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Examining the Hayek–Friedman Hypothesis on Economic and Political Freedom
Abstract
This paper examines empirically the hypothesis made famous by Nobel Laureates Friedrich A. Hayek and Milton Friedman that societies with high levels of political freedom must also have high levels of economic freedom. In our judgment, the Hayek–Friedman hypothesis holds up fairly well to historical scrutiny. Using data on economic and political freedom for a sample of up to 123 nations back as far as 1970, we find relatively few instances of societies combining relatively high political freedom without relatively high levels of economic freedom. In addition, we find that these cases are diminishing over time. Finally, we examine several cases of countries on different economic and political freedom journeys.
... Economists otherwise favoring private control of the means of production may nevertheless support specific policies, such as selective Pigouvian taxes, fiscal and monetary stimulus during recessions, or consumer-protection regulation, all of which may actively restrict economic freedom, without necessarily affecting overall public control of the means of production (Bergh, 2020). Lawson and Clark (2010) test the Hayek-Friedman hypothesis empirically by synthesizing Hayek's hypothesis with Friedman's broader one. Their results show that the Friedman hypothesis holds with a few exceptions but note that the extent to which it holds depends on "the thresholds one uses for defining the concepts of high political and low economic freedom" (Lawson & Clark, 2010: 238). 1 However, the Hayek hypothesis has not been examined empirically. ...
... While in his earlier work, Friedman (1947: 407) acknowledged the traditional definition of capitalism as "characterized by private ownership of the means of production," he later appeared to use the terms "capitalism" and "economic freedom" interchangeably (Lawson & Clark, 2010). ...
Is capitalism a necessary condition for political freedom? Friedrich Hayek and Milton Friedman argued that capitalism is necessary for political freedom in what is now known as the Hayek–Friedman hypothesis. While previous empirical work relying on economic freedom as a proxy for capitalism has confirmed the hypothesis overall, those results are sensitive to the definitions of capitalism and political freedom. We argue that while Milton Friedman claimed that political freedom could not exist without economic freedom, Hayek argued that political freedom could not exist without private ownership and control of the means of production, a distinction that could affect the results. We test the Hayek hypothesis using V-Dem’s measurement of state ownership and its political civil liberties index, which summarizes annual data going back to 1789. Our primary results identify only one robust example of a country wherein political freedom was maintained temporarily in the context of heavy to complete state economic control: Belarus amidst the fall of the Soviet Union in 1991, a brief transitional phase that does not violate the Hayek hypothesis. We argue that explaining the connection between private property and democratic freedoms requires a humanomics appreciation of those consensus-based institutions. The emergence and exercise of private property rights fosters the individual responsibility, sociality, and tolerance required to preserve democracy.
... Similarly, the classic ' 'Hayek-Friedman Hypothesis'' suggests that a state cannot be politically free and not have economic freedoms (Hayek, 1944;Lawson & Clark, 2010;Lawson et al., 2020). According to Hayek and Friedman, individuals with economic freedoms are able to cooperate voluntarily through means like entrepreneurship, which allows them to acquire the power and control necessary to resist political coercion or central direction. ...
... Several studies conclude that democracy is associated with institutional quality, such as government effectiveness, political stability, low corruption, and strong property rights (Acemoglu & Robinson, 2012;Robinson, 2006). Prior literature exploring the relationship between economic development and institutional quality postulates that higher levels of political freedom are highly correlated with higher levels of economic freedom, the so-called ''Hayek-Friedman Hypothesis'' mentioned above (Lawson & Clark, 2010). Empirical evidence suggests that politically free states oscillate toward economic freedom (see Farrant & McPhail, 2009, for an overview of the ''inevitability thesis''). ...
This research note critically extends Audretsch and Moog’s work on the relationship between democracy and entrepreneurship. While Audretsch and Moog present a positive relationship between democracy and entrepreneurship, we find that key measures of entrepreneurship are frequently negatively, not positively, associated with democracy and its various determinants. However, we do find some evidence to support Audretsch and Moog’s theorizing that democracy is learned in start-ups and small businesses by showing that entrepreneurs in advanced economies are more democratic in their attitudes or behaviors than their employee counterparts. But the evidence on whether the transition from regular employment to entrepreneurship increases political engagement and democratic orientation remains inconclusive.
... This appears to form the overlapping consensus of many scholars in this field and has inspired empirical tests. The so-called 'Hayek-Friedman-hypothesis' is the most prominent example (Lawson and Clark, 2010). It concedes the fact that non-democratic regimes which have achieved a high level of economic freedom are at least theoretically possible, even though this combination may be considered unlikely or unstable (see above); only in this case would low scores of political freedom coincide with high scores of economic freedom (ibid.). ...
... The Hayek-Friedman-hypothesis rules out the concomitance of democracy with low scores of economic freedom; no democracy, as Friedman states, has ever established a planned economy (Friedman, 1962). According to the Hayek-Friedman-hypothesis, the coinciding of political freedom and capitalism is the more likely combination, which is supported by empirical tests (Lawson and Clark, 2010). Acemoglu and Robinson (2012), in turn, give causal priority to democracy when a free market order is to be established. ...
The paper interrogates the argument put forward by Acemoglu and Robinson or North et al. that capitalism and democracy are supportive to each other. It analyzes the development of political and economic institutions in Germany before and after World War I. It is shown that the lack of democracy in Imperial Germany furthered a liberal economic order and gives reasons why the transition to full-scale parliamentarianism would have impaired the quality of economic institutions. This also explains why such a transition was not completed. The Weimar Republic established a modern democracy but was unable to secure the quality of economic institutions achieved before. Not only in Germany did the politicization of the economy impair the economic order. This empirical outcome helps to explain why Eucken and other liberals identified democracy as part of the economic problem during the interwar period. It also gives reasons to rethink the complex relationship between capitalism and democracy.
