UPDATED: Economic Indices Ignore ‘Century of the State’

Australia, New Zealand, Ireland, Canada and Chile have leapfrogged over the United States on the Fraser Institute’s index of economic freedom.

“In this year’s index, Hong Kong retains the highest rating for economic freedom, 9.05 out of 10. The other top 10 nations are: Singapore (8.70), New Zealand (8.27), Switzerland (8.08), Chile (8.03), United
States (7.96), Canada (7.95), Australia (7.90), Mauritius (7.82), and the United Kingdom (7.81).”

Forty-two data points are used to construct a summary index and to measure the degree of economic freedom in five broad areas:
1 Size of Government: Expenditures, Taxes, and Enterprises;
2 Legal Structure and Security of Property Rights;
3 Access to Sound Money;
4 Freedom to Trade Internationally;
5 Regulation of Credit, Labor, and Business.

With some variation, The Heritage/WSJ’s economically freest countries are these:

1- Hong Kong
2- Singapore
3- Australia
4- New Zealand
5- Ireland
6- Switzerland
7- Canada
8- United States
9- Denmark
10- Chile

Lest you forget, these indices provide important but woefully incomplete data. Long ago, Pierre Lemieux, a libertarian Canadian economist (a friend too) explained:

“If ‘economic freedom’ is inseparable from the rest of human liberty in a social context (using one’s property to express dissenting opinions, travel, have sex, grow marijuana, store one’s firearms, raise funds from “public” investors, etc.), the freedom indexes are off the mark.

“This explains why some countries ruled by hard tyrannies (as opposed to the soft, Tocquevillian brand we know in the West), where nobody in his right mind would want live except to make a buck as a privileged foreigner or a member the local nomenklatura, make it to the top of the list. Who would want to live in Hong Kong (ranked 1st of 151 countries in the HF/WSJ index), that is, under one of the worst tyrannies on earth, and so much so for its very efficiency? Who would want to be a peasant under other Asian tyrannies like Singapore (ranked 2nd)?”

“The selective definition of economic freedom also explains why the indexes show growing economic freedom while everybody who lives in the real world must know that the 20th century, rightly described by Mussolini as ‘the century of the state,’ is continuing in the 21st with a vengeance. During the 12 years of the HF/WSJ index, economic freedom is supposed to have increased. For example, over that period, both the U.S. (now ranked 9th) and Canada (ranked 12th) have improved their scores by 11%, while in both countries (and others) the Surveillance State was growing uncontrollably, including on financial markets. In the U.S., so many business executives are going to jail that perhaps repression will have to be outsourced to China.”

“Thus, the ‘economic freedom’ that is being measured is a rather special animal: it is the freedom to do what is narrowly defined as freedom in the statistics underlying the index. In practice, the freedom indexes encompass some general conditions for economic freedom (like a stable currency, or narrowly defined ‘property rights’), specific government restrictions or controls (on foreign investment, for example), and consequences of state intervention (the informal economy or corruption). And, of course, the weights assigned to the components of the indexes are arbitrary.”

“I am not saying that such indexes are totally useless. They do regroup variables that are correlated with GDP per capita and its growth, but keep in mind that GDP is a very unreliable construct that reveals basically nothing about the general welfare, and is based on arbitrary value judgments (this is pretty standard welfare economics: see my upcoming article in The Independent Review). The indexes may correlate with the difficulties the businessman will have with local bureaucracies. They may even indicate opportunities for investors to make money in limited contexts, assuming the information has not already been incorporated in prices. The HF/WSJ publication even contains some useful country summaries and international statistics.”

“But the freedom indexes have little to do with ‘economic freedom’ as we use the term in politics, economics and philosophy.”

UPDATE (Oct. 17): Interestingly, John Stossel has addressed Myron’s question:

“This evening on Eric Bolling’s show, Follow the Money, when I argued that economic freedom brings prosperity, lefty lawyer Ron Kuby said I was ‘full of it’ because the freest countries are not at the top of a list of the world’s richest countries:

1- Monaco
2- Liechtenstein
3- Norway
4- Luxembourg
5- Channel Islands
6- Qatar
7- Bermuda

But this is deceptive nonsense, like so much of what lefty lawyers say. It’s no surprise that small oil-rich nations, tax havens, and countries with old wealth have the highest per capita income. But the freest counties are all near the top of the list. Here’s Heritage’s list of the least economically free countries:

172- Democratic Republic of Congo
173- Libya
174- Venezuela
175- Burma
176- Eritrea
177- Cuba
178- Zimbabwe
179- North Korea

Do you want to live in any of those counties? I sure don’t.”