Economic Freedom and Growth

Economic Freedom and Growth

Why are some places rich and others poor?
Why are some big cities bright, and others dark? These are some of the most important
and enduring puzzles in the history of economics. Adam Smith saw these same contrasts in 1776,
and asked the same questions in his book, The Wealth of Nations. For Smith, the source
of these differences was simple:, economic freedom. In his own words, “lLittle else is requisite
to carry a state to the highest degree of opulence from the lowest barbarism but peace,
easy taxes, and a tolerable administration of justice.” Was Smith right that a limited
government that keeps the peace and administers justice is all we need for prosperity? How
would we know? The “eEconomic fFreedom of the wWorld”
report measures how a country’s policies are consistent with personal choice, private
property, and voluntary exchange, —the economic system that Adam Smith advocated. We can use
these measures to rank a country’s economic freedom and then see how freedom is related
to growth. Let’s take these rankings and separate the counties into four4 groups, from
the least free to the most free. The countries with the lowest economic freedom have the
lowest GDP per capita, but the freest countries enjoy a standard of living over eight8 times
higher. If you think that these results are skewed
by factors like geography or culture, let’s look at the Korean peninsula. North and South
Korea have similar culture, geography, and natural resources. Now, let’s look at the
peninsula at night. What happened? In 1953, Korea separated. The South chose greater economic
freedom while the North eliminated nearly every form of individual liberty. 60Sixty
years later, average income in South Korea is 10 times higher than in the North. Now, let’s look a little closer to home.
Maryland versus West Virginia. According to the reports, “tThe eEconomic fFreedom of
North America,” Maryland is the 18th freest state, while West Virginia is 40th. Why? The
West Virginia tax code makes it difficult for businesses to operate. For example, the
buildings that you see in this photo, on the Maryland side, those belong to a company that
was originally founded in West Virginia. It moved across the border so its taxes and costs
would be lower, allowing it to grow, create more jobs, and increase prosperity. This happens
all over the state, and these differences in prosperity are measurable. The result is
that per- capita incomes are over $10,000 dollars higher in Maryland than in West Virginia. Clearly, they should have followed Adam Smith’s
advice. He got it right. Individual freedom in and economic life leads to economic progress.
sSo if you care about growth and prosperity, you can’t ignore the importance of economic

31 thoughts on “Economic Freedom and Growth

  1. My question to this video is "How did Adam Smith know what parts of the world were brighter than others?" There was no space exploration or satellite imagery back then. I don't get it!

  2. From slavery to feudalism, from feudalism to capitalism, time to move from capitalism closer to direct democracy.

  3. @stutek What most free marketeers fail to tell is that money system is actually a social contract, just like the 5 year's plans in past communist countries. The significant difference is that money is (up until now) the best try to achieve direct democracy, where each $ is a vote on what needs to get done in society. But it has a fundamental flaw, the ones with more $ get more power over the ones with less $ and thus the system undermines itself due to imbalance.

  4. @bdg323
    So you prefer dictatorship of the elected elite over dictatorship of the majority?

    You do realize, that FED is already stealing from you in the form of inflation? Government imposed taxes are meant to be contribution to the work of society: healthcare, education, infrastructure. But the public has too little control over how tax money is spent.

    The reason why free markets require anti-trust laws is because everyone knows that collaboration is much more efficient then competition.

  5. @bdg323
    I do hope to believe in a fair sharing of freedoms and responsibilities. I do believe that constitutions are a great, since most of them formulate very high standards of values and morality.

  6. @bdg323

    I do have big problem with government institutions not working in the best interest of their citizens. Are governments still serving their citizens or are citizens enslaved to the big corporate interest? And I do not recall a democratic workplace, all the corporations I know of, are some sort of a dictatorship and / or wage-slavery. If we had true free markets we all would be independent contractors.

  7. @bdg323
    1st: Yes all workers should be independent contractors, that would be true freedom.
    2nd: Go check out this video ( Dan Pink, motivation, /watch?v=rrkrvAUbU9Y ), it shows that money is good incentive for non intellectual work, while it can be contra-productive to try to stimulate creative work with money.
    3rd: Every aggression provokes defensive mechanisms – so the more unhappy the workers get, the stronger the unions will be.

  8. @bdg323
    The video is on youtube, which does not let me post direct link, so i just posted the part after
    Full title is: 'Daniel Pink on the surprising science of motivation'

    Independent contractor: a worker that is on equal terms to his employer. Thinking a bit more about it – would be cool if there were no corporations at all, just individuals that exchange goods and services?

    Unions loosing power, since workers are disappointed them, but my argument about aggressiveness stands.

  9. @SkepticThink
    The corporate interest (profit) is conflicting with the interest of the worker (higher wages). If both actors – a corporation and a worker – had equal power the ultimatum game might find an equilibrium. But that is impossible since the corporation does not lose if 1 worker decides not to take their offer. Only organized workers can stand up in an ultimatum game, since both actors lose only if none of the workers accepts the ultimatum.

  10. @SkepticThink
    It is a race of concentration of power. There can be no balance in an organisations like that.

    The only possible balance I can imagine is we all take on roles of independent contractors (freelancers) and exchange goods and services via friend to friend networks.