... Our second expanded model includes the population and resource measures above plus measures of democracy, corruption, and the economic freedom of neighboring countries. Democracy is generally positively related to economic freedom (see e.g., de Haan and Strum, 2003;Lundström, 2005;Lawson & Clark, 2010;Sobel & Coyne, 2011;, thus we expect democracy to increase the probability of belonging to the higher economic freedom convergence club. Corruption has also been linked to poor institutional quality and lower economic freedom, although with a complex interrelationship (see Carden & Verdon, 2010;Apergis et al., 2012;. ...
Are the economic freedom levels of all countries converging now that the Cold War is over? If not, are they converging into a subset of economic freedom groups or ‘clubs’ based upon underlying legal origins and country characteristics? This study investigates these questions using recent methodological developments in panel data convergence analysis. Our tests indicate non-convergence of economic freedom across all countries. However, club convergence tests reveal three distinct convergence clubs. Our subsequent results demonstrate that countries belonging to the higher economic freedom convergence clubs are less likely to have French legal origin and lower reliance on natural resource rents, and more likely to have long tenured and democratic governments, easier exitability, more net migration, faster economic growth, more control of corruption, as well as more elderly and dense populations.
... Although we hypothesized that democracy would also exert an indirect effect on innovation through the channel of pro-market institutions, our results do not support this hypothesis. One potential explanation might be related to the Friedman-Hayek hypothesis that states democracy encourages pro-market institutions but not vice versa (Lawson & Clark, 2010). For example, there are several Asian countries (e.g., Singapore and Hong Kong) and ...
Prior studies examining the democracy-innovation relationship have reported mixed results. To resolve this tension, our framework grounded in information processing and institutional theory proposes two mechanisms through which democracy influences innovation—pro-market institutions and information processing. Our analysis reveals that democracy indirectly affects innovation primarily through information processing rather than pro-market institutions. While gradually or increasingly democratizing states tend to focus on adopting pro-market systems without considering information freedom (e.g., lifting censorship), our results underscore the importance of information processing for strengthening the democracy-innovation relationship. Our study extends the literature on national innovation rates by shedding light on the information processing implications of democratic institutions.
... 3 There is a large literature relating economic freedom to other outcomes: see Hall and Lawson (2014), Lawson (2022) and Berggren (2024). 4 Lawson and Clark (2010) test what is now known as the 'Hayek-Friedman hypothesis' and find, using data on economic and political freedom for more than 100 countries over four decades, that it is rare to see countries have high political freedom if they do not also have high economic freedom. Recent evidence in Benzecry et al. (2024) suggests that the relationship is mainly driven by substantial state ownership, which cannot co-exist with political freedom. 5 Why would academic freedom be different from press freedom or a general freedom of expression? ...
Academic freedom is a cornerstone of modern academic life. It is not only implied by basic liberal principles but also contributes to scientific progress and economic growth. It is therefore important to better understand what affects how free scholarly pursuits are, and to that end, we ask whether economic freedom can help explain variation in academic freedom across countries. In our case, relating the Economic Freedom of the World index and its five areas to V-Dem's index of academic freedom and its five areas reveals that the rule of law is positively and robustly related to academic freedom in all its forms. This suggests that the rule of law, in its general and broad sense, can arguably serve as a guarantor of academic freedom. Where the rule of law is weakened, academic freedom can be at risk. There are some indications that regulatory freedom is similarly related to academic freedom, but less robustly so, maybe indicating that interventionism in one policy area (economics) can breed interventionism in another (academia).
... Later studies in Lawson and Clark (2010), Webster (2012), and Khan (2012) confirm the pattern. Pryor (2010) also shows significant evidence but finds that the effect runs through education as originally hypothesized by Lipset (1959). ...
... We may, therefore, be underestimating the full effects of economic freedom, as it also appears to be a condition for maintaining a stable democracy (cf. Lawson & Clark, 2010). In all, we find support for a negative association between aspects of economic freedom and government discrimination, especially in electoral democracies and multi-party autocracies, with legal and cultural channels driving the results. ...
Exclusion of some groups caused by the misuse of government power remains a major problem across the world. We propose that market-oriented institutions and policies have the capacity to reduce such exclusion. To test this, we use an overall measure derived from the V-Dem dataset, capturing government discrimination based on political group, social group, socioeconomic group, and gender, which we combine with the Fraser Institute's Economic Freedom of the World index. The sample consists of 153 countries for 1970-2020, which we organize in a panel consisting of consecutive , non-overlapping 5-year periods, rendering up to about 1,200 observations. Our estimates show a clear negative association between the rule of law and government discrimination in electoral democracies and electoral autocracies but not in single-party autocracies. There are, however , reasons for not considering the finding for electoral autocracies causal. Two further areas of economic freedom seem to matter: free trade is negatively related to government exclusion in electoral democracies, while regulatory freedom is so in both types of autocracies. Thus, it seems as if a market-economic system may be able to constrain public officials in the direction of non-discrimination.
... Finally, economic freedoms are associated with political freedoms, as per the Hayek-Friedman hypothesis. For instance, Lawson and Clark (2010) found "relatively few instances of societies combining relatively high political freedom without relatively high levels of economic freedom." ...
