By comparison, the lowest co-efficient among major democracies (meaning greater equality) is found in Nordic countries at 25-27. Another measure of imbalance and increased worker exploitation is trade union membership in the private sector. In the U.S., it fell from a high of more than 35 percent of the workforce in 1955 to 6 percent in 2022.

There are thus signs that another “rebalancing” back toward social democratic policies may have begun. In the United States, for example, Democrat Joseph R. Biden, who won the presidency in 2020, has adopted an aggressive policy of government re-investment in infrastructure, an industrial and environmental policy to address the climate crisis and policies to restore funding to government assistance programs and foster trade unions.