    Check out video titled 'what is ripple pay'.

  11. Ripple pay is a system for creating credit. Instead of the FED ponzi scheme we can create our own credit.
    I imagine that there will be no employer and employee relation. Instead any individual can sell goods and services for as much credit as the buyer is willing to pay and as much as the seller trusts the buyer to repay with other goods and services directly or trough circular barter.
    The idea is to lose centrally managed credit creation. I am still in a process of designing the details tho.

  12. @stutek – This system makes two errors. First, debt does not create wealth. Creating credit does not create an incentive to produce, and thus, productivity is destroyed. The second error is the classic calculation error. Since the system is entirely zero-sum, there is no way to calculate profit and loss. Because of this, the system does not allocate resources properly, much less ideally.

  13. @Slipknotyk06
    1st: Debt does not create wealth? Tell that to all the institutions that issue bonds based currency – including the US FED.

    2nd: My proposal is a zero-sum economy if and only if our wants are limited. If our wants are limitless then this system is not zero-sum. If the wants are limited, it is a sane proposal to comply to the rules of supply and demand.

    My idea might not the best system out there, but it is far better then the current hamster-wheel economy we are currently in.

  14. @stutek
    1. No, Debt does not create wealth. Production does.
    2. Your proposal remains zero-sum either way. If our wants are limitless, then so is debt. Since all supply is created on debt, the debt always equals supply. Thus, a zero-sum economy.
    The hamster wheel economy is the result of debt. If debt is so productive, then you need to take a realistic look at the current economy. Unregulated expansions of credit create unsustainable booms, and thus, collapses.

  15. @Slipknotyk06
    1. Exactly my point. Currently almost all money issued is based by bonds or created trough loans in banks. Thats why we are in a mess right now.

    2. I do not see a problem of a zero-sum economy – as long as the demand is getting filled we all should be happy, right?

    Are you suggesting that demand and supply is a bad strategy for managing production?

  16. @stutek
    1. You fail to distinguish investment (beneficial) from consumer debt (harmful).
    2. Zero-sum is a problem because the only way for individuals to succeed is at the DIRECT expense to others. Also, debt WILL exceed material wealth, since goods get destroyed with use.
    3. The problem with your strategy is that it severely distorts price signals. Undistorted price signals are necessary for a viable economic strategy.

  17. This is fascinating! Europeans believe that the recipe for prosperity and freedom is:

    1) a steeply progressive income tax
    2) a vast welfare state (oops, I meant "public sector")
    3) a regulatory state, to protect workers, consumers, and the environment from the depredations of corporations, since they are based on pure greed
    4) government investment in energy, education, and other important public endeavors.

    Millions of people in the U.S. believe this, too!

  18. Are you Scandinavian? If so, then you are very fortunate. You have the safest roads in the entire world — and that's just the beginning. How do y'all do it? What is your secret to safety and happiness?

  19. In America, we have to own guns because there are so many boyz from broken families that they become violent criminals. In America, millions are denied health insurance by corporations. In America, we have Mississippi, where almost all the people are obese, uneducated, and poor.

    In Sweden, Finland, etc., everyone respects one another. You don't need to own a gun to protect yourself. Everyone has access to medical care. No area of Scandinavia is like Mississippi. We need your government!

  20. Not necessarily. This is why a small bit of printing money is a good thing. Not to cause inflation, but to stem deflation. It's a balancing act. As long as the supply of currency is close to matching the shift in services and products offered, everything will run smoothly.

    As for loans, of course they should exist; but as you point out there's a massive difference between investing and buying a new plasma tv on a credit card. We currently encourage the latter way too much.

  21. Thank the soldiers who came and fought for the country not their own.
    If it wasn't for them. We'd be all stuck in Communism Korea.

  22. Why does the currency have to stay at a constant level? How do you even define that constant level of purchasing power? Modern cars are better in every aspect than old cars, should the average new car cost more than the average old car? Do you think people are so stupid that they can't just adjust their prices every now and then to accommodate the deflation? It just seems that allowing for inflation would provide no benefit and would open the door to the massive inflationary abuses we see today.

  23. They can, and I'd prefer deflation over inflation (to a degree), but a stable currency makes more sense in my mind. No need to adjust prices because of excess or too little money. It's a balancing act merely in the sense of keeping the amount of money in ratio to the available goods and services around the same.

    If you do that, you're solid. With deflation, it makes debt a bit too risky (because interest rates should be higher).

    You are right that allowing it to begin with opens the door..

  24. So what if it makes debt riskier? Also, what is to stop a bank from offering zero interest or even negative interest? They could simply lend their money based on 'real interest' meaning they could adjust the nominal repayment amount each year to make up for the deflation. For example, "We'll loan you $30,000 in 2013, and we want you to repay the equivalent of 40,000 2013 dollars by the end of 2033."

  25. a lot of Maryland's higher gdp per cap is caused by federal jobs near DC ( I live in a county near DC and a lot of the neighborhood has 6 figure federal jobs )

  26. So… you saying the Saudi Arabia is rich because they sooooooo free. Land of freedom. Indeed. No need for oil to be rich. You just need to be as free as a Saudi Arabia. Great.

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