This study examines the effect of U.S. Presidents and Secretaries of State visits to a country on institutional quality, particularly on economic freedom. Hence, the study develops a model that predicts the conditions under which official visits can enhance the quality of institutions. We compile variables on official visits from 1960 to 2019 from the archives of the U.S. State Department to test the predictions of our model. In addition, we use the endogenous treatment model estimation to deal with potential endogeneity. The estimation results show that the official visits have a statistically significant negative effect on economic freedom, particularly in non-democratic countries with less political freedom. The estimation results are robust with different types of visits and samples. The study presents multiple explanations for these results, including the possibility of the following: First, some American administrations adopt a pragmatic approach aimed at achieving strategic objectives while overlooking practices that do not enhance institutional quality. Second, these official visits may improve other aspects of institutional quality that are more observable to the international community than economic freedoms. Third, American policymakers care more about achieving short-term objectives from their visits that can be presented as accomplishments to their electorate rather than institutional reforms that will only yield benefits to the United States in the long run. Finally, economic freedoms are associated with political freedoms per the Hayek-Friedman hypothesis.
... We use qualitative comparative analysis to examine institutional causal mechanisms of economic development in two historical case studies of Soviet and Chinese transitional political economy. This approach considers set-theoretic propositions that allow for multiple causal pathways that connect dependent variable to explanatory variables (Lawson and Clark, 2010;Krasnozhon, 2013;Skarbek, 2020). Any cause can be sufficient or necessary or both or none of them. ...
Despite its invaluable contribution to the field of comparative economics, the socialist calculation debate has focused on the narrow topic of the impossibility of the rational economic calculation under socialism. The literature on new institutional economics suggests that economic development is determined by economic and political institutions which are far more complex than the issue of economic calculation. To bridge the gap between the calculation debate and new institutional economics, this paper utilizes the historical case studies of Perestroika and Deng's China to demonstrate relationship between state capacity and economic calculation. We argue that rational economic calculation requires the state's institutional ability to make a credible commitment to constraints inhibiting public predation.
... Understanding how pandemic regulations impact economic freedom is important because economic freedom has been shown to be an important determinant of a wide variety of desirable economic outcomes. Economic freedom is positively correlated with economic growth (Scully and Slottje, 1991;Williamson and Mathers, 2011), development (Bennett and Nikolaev, 2017), environmental progress (Barbier, 2019), and improved political and civil liberties (Benyishay and Betancourt, 2010;Dawson, 1998;Lawson and Clark, 2010). Economic freedom is also positively related to advances in human development including measures of education (Feldmann, 2017), life expectancy (Esposto and Zaleski, 1999), disease prevention (Stroup, 2007), and upward income mobility (Dean and Geloso, 2021;Callais and Geloso, 2021). ...
The Covid-19 pandemic in 2020 led to extensive new government regulations and lockdown policies that, according to some prominent definitions, severely reduced economic freedom. However, many of these new pandemic-related regulatory restrictions on economic freedom are largely missed by the Economic Freedom of the World Report (EFW). This paper first adjusts the Our World in Data Covid-19 Stringency Index into a measure of lockdown regulatory freedom and then merges it into the EFW index to better measure countries' 2020 cross-sectional relative economic freedom. We find significant differences in the relative ranking of economic freedom between countries once we adjust for lockdown regulatory restrictions.
... Chile began the period under examination as a politically and economically turbulent country in the 1960s and 1970s. Shortly after Pinochet's coup in 1973, and during the 1980s, the country began to move in the direction of economic liberalism while remaining politically repressive (Lawson and Clark 2010). A synthetic control will allow observation of the direct 1 Gilson and Milhaupt (2011) argue that authoritarian regimes promote the economic success of their countries by taking them into global commerce. ...
This article analyzes the impact of Augusto Pinochet’s autocracy on the Chilean economy. The study compares outcomes under Pinochet’s leadership with those in a synthetic counterfactual made of a weighted average of countries with similar characteristics. It finds that, relative to the control, Chilean income per capita greatly underperformed for at least the first fifteen years after Pinochet’s coup. The results are robust to extending the pool of donor countries and expanding the pretreatment period by switching data sets to capture potential heterogeneity of effects. The evidence suggests that Chile’s remarkable economic growth during the period 1985–1997 did not depend on Pinochet’s autocracy. These results further bring into question the effectiveness of the regime to enhance economic growth and the narrative of the Chilean miracle.
... 3 Further, both Hayek (1944) andFriedman (1962) argued that economic freedom is a prerequisite for other human rights and civil liberties. This hypothesis has been supported empirically with regard to political freedom (Lawson & Clark, 2010) as well as freedom of the press (Bjørnskov, 2018). In addition, restrictions on women's rights are more severe in countries that have less economic freedom (Fike, 2020). ...
Storr and Choi (2019) present ample evidence that the market process results in outcomes that can be considered “moral”, however they do not address the potential moral implications of policy interventions that place restrictions on the market process. This essay poses, and begins to answer, a related question: is it immoral to stand in the way of the market process? Insights from market process theory are used to explore this question and to identify four ways in which impediments to markets, and not markets themselves, have the potential to corrupt our moral character: 1. They prevent people from accessing the benefits markets have been shown to provide. 2. They create incentives that encourage people to practice behaviors that are considered immoral. 3. They prevent people from actively participating in the development of their own moral character. 4. They prevent us from discovering new social rules that are morally superior to the ones that currently exist.
... The literature provides empirical verifications of this hypothesis, confirming that high political freedom almost cannot exist along with low economic freedom. Cases of countries that meet both conditions are in a decisive minority and expose that such countries gain economic freedom over time, which proves the validity of this hypothesis in the long run (Lawson and Clark, 2010). Moreover, it has been proved that economic freedom is required to maintain political freedom (Kapas and Czegledi, 2018). ...
The main research question of this study is about the drivers of democracy backsliding during the COVID-19 pandemic, with a special focus on the rule of law and the state of democracy just before the shock. There is growing interest in the political implications of the coronavirus pandemic, debating mostly the misuse of emergencies and violations of various norms by governments; however the links between the current democracy erosion with institutional environment remain unclear. We use a novel global dataset covering the period of the first two waves of the pandemic (January-December 2020), and apply various econometric and machine learning tools to identify institutional, economic and social factors influencing democracy. Our results are of scientific and practical importance and imply that the stronger the rule of law and the higher the level of democracy, the lower the risk of democracy backsliding in the face of the pandemic.
