Economic freedom is, as Martha Stewart might say, a good thing. That's not just my bias as a libertarian: I've got science on my side.
In a new study published in Contemporary Economic Policy, two of the authors of the annual Economic Freedom Index set out to see how other researchers were using their work. Specifically, West Virginia University economist Joshua Hall and Southern Methodist University economist Robert Lawson found 402 scholarly articles that use some aspect of the index, which the Fraser Institute has published each year since 1996. The institute broadly defines economic freedom as “the extent to which you can pursue economic activity without interference from government, as long as your actions don't violate the identical rights of others.”
Once Hall and Lawson identified the articles citing the Index, they whittled the list down to 198 papers that use it as a substantive variable in their analyses, usually trying to correlate economic freedom with some other outcome, such as economic growth, income levels, productivity, poverty, inequality, and so forth. Based on the effects identified in each study, Hall and Lawson sorted the articles into three outcome groups: good, bad, and mixed. An example of a good outcome would be a 2008 study in the Journal of Economic Behavior and Organization that found that “those societies that rely upon individual economic freedoms to promote women’s well-being have been more successful than those societies relying upon greater political rights.”
Similarly, a 2006 study published in the Journal of International Trade & Development correlated child labor rates with the index's ratings of countries' openness to trade. From 1960 to 2000, the article reported, “Child labor force participation rates declined on average by 3 percentage points per decade while trade openness increased on average by 6 to 7 percentage points.” A third study, published in Contemporary Economic Policy in 2008, found that economic freedom correlated with greater protection against the extinction of species. Insecure property rights, for example, are associated with increased deforestation.
Economic freedom isn't all beer and pizzas. In 2007, two economists from Lund University reported in the Journal of Economic Literature that the freedom to trade internationally was associated with higher levels of income inequality. Another study finding a bad outcome was published in the Annual Review of Public Health in 2008. It reported that economic freedom contributed to rising obesity by lowering food prices, empowering women to participate in the paid workforce, and producing fewer restrictions on the entry of new businesses selling food into the marketplace. Likewise, a 2003 study in the Journal of Economic Perspectives found that people living in developed “countries with more price controls are much less obese than people in countries without price controls.” In other words, freedom tends to make people fat. A sociopolitical recipe for reducing obesity might involve establishing price controls, forcing women to stay home, and imposing regulations that limit the creation of new businesses.
Once Hall and Lawson finished sorting through the relevant 198 articles, they found that two-thirds (134 articles) reported good outcomes correlating with higher levels of economic freedom. Twenty-eight percent (56 articles) reported mixed outcomes and just four percent (8 articles) found economic freedom correlated with bad outcomes. “The balance of the evidence is overwhelming," Hall and Lawson conclude, "that economic freedom corresponds with a wide variety of positive outcomes with almost no negative tradeoffs.”
In that case, here's another piece of good news: According to the latest Economic Freedom Index, “average economic freedom rose from 5.30 (out of 10) in 1980 to 6.88 in 2007. It then fell for two consecutive years, resulting in a score of 6.79 in 2009 but has risen slightly to 6.83 in 2010, the most recent year available.” Less happily, the United States has fallen from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. After a long stint as third freest economy in the ratings, the U.S. is now number 18.