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A leftist view of the Economic Freedom Index

April 12, 2005

I found a interesting critique of the Heritage Foundation's Economic Freedom Index written by left-wing economist John Miller. On some issues he actually agrees with my critique and he does actually make a reference to me, but on other issues he is a bit confused.

One thing that did surprise me was that he did not try to argue that the welfare state actually increases economic freedom, which many left-liberals and socialists argue. But that still does not mean he does not have a libertarian definition of economic freedom. Indeed he refers to the libertarian conception of economic freedom as "Economic freedom for corporations".

His primary critique of the index seems to be that economic freedom is not defined as adherence to democratic principles, illustrated by the fact that the two freest countries according to the index are Hong Kong and Singapore, neither of whom are fully democratic. They are according to a index measuring the degree of democracy (and which defines democracy as freedom) both only "half-free". But for one thing it is hardly self-evident that democracy should be equated with freedom and even if we for the sake of the argument accepted that, democracy could hardly be classified as economic freedom , much less the only criteria of economic freedom. He then agrees with my critique of the bizarre methodology in calculating the burden of government spending as the change in government spending and the equating of the burden of taxation with only 2 arbitrarily selected tax rates, completely neglecting to what extent these rates are applied and the tax rates on the things which the selected tax rates are not applied.

And he also agrees with my critique of the neglect of so-called industrial policy, although in that segment he falsely asserts that the success of the East Asian tiger economies can be attributed to that, a assertion which has no valid theoretical or empirical (The most successful East Asian economy is Hong Kong, which has had no industrial policy) grounding. He also agrees with my critique of the informal market category and in that paragraph he does make a reference to me: "Even right-wing economist Stefan Karlsson of the libertarian Ludwig Von Mises Institute has criticized the index on this point.". 

In the final paragraph he points out that the correlation between economic growth and the economic freedom index ranking is non-existent or even negative, that is that countries considered unfree probably have a higher average growth rate. He points to the high growth rates of "unfree" economies like China, India and Vietnam. This finding however does not disprove that economic freedom boosts growth because for one thing the Heritage institute ranking is very flawed and underestimate the relative level of economic freedom in China, India and Vietnam and other poor countries. And secondly there are of course other factors than economic freedom which is relevant. In particular, poorer countries generally have higher growth than rich countries not because they necessarily have better economic policies, but because they can benefit from western technology already utilized by the west and given their current low income levels their percentage gains from increased trade will be bigger than for richer countries.

The funniest error of his text is however when he tries to give a empirical example of a free economy with slow growth. His example is: Estonia!?! Say what? Estonia has during the latest 5-year period had a average annual growth rate of 6.5%. That may be slower growth than in China and a handful or so other countries, but it is higher than in the vast majority of countries, particularly if you take into account the fact that Estonia's population is shrinking, making Estonia's relative GDP/capita growth even higher.

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