... 6 The effect of the institutions of a given organization is a product of their context, which per polycentricity includes the set of organizations (and associated subsidiary institutions) that they include, the set of organizations of which they are part, and the set of organizations with which they compete (Ostrom 2010). 7 Despite the relationship between political and economic institutions being one long identified as crucial to social outcomes (Hayek 1944), the nature of this dynamic has remained one of perennial interest to institutional scholars (Hayek 1979, 105;Weingast 1995;Murmann 2003;North, Wallis and Weingast 2010;Lawson and Clark 2010), as well as economics scholars more broadly (Acemoglu and Robinson 2020), including those drawing upon the Austrian tradition (Holcombe 2018;Holcombe 2020). My unit of analysis, the output of public institutional processes, also avoids the entangled political economy critique surrounding the ultimately inseparable nature of the political and economic realms in a given society (Wagner 2016;Wagner 2020a). ...
Defining rules politically poses the general question of which aspects of social ordering are tractable to public institutional resolution. But not all institutions emerge from the same processes of spontaneous ordering; self-interest subject to market discipline looks very different than self interest subject to political discipline. Because of the structural way in which changes to political rules result in distributional consequences compared to the political status quo, their emergence is fundamentally governed by the dynamics of political self-interest. In contrast, while the public definition of economic institutions is also governed by political self-interest, economic dynamics can redefine this political self-interest in socially beneficial ways. Through the analysis of the emergence of the Australian ballot and the general corporate form in the 19th Century US, I argue that public economic institutional change is a process more tractable to constructivist influence. This is because dynamic economic forces (which operate through mutually beneficial exchange) can disrupt political economic equilibria. In contrast, constructivist political change is necessarily competitive, which makes such change less intrinsically related to longer-term emergent benefits to social ordering.
... Their fixed effects regression results revealed that "GDP per capita growth is positively affected by economic freedom index and this relationship has weakened by the global economic crises of 2008" (Nadeem et al., 2019, p. 60). Lawson and Clark (2010) challenged the Hayek-Friedman hypothesis that posits, "societies with high levels of political freedom must also have high levels of economic freedom" (Lawson & Clark, 2010, p. 230). They found that there are relatively few instances of societies combining high political freedom without high levels of economic freedom. ...
This research explores the relationship of variant degrees of a country’s economic freedom to the ethical profiles of millennial business students, specifically an individual’s personal value orientation and post-conventional reasoning. Grounded in Social Identity, Personal Values, and Cognitive Moral Development theories, we construct an ethical profile to compare responses provided by millennial business students from eight countries. Our results suggest that a country’s degree of economic freedom has some association with an individual’s ethical profile, yet we also discuss other national influences on an ethical profile. These results and their implications are discussed in the article.
... We will also try to assess the importance of competing hypotheses regarding political institutions. Given that economic and political freedoms are heavily correlated (Lawson and Clark 2010;Sobel and Coyne 2011), it could be the democratic nature of governments that lead them to be more responsive (Sen 1999). Thus, by virtue of their responsiveness, democracies could suffer lesser shocks. ...
The 1918 flu pandemic constituted an exogenous shock on economic activity. In this paper, we condition the economic importance of these shocks on the level of economic freedom measured by the HIEL project (Prados de la Escosura 2016) to test whether freer economies fared better. Our argument is that higher levels of economic freedom meant a greater ability to adjust to shocks by reducing frictions in the reallocation of resources and the reorganization of economic activity. We find that higher levels of economic freedom mitigated the pandemic's effect. We link this finding with the literature on economic freedom and crises.
... My argument is a contribution to the Rawlsian project of reconciling political philosophy with public understandings and underpinnings of liberal society, as well as empirical observations of the relationship between economic and political liberty (Lawson and Clark 2010). Economic liberty is one necessary but emphatically insufficient condition for a stable liberal society, which means that it cannot be granted priority above other basic liberties. ...
The moral status of economic liberty is a critical point of contention within liberal theory. Classical liberals, including Tomasi, suggest that economic activity is fundamental for exercising personal autonomy and its protection to be to the overall benefit of all persons. By contrast, egalitarian liberals, following Rawls, argue that economic activity is not a sufficiently significant site of moral development. Drawing on contemporary interpretations of Adam Smith, I argue that commercial practices cultivate attitudes of mutual trust and respect in a way that is unique and necessary for developing the moral powers. Although they need not be universally exercised, basic economic liberties must be available to all. While rejecting laissez-faire, this case suggests that well-ordered societies must protect a substantial degree of commercial activity as part of the basic structure.
Is a monopolized banking sector a threat to democracy? Increasing bank monopolization and its growing share of the economy have brought renewed interest to this historical concern. Oskar Lange and Abba Lerner held that banking monopolization would undermine democracy through the concentration of political power among banking elites. This led them to exclude the banking sector from their more general support for private ownership of the means of production. We examine whether banking monopolization is associated with concentrated political power and the undermining of democracy using the Lerner Index (based on Lerner’s measure of banking concentration), Polity scores, Varieties of Democracy’s (V-Dem’s) Political Civil Liberty Index, and V-Dem’s Power Distributed by Socioeconomic Position Index, comprising data for 101 countries from 1996 to 2014 in our full specification. We find no relationship between civil liberties and the banking sector in Organisation for Economic Co-operation and Development (OECD) countries but a negative and statistically significant relationship in non-OECD countries. We find no relationship between the Lerner Index and the concentration of power by socioeconomic status. Our results support only one variant of the Lange–Lerner Hypothesis and only among non-OECD countries. We argue that, most likely, this is because long-established democracies are more resilient.
