Index of Economic Freedom

The Heritage Foundation has recently brought out the 2007 version of their annual Index of Economic Freedom. This assesses and scores countries according to their performance on a range of factors, and then combines them to provide an overall score for each country's degree of economic freedom. Full details can be found at the excellent website - - that now accompanies the book.

A couple of things leapt out from an initial scan of the analysis:

  1. The top seven countries (Hong Kong, Singapore, Australia, USA, New Zealand, UK and Ireland) were all Anglophone.
  2. The way in which the Freedom from Government category was calculated - primarily based on tax revenues as a proportion of GDP, but also taking account of the scale of nationalised industries - yielded improbable results, such as the suggestion that countries such as Zimbabwe, Burma, Venezuela and China are relatively free from government, which would be news to the inhabitants of those countries.

With regard to the latter point, the authors do not claim that this category is anything other than it is. The title is perhaps a misnomer, probably better replaced with "Size of Government". Even that alternative title would not reflect the possibility that a government (for instance, the pre-war National Socialist government of Germany) could dominate, through direction and enforcement, all activities within its borders without having to own much or tax much. One should bear in mind, when considering the numbers, that there are many incalculable factors such as this that simply cannot be taken into account, but the method of calculating that which is calculable is set out clearly, and the reader is free to use the numbers so derived to whatever ends they see fit. The conclusions of the authors of the Index might need putting into context, but they are not invalidated.

With regard to the former point, the dominance of those countries whose political and economic systems derive from the Anglo-American model does not necessarily indicate the superiority of the model. Prima facie, it proves only that those economies value the same things that the authors of the Index value, to a greater extent than other cultures. Nevertheless, it is interesting to note the greater correspondence amongst this group than amongst other groups, such as members of the European Union, who are supposed to share cultures and economic models. In fact, the wide gap between the scores of liberal countries such as Britain and Ireland, and those of illiberal countries such as France and Italy (respectively in 45th and 60th place, with such economic giants as El Salvador, Armenia, Uruguay, Georgia, Botswana and Bahrain above them) probably does illustrate a real gulf in the philosophies of members of a club aiming for ever closer integration on the spurious grounds that there is an homogenised European social and economic model to which we all aspire. Whatever the rights and wrongs of the different philosophies, it is clear that culture, language and historical friendship are stronger ties than geographical proximity, and that the Anglophone countries could more easily work together on a shared philosophy than they could with their geographical neighbours.

As it happens, the analysis provided with the Index allows stronger conclusions to be drawn about the virtues of the competing economic models than simply to observe the similarities and differences without judgment of relative merit. This analysis shows that there are strong correlations between the economic freedom scores and (a) per capita GDP, (b) employment, (c) inflation (negatively, i.e. the more free, the lower the rate of inflation), and (d) reduction of poverty.

This still does not demonstrate that economic freedom enhances happiness, but only those who do not understand economics (such as Oliver James, who blames liberal capitalism for a variety of ills in his new book Affluenza) expect free markets to deliver such subjective benefits. Freedom offers people the opportunity to lead their life how they see fit and to pursue their ends by whatever means they choose (provided that those means are compatible with the freedoms of others). Some people may well make bad use of their freedom (for instance by pursuing materialist illusions), but that is hardly the fault of freedom, any more than, if someone jumps off a cliff, their death is the fault of the cliff.

Maybe, by expecting people to find their own answers, liberal capitalism exposes more harshly those who cannot think straight for themselves. It is an important moral adjunct to economic freedom that those who understand how to benefit from the system should be compassionate towards those who do not. But the alternative, of having our ends, means, questions and answers decided for us by a higher authority, not only suppresses the hopes and happiness of the majority who can think for themselves, but stultifies the material progress that is dependent on the rich variety of human endeavour. Anyone who fools themselves that people would be happier under a collectivist system deserves to spend some time in a Gulag.

We cannot make people happy, but we can give them the opportunity to pursue their own happiness (or more precisely, the reduction of dissatisfaction). That is what money and markets are about. The analysis accompanying the Index shows clearly that freedom is very effective at providing those means (wealth, employment, a stable economy where the products of one's labour retain their value, and freedom from want). And what Europeans often define as Anglo-Saxon culture is equally clearly effective at delivering freedom.

Many people put this Anglophone liberalism down to the legacy of Adam Smith. The implication is that the system is peculiar to us, and not applicable to them. In fact, the real contrast in the Western world is between the Lockean conception of the sovereignty of the individual and its embodiment in the common law, compared to the Rousseauian view of the relationship of the individual and the state, and its embodiment in Napoleonic law.

Though these contrasting philosophies are most strongly associated (respectively) with an Englishman and a Swiss living in France, there is nothing inherently British or European about them. Many of the great liberal thinkers were continental Europeans, from the late Spanish scholastics, to the French Physiocrats, to Wilhelm von Humboldt, to the Vienna School. Conversely, Smith's Wealth of Nations, though a useful amalgam of liberal philosophies developed to that day, also added his own significant mistakes that were to provide the basis for the collectivist cul-de-sacs that followed in the nineteenth and twentieth centuries. It was the wrong turn taken after the French Revolution, exported across most of the continent by Napoleon, and then never subsequently challenged, that created the illusion that there was somehow a cultural difference between the Anglo-Saxons and their European neighbours.

It is long past time that Europeans looked at the history of the nineteenth and twentieth centuries, recognised that the social-market model is simply a mistake, and adopted the liberal approach that has proved itself time after time. The Anglophone countries should lead the way by ever closer cooperation (without the need for centrally imposed harmonisation), welcoming into the club any members that are prepared to operate according to those shared liberal values.