Economic and Political Freedom: A Difficult Mixture

Since 1995, the Heritage Foundation and the Wall Street Journal have published an annual Index of Economic Freedom (available at www.heritage.org). This index measures the extent of economic freedom throughout the world. The idea behind this effort is that economic freedom expands as people are allowed to engage in economic activity free from governmental control.

The Index of Economic Freedom appraises the individual nations of the world in terms of ten criteria. Factors that increase economic freedom within a nation are lower tariffs and tax rates; less inflation; less government spending and regulation; and fewer controls over foreign investment, prices, and wages. Other factors that increase economic freedom are fewer restrictions on banking and credit, stronger protection of private property rights, and less black market activity (black markets, after all, arise primarily to avoid high taxes and stifling regulations).

The Index of Economic Freedom shows that throughout the world, nations with more economic freedom are wealthier than nations with less economic freedom. The correlation between economic freedom and wealth, moreover, is strong. There are no wealthy nations that have little economic freedom. While there are some relatively poor nations that have high economic freedom, these are nations that only recently embraced economic freedom and are growing rapidly now in response.

Despite the strong correlation between economic freedom and prosperity, economic freedom seems to be difficult to attain and hard to maintain. Over the past year, measured economic freedom increased for seventy-three nations and decreased for fifty-three. Moreover, only seventy-one nations were classified as free or mostly free, while eighty-five nations were classified as unfree. The record over the period during which this index has been compiled does not show any strong, one-way movement toward economic freedom.

In his widely acclaimed book published in 1992, The End of History and the Last Man, Francis Fukuyama argued that economic freedom and political democracy jointly represented the wave of the future. Fukuyama predicted there would be a confluence of economics and politics, with liberal democracy standing at the end of history. Economically, only capitalism could deliver the goods. Politically, only democracy could satisfy our desires for respect. Democracy in the political sphere, and capitalism in the economic sphere, have endured the distillation of history and have emerged as the clear winners with no sign of anything superior on the horizon.

It might seem intuitively apparent that capitalism and democracy are complements in a general constitution of liberty, but intuition is not always accurate. While capitalism would seem to be the expression of freedom in the economic sphere, democracy is more problematic. While democracy may be necessary for securing freedom, it is not sufficient for doing so. The constitutional framework of democratic governance is important as well. A difficulty arises because economics and politics do not represent independent spheres of action within society. If they did, it would be possible to add measures of economic freedom to measures of political freedom to derive a measure of total freedom within a society.

With interdependence, however, this cannot be done. Economic freedom is affected by political action, and democratic action may well undermine economic freedom instead of supporting it. Just now, for instance, the attorneys general of nine states are proceeding with an antitrust suit against Microsoft. Through their suits, these attorneys general seek to transform Microsoft from an independent company into a form of public utility. Among other things, they would transfer its primary products into the public domain and would eliminate its ability to innovate. California and Utah, where several of Microsoft’s chief competitors have corporate headquarters, are among the states that are sponsoring this case. These attorneys general are seeking to impose a hefty tax on Microsoft, a good deal of which would end up in the pockets of such gigantic companies as AOL Time Warner, Sun Microsystems, Oracle, and Apple. In this instance, then, the democratic process is serving as an instrument to abridge economic freedom.

It has long been noted that antitrust actions are rarely about protecting competition and are mostly about protecting less successful competitors from superior competition. Yet this is always a possible outcome of democratic processes, and makes it difficult to presume a ready and easy alliance between economic liberty and political liberty. Democracy may promote economic liberty, but it may also clash with it. Which happens and to what extent depends, among other things, on the form of constitutional limits on democratic outcomes. We should never forget that Adolf Hitler emerged from a democratic maelstrom.