Some countries get stuck in suboptimal trajectories and remain there for decades, a phenomenon known as institutional lock-in. In the evolutionary literature, institutional lock-in is explained by a unidirectional link between mental models (ideas, beliefs) and institutions. In contrast, the conventional non-evolutionary view considers institutions as exogenously given, with individuals choosing among them, implying another unidirectional link between mental models and institutions. In this paper, I develop a coevolutionary view of the institutional lock-in phenomenon, emphasizing the path-dependencies of both mental models and institutions and their mutual influence. I use this perspective to analyze the susceptibility of different political-economic systems to institutional lock-in. I conclude by hypothesizing that an ideal-type socialism is the most prone to lock in, followed by an ideal-type welfare state and an ideal-type free market system. Future research could test this framework through simulation models or empirical strategies.
Three characteristics of developed twenty‐first century countries are high levels of state capacity, democracy, and economic freedom. This article compares countries that lack one of the characteristics with countries that have more even levels of institutional development. Countries which lack democracy use other means to secure political legitimacy, and those without strong states are geographically concentrated in Latin America and eastern Europe. Those without liberalised economic institutions are an idiosyncratic group that have unconventional historical paths. These findings speak to the prospects for development outside the liberal democratic path, the nature of development in the absence of a state, and unexplored determinants of economic freedom.
Novel externalities are social activities for which the emerging cost (or benefit) of the spillover is unknown and must be discovered. Negative novel externalities have regained international salience following the COVID-19 pandemic. Such cases frequently are invoked as evidence of the limits of liberal political economy for dealing with public emergencies. Through a re-reading of classical political economy with the modern state’s confrontation with infectious disease in mind, we defend the comparative efficacy of liberal democracy against authoritarian alternatives for coping with these social problems. Effective responses to novel externalities require producing and updating trustworthy public information and an independent scientific community to validate and interpret it. Those epistemic capacities are prevalent in liberal democratic regimes with multiple sources of political power, an independent civil society, and practices of academic freedom. Our analysis highlights the theoretical value of polycentrism and self-governance beyond their more familiar role, of increasing accountability and competition in the provision of local public goods, towards facilitating effective national policy.
Three characteristics of developed twenty-first century countries are high levels of state capacity, democracy, and economic freedom. This paper explores which countries do not possess one of the characteristics relative the levels of the others. We find that countries which lack democracy are those with other means to secure political legitimacy, and those without strong states are geographically concentrated in Latin America and Eastern Europe. Those without liberalized economic institutions are an idiosyncratic group that are best described as having unconventional historical paths. These findings speak to the prospects for development outside the liberal democratic path, the nature of development in the absence of a state, and unexplored determinants of economic freedom.
JEL Codes: O43; H10; P10; N40
The comparative causal effects of democracy and democratization on economic development in developed and post-communist nations (PCN) are the subject of the present study. The research question is, “Would democratization and established democracy cause economic development through economic institutions?” The instrumental variable estimation indicates that economic institutions created by their political systems (instrumental variables) had strong negative effects on economic growth in PCN. Political institutions were not instrumental variables in developed countries with their economic development. This fact indicates that only democratization, not established democracy, serves as an instrumental variable in economic development.
In an era of increasing inequalities, and also of deep anxieties about the consequences of two major economic crises, economists are faced with a major question: can economic growth be achieved without inequalities? Economic Growth and Inequality critically evaluates the economic literature on this question from a pragmatic perspective, seeking to reconcile those who regard economic liberties as a paramount value, and critics who object that prioritizing these liberties leads to inequitable outcomes.
The book presents an overview of the models used by economists to define and measure inequalities and the ongoing dialogues between political philosophers and economists in an effort to find solutions to the problems. It explores Rawlsian justice, Sen’s capability theory, and the theory of rent and compares and contrasts the most often discussed institutions and policies designed for remedying poverty and reducing inequalities.
This book marks a significant contribution to the literature on some of the most pressing problems of our time and will be of great interest to readers of political economy, public policy, moral philosophy, and history of economic and political thought.
Nach kurzen Erläuterungen zu Karl Poppers (1902–1994) Kritischem Rationalismus wird die Relevanz klassischer Entscheidungsregeln für die Zielsetzungen wirtschaftspolitischen Handelns bewertet. Behandelt werden dabei die Maximax-, Leximax-, Maximin-, Leximin-, Hurwicz-, Savage-Niehans-, Laplace-, Bayes- und μ-σ-Regel. Das Gefangenen-Dilemma leitet die Berücksichtigung strategischer Aspekte ein. In deren Zentrum steht die Strategieanalyse mit der Untersuchung externer und interner Umweltbedinungen, die Strategieentwicklung mit GAP-, SWOT-, TOWS-Analyse und Benchmarking sowie die Strategieformulierung mit der Innovations-, Imitations-, Adaptions-, Kostenführerschafts-, Differenzierungs-, Nischen- und Diversifikationsstrategie. Die 36 Strategeme des Tan Daoji geben einen Einblick in das Denken chinesischer Strategen. Nach verhaltensökonomischen Erläuterungen zu systematischen („biases“) und unsystematischen („noise“) Verzerrungen sowie zum staatlichen Nudging und Sludging bildet die Präsentation des innovationsfreundlichen Serendipitätsprinzips den Abschluss dieses Kapitels.
The creative economy is currently demonstrating quite intensive development indicators, and the share of the creative sector in GDP creation is constantly growing. The aim of this article is to reveal the interrelation and interdependence of socio-economic development factors and to clarify the place of the creative sector in ensuring sustainable economic growth. On the basis of 19 variables, the economies of the EU countries were analyzed by means of cluster analysis, which allowed the authors to single out 8 clusters in the constructed dendrogram, united by the nature and trends, as well as the role of the creative sector in these processes. In addition, the degree of correlation and interaction between the influencing factors themselves was described. Using RStudio, the authors built two multiple regression models, where the dependent variables were GDP and the global creativity index, and the factors were the indicators used to calculate the creativity index. Innovations and creativity are one of priorities of the program of socio-economic development of the European Union. There is a universal approach to understanding the importance of creative economy in the EU. However, the practical implementation of the strategy of development and activity of the creative industries by the EU countries is carried out in the following different directions – the foreign economic expansion of the creative industries themselves; the promotion of all national culture at the international level; export-oriented development of the creative sector of the economy; the lack of a separate comprehensive strategy of foreign economic activity for the creative industries, but the implementation of various programs and measures aimed at promoting exports of products of these industries as part of a national development strategy. Overall, the active functioning of the EU creative sector directly or indirectly affects the economy by improving its performance and creating jobs, stimulating innovation, and contributing to social and sustainable development. As a result, it was found that the global creativity index is largely dependent on the share of the creative class. It has also been proved that the creative and cultural industries determine the growth of a country's economy in terms of traditional economic and employment indicators. Investments in the creative economy will increase the qualitative and quantitative indicators of sustainable economic development.
When states are targeted with sanctions, they may respond with alterations of their domestic economies meant to counter any negative effects of sanctions. In this article, we argue that these alterations tend to lead to increased state command of the economy and reduced economic freedom, as sanctions create opportunities and incentives that encourage target states and firms within them to pursue increased state control of the economy. These declines in economic freedom may come about through a number of causal mechanisms, several of which will be elaborated upon in this article. We use large‐N empirical analysis of all aspects of the Fraser Institute's Index of Economic Freedom and find that sanctions associate with reductions in most components of economic freedom.
Economic arguments against immigration suggest that immigrants undermine the culture, institutions, and productivity of destination countries. But is that true? Nowrasteh and Powell systematically analyze cross-country evidence and case studies of the potential negative effects of immigration on economic freedom, corruption, culture, and terrorism. They find that immigrants do not destroy the institutions responsible for prosperity and, in some cases, even improve them.
Economic arguments against immigration suggest that immigrants undermine the culture, institutions, and productivity of destination countries. But is that true? Nowrasteh and Powell systematically analyze cross-country evidence and case studies of the potential negative effects of immigration on economic freedom, corruption, culture, and terrorism. They find that immigrants do not destroy the institutions responsible for prosperity and, in some cases, even improve them.
We present the approach to comparative economic development of Why Nations Fail. Economic prosperity requires inclusive economic institutions—those which create broad based incentives and opportunities in society. Extractive economic institutions, which lack these properties, create poverty. Variation in economic institutions is created by differences in political institutions. Inclusive economic institutions are the result of political choices which arise under inclusive political institutions: a strong state and a broad distribution of power in society. When either of these conditions fails one has extractive political institutions that lead to extractive economic institutions. We relate our analysis to Tullock’s notion of ‘rent seeking’.
Human flourishing is what God desires for his people and his creation. A close examination of Genesis reveals not only God’s desires but his designs for us and through this, we get a clear understanding of our purposes and our relation to both God, his creation and each other. In the beginning, we are given all that we need both in terms of human and physical capital. The economic way of thinking helps us to understand the principles of human action and the implementation of human creativity. When society is ordered in a way that allows these principles to work will be one that fosters greater human flourishing.
Cambridge Core - Economics: General Interest - Defense, Peace, and War Economics - by Christopher J. Coyne
For several years, the Economic Freedom of the World (EFW) annual reports large set of nations around the world. 1 This index is designed to measure the degree to which a nation's policies and institutions protect its citizens' economic freedom. In this article, we explain the basic methodology employed in constructing the index and summarize the study's findings. What Is Economic Freedom? Any attempt to quantify economic freedom must begin with a solid theoretical under-standing of the concept. The EFW report holds the key ingredients of economic freedom to be personal choice, voluntary exchange, freedom to compete, and protection of person and property. Institutions and policies are consistent with economic freedom when they provide an infrastructure for voluntary exchange and protect individuals and their property from aggressors who seek to use violence, coercion, and fraud to seize things that do not belong to them. Legal and monetary arrangements are especially important: governments promote economic freedom when they provide a legal structure and a law-enforcement system that protect the property rights of owners and enforce contracts in an even-handed manner. They also enhance economic freedom when they facilitate access to sound money. In some cases, the government itself may provide a currency of stable value. In other instances, it may simply remove obstacles that retard the use of sound money that is 1 The most recent report is Gwartney and Lawson 2004. In this article, we draw heavily from the first chapter of that report.
Each year the Fraser Institute and the Heritage Foundation (in conjunction with the Wall Street Journal) publish indexes of eco-nomic freedom, while the Freedom House publishes an index of political freedom around the world (Gwartney and Lawson 2002; O'Driscoll, Holmes, and Kirkpatrick 2002; Freedom House 2001). The explanations and graphs in those reports illustrate the relation-ships between each of the indexes and relevant socioeconomic vari-ables such as GDP growth, life expectancy, and measures of human development. What the annual reports suggest is that there is a posi-tive relationship between economic freedom and the standard of living, as well as between economic growth and political freedom. Although such assertions would appear to be intuitively correct, the reports do not undertake any rigorous empirical tests to provide sci-entific support to such relationships. The empirical analyses existing in the literature afford more or less clear, but inconclusive, results. They highlight the positive impact of economic freedom on growth, 1 or the ambiguous relationship between growth and political freedom. Fewer studies have been published on the association between the two types of freedom, but much attention is paid to the hypothesis of both being mutually enhancing. Such conclusions are open to criticism. Generally speaking, they depend on the choice of methodology and sample size. Moreover, a series of control variables must be included in the model for the analysis to be robust. In other words, there is a need for data on a-Gordillo is Professor of Quantitative Methods at the University of Navarra and an Adjunct Scholar at the Círculo de Empresarios in Madrid. José L. lvarez-Arce is a Professor of Economics at the University of Navarra. 1 Several of these empirical studies stress that economic freedom is one of the factors that affects economic development (e.g., Vanssay and Spindler 1994; Haan and Siermann 1998; Haan and Sturm 2000). See Vamvakidis (2002) for the connection between economic growth and trade openness. 199 broad range of variables, for a considerable number of countries, over a long period of time—a task whose complexity should not be under-estimated. Indeed, in many cases we are obliged to work with a small sample of countries and a small set of time observations. This prob-lem conditions the methodology to be used (Judson and Owen 1999). Under such circumstances, any new contribution on the subject is welcome, as far as it can offer additional evidence on the behavior of these variables and contribute to suitable institutional reform. It is along these lines that our study is intended. Our study adopts the general approach previously taken by Farr, Lord, and Wolfenbarger (1998), hereafter FLW, although with a different econometric technique. We do not try to analyze the vari-ables relevant to economic growth, 2 but rather to discern the causal relationships existing among economic freedom, democracy, and growth. With this aim in mind, we have structured the article as follows. First, we provide a review of what we regard to be some key ideas in the existing research on the relationships among the three variables. Second, we define economic and political freedom and briefly explain the most relevant ingredients used to build the indexes to measure them. Third, we develop the model we use to study and analyze the different associations and statistical relationships between the variables, and we succinctly explain the methodology. Finally, we examine the results and set out our conclusions.
This paper addresses the issue of causality in the relationship between various types of institutions—namely, political and economic freedom—and long-run economic growth. It is shown that existing empirical studies of these relationships provide evidence of correlation, but not causation. Granger causality tests of freedom vs. growth, and freedom vs. investment are conducted using aggregate measures of freedom as well as underlying components of freedom when available. The results suggest which aspects of freedom are most important in fostering growth in a causal sense. The paper closes with a causal analysis of changes in the different types of freedom themselves.
The paper explores empirically the impact of preceding growth and inflation crises on the extent of economic liberalization as measured by the Fraser Institute's Economic Freedom of the World-index. We find that deep crises are conducive to market-oriented policy reforms. The paper also finds evidence for a positive impact of democratic regimes and checks and balances on the extent of economic reforms. The popular thesis that fractionalized governments have a lower propensity to reform is clearly rejected.
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In recent years, a renewed interest has been shown in trying to further comprehend the factors that determine a country's rate of economic growth. This is important since a higher growth rate means greater national output, potentially higher living standards, and an enhanced ability to attain economic and social objectives. Earlier studies of the causes of economic growth focused on the importance of increasing exogenous quantities of physical resources (land, labor, and capital) to enhance the rate of growth, while more recent evidence suggests that growth is determined by a much larger set of endoge- nously determined variables.1 Institutional factors—the political and economic customs and prac- tices that exist within countries—have received particular attention in a number of recent studies. The importance of these factors lies in the fact that all economic decisions are made within a given institu- tional setting. And while it is difficult to know with certainty how these factors influence economic growth, it is generally assumed that greater economic and political freedom act as catalysts to enhance growth. But economic growth may also, in turn, enhance economic and political freedom.2
Many empirical studies indicate that economic freedom in society is positively correlated with prosperity and growth, while democracy exhibits mixed correlations. However, these studies do not control for the possible interaction of these two types of freedoms or their respective influences on social welfare. This empirical analysis examines the interaction of economic freedom and democracy on measures of health, education, and disease prevention in society. The results imply that greater economic freedom consistently enhances these welfare measures, even among more democratic countries. Democracy has a smaller positive influence that disappears for many welfare measures in countries with more economic freedoms.
This empirical analysis seeks to determine which institutional arrangement, capitalism or democracy, tends to be more effective at improving women's well-being and promoting gender equality in society. Country-specific indexes measuring the degree of economic freedoms that exist within the market and the degree of political rights that exist within a democracy are used in a panel data analysis to explain the observed levels of various quality of life measures reflecting issues that are relevant to women. These empirical results indicate that capitalism often has a stronger beneficial impact on many aspects of women's well-being and gender equality in society.
In Two Lucky People, Rose and Milton Friedman provide a memorable and lively account of their lives, the people they knew, and the work they shared. Their involvement with world leaders and many of this century's most important public policy issues moves their memoir beyond the merely personal and makes fascinating reading for anyone interested in the history of twentieth-century ideas. "The Friedmans come across as the last Enlightenment thinkers in a post-modern world. . . . This is a book that restores your faith in reasoned discourse. . . . There really are people who believe in scholarly exchange as a way to discover truth."âDavid Brooks, New York Times Book Review "The Friedmans are a feisty couple, who clearly delight in their lives and each other. And shining through their reticence, and their conservatism, is a decency that even liberals will recognize."âMilton and Judith Viorst, Washington Post Book World "This engaging book recounts the life and contributions of one of America's most influential writers and economists in the second half of the twentieth century. And her husband's no slouch either. . . . An indispensable guide through the evolution of economic thought."âStephen Moore, National Review "A thought-provoking book and one rich in history, the personal history of the Friedmans . . . and the cultural and political history of our country."âSteve Huntley, Chicago Sun-Times Books "[Two Lucky People] is almost like a letter from a couple of old friendsâa couple of old friends who had a long, compelling intellectual journey, came to know some of the great world leaders of this century, and had 60 years of happy, supportive marriage."âN. Gregory Mankiw, Fortune "A rich autobiographical and historical panorama."âWilliam P. Kucewicz, Wall Street Journal
In the classic bestseller, Capitalism and Freedom, Milton Friedman presents his view of the proper role of competitive capitalismâthe organization of economic activity through private enterprise operating in a free marketâas both a device for achieving economic freedom and a necessary condition for political freedom. Beginning with a discussion of principles of a liberal society, Friedman applies them to such constantly pressing problems as monetary policy, discrimination, education, income distribution, welfare, and poverty. "Milton Friedman is one of the nation's outstanding economists, distinguished for remarkable analytical powers and technical virtuosity. He is unfailingly enlightening, independent, courageous, penetrating, and above all, stimulating."-Henry Hazlitt, Newsweek "It is a rare professor who greatly alters the thinking of his professional colleagues. It's an even rarer one who helps transform the world. Friedman has done both."-Stephen Chapman, Chicago Tribune
A classic work in political philosophy, intellectual and cultural history, and economics, The Road to Serfdom has inspired and infuriated politicians, scholars, and general readers for half a century. Originally published in England in the spring of 1944âwhen Eleanor Roosevelt supported the efforts of Stalin, and Albert Einstein subscribed lock, stock, and barrel to the socialist programâThe Road to Serfdom was seen as heretical for its passionate warning against the dangers of state control over the means of production. For F. A. Hayek, the collectivist idea of empowering government with increasing economic control would inevitably lead not to a utopia but to the horrors of nazi Germany and fascist Italy. First published by the University of Chicago Press on September 18, 1944, The Road to Serfdom garnered immediate attention from the public, politicians, and scholars alike. The first printing of 2,000 copies was exhausted instantly, and within six months more than 30,000 were sold. In April of 1945, Reader's Digest published a condensed version of the book, and soon thereafter the Book-of-the-Month Club distributed this condensation to more than 600,000 readers. A perennial best-seller, the book has sold over a quarter of a million copies in the United States, not including the British edition or the nearly twenty translations into such languages as German, French, Dutch, Swedish, and Japanese, and not to mention the many underground editions produced in Eastern Europe before the fall of the iron curtain. After thirty-two printings in the United States, The Road to Serfdom has established itself alongside the works of Alexis de Tocqueville, John Stuart Mill, and George Orwell for its timeless meditation on the relation between individual liberty and government authority. This fiftieth anniversary edition, with a new introduction by Milton Friedman, commemorates the enduring influence of The Road to Serfdom on the ever-changing political and social climates of the twentieth century, from the rise of socialism after World War II to the Reagan and Thatcher "revolutions" in the 1980s and the transitions in Eastern Europe from communism to capitalism in the 1990s. F. A. Hayek (1899-1992), recipient of the Medal of Freedom in 1991 and co-winner of the Nobel Memorial Prize in Economics in 1974, was a pioneer in monetary theory and the principal proponent of libertarianism in the twentieth century. On the first American edition of The Road to Serfdom: "One of the most important books of our generation. . . . It restates for our time the issue between liberty and authority with the power and rigor of reasoning with which John Stuart Mill stated the issue for his own generation in his great essay On Liberty. . . . It is an arresting call to all well-intentioned planners and socialists, to all those who are sincere democrats and liberals at heart to stop, look and listen."âHenry Hazlitt, New York Times Book Review, September 1944 "In the negative part of Professor Hayek's thesis there is a great deal of truth. It cannot be said too oftenâat any rate, it is not being said nearly often enoughâthat collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamt of."âGeorge Orwell, Collected Essays
In 1980 Friedrich Hayek wrote to Paul Samuelson complaining about the role that Economics had played in discrediting the thesis of Hayek's The Road to Serfdom. In the 11th edition of Economics, Samuelson had written that "each step away from the market system and towards the social reform of the welfare state is inevitably a journey that must end in a totalitarian state." Given the apparent prevalence of this reading of Hayek's thesis, we assess the dispute over Hayek's 'inevitability thesis' and whether Hayek's complaints were justified.
This paper outlines the alternative channels through which institutions affect growth and studies the empirical relationship between institutions, investment, and growth. The empirical results indicate that (1) free-market institutions have a positive effect on growth; (2) economic freedom affects growth through both a direct effect on total factor productivity and an indirect effect on investment; (3) political and civil liberties may stimulate investment; (4) an important interaction exists between freedom and human capital investment; (5) Milton Friedman's conjectures on the relation between political and economic freedom are correct; and (6) promoting economic freedom is an effective policy toward facilitating growth and other types of freedom. Copyright 1998 by Oxford University Press.
Log-linear methods are applied to categorical data containing economic freedom, political freedom, the level of income, and the rate of economic growth for a panel of about 100 countries from 1975 to 1992. The main results are: given economic freedom, the rate of economic growth is independent of political freedom and the level of income; given the level of income, political freedom is independent of economic freedom and the growth rate. The analysis suggests the fundamental effects of economic freedom in fostering economic growth, and a high level of income as the condition of a high degree of political freedom. Copyright 1999 by Kluwer Academic Publishers
This paper examines the relationship between economic and political freedom, focusing on developing countries. We conclude that increases in economic freedom between 1975 and 1990 are to some extent caused by the level of political freedom. This result shows up for all measures of political freedom that we employ. Our conclusion also holds for the sample without outliers. These outlying observations are identified using so-called robust estimation techniques.
[Rpt 2001]. Man, Economy and State
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Scorecard on the Israeli Economy: A Review of 1993
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Scorecard on the Israeli Economy: A Review of 1993. The Institute for Advanced Strategic and Political Studies
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