Examining the Hayek-Friedman Hypothesis on Economic and Political Freedom

0:00So I'm going to talk about a paper on what I'm calling the Hayek-Freedman Hypothesis. The first version of this paper was called the Freedman Hypothesis. And then Ben Powell read an early draft and wrote me an email and said, well, you need to show Hayek some love. After all, Hayek really said the same thing about 18 years earlier in the Road to Serfdom. So I said, OK, we'll call it the Hayek-Freedman Hypothesis. I'm sure other people have said it, but that's all the names I'm going to put on it for now. I should recognize my co-author who's in the room, Jeff Clark, from University of Tennessee, Chattanooga. So if you have any damning criticisms, direct them to him afterwards. This is the 50-minute PowerPoint, so I'm going to do it in 15, so I might be a little quick, just give you an idea of what the paper's about.

0:49These are some quotes that basically motivate the paper. The first one is from Hayek and the Road to Serfdom. The second is from Capitalism and Freedom, and in both of these works, Hayek and Friedman make an empirical claim about the relationship between economic freedom and political freedom. In a nutshell, the claim is that economic freedom is a necessary but not sufficient condition for political freedom, that if you're going to have political freedom, you must have economic freedom. And that's the claim that Friedman made in this quote. If you read, I know of no example in time or place of a society that has been marked by a large measure of political freedom and that has not also used something comparable to a free market.

1:37So a free market is a necessary condition for political freedom. They're both a little bit fuzzy sometimes about what they exactly mean by economic freedom and political freedom, particularly political freedom in Hayek's world, World, especially writing right after World War II. He seemed to be more interested in the formal trappings of political freedom in the sort of democracy sense, whereas Friedman is clearly a bit broader in terms of political freedom. At this time, he was more including things like civil freedoms and freedom of speech and religion and so forth. But in any case, they're both making claims that the liberal society, the free society, that these two dimensions are linked. in this peculiar way. Let me use this as, I think, a simplified version. I just saw a presentation the other day where the fellows stood up and said every presentation should have a two-by-two matrix, so I'm going to follow that from now on.

2:40Two-by-two matrices, of course, simplify things, they oversimplify, but this gives you an idea of what I think the hypothesis that Frieden and Hayek had was all about. So, across the horizontal we have economic freedom, and the left is no economic freedom, and on the right is economic freedom, and in the real world it's a continuum, we'll talk about that in a minute, but on the vertical axis it's the political freedoms dimension, so politically free is up and not politically free is down, and if you think about some of the combinations, for example, the upper right-hand quadrant, the economically free, politically free quadrant, places that combine both political and economic freedom are pretty easy to find. The United States, at least in a relative sense, don't throw any bricks at me. In a relative historical sense, the United States is both liberal free politically and economically, at least relative to anywhere else on earth, just about. There's no shortage, alas, unfortunately, of examples in the lower left-hand quadrant of countries

3:43that have been repressive in both dimensions. The Soviet Union is a classic example, others Today, you can find like that. There's also plenty of examples in the lower right-hand quadrant, and it's important to note that the Freedmen especially was quite clear that economic freedom can be combined without political freedom. If you have economic freedom, that doesn't necessarily mean you're going to have political freedom in Singapore and Hong Kong and many of the oil-rich nations or countries today that typify a They're pretty much a market economy, I mean, at least in a relative sense, a free market economy by today's standards, and yet they're politically repressive. They're not democracies, and certain basic civil liberties tend not to be widely respected.

4:31So that combination in the lower right-hand quadrant is not a problem in the Hayek-Freedman worldview. I don't think that... Friedman almost celebrated, like Hong Kong, and he kept saying over and over again, Hong Kong is so economically free, and by the way, they don't have a democracy and so forth, so that lower right-hand quadrant was not an offensive combination in their way of thinking. It's the upper left-hand quadrant that is the problem, and the upper left-hand quadrant represents country experiences where you're trying to have a controlled economic environment, repressive economic environment, but have a politically liberal, politically free environment at the same time. And the combination of what Hayek and Friedman both suggested was problematic.

5:17And again, Friedman's language was, I know of no example of a place that had... Basically, I know of no example of the upper left-hand quadrant. When I first started to think about this, I said, well, geez, when he wrote that in 1962, I mean, India would have come right to my mind. I mean, India, the world's largest democracy, reasonably free politically, freedom of speech, and so forth. And yet, in the 1950s and 60s, India was borderline Soviet in its economic regime, so just on the face, it was kind of, you know, you can think maybe there are examples of countries that have tried to have political freedom, but not economic freedom, okay? So that's the sort of framework. This paper is actually an empirical paper, though. I wanted to empirically look at this hypothesis.

6:05So I collected data. You won't be surprised to learn if you know about my background. I use the Economic Freedom of the World Index, published by the Fraser Institute and written by a brilliant young scholar at Auburn University. And the Economic Freedom Index is horizontally there. I've standardized it and centered it on zero, so basically it's zero mean and one standard deviation. One is standard deviation and the Political Rights and Civil Liberties Index from Freedom House, pretty common if you know about these indices, it's a long-running survey that's done out of New York on political and civil liberties and I use the average of those two. And again, I standardized that and centered it on zero so that these two scales are comparable.

6:50And so, and I've sort of drawn this, so the quadrants are still the same quadrants from the previous two by two matrix are sort of represented here, There are countries up in the upper left-hand quadrant right off the face. About the data itself, there's 815 dots there because I have data for 1970, 75, 80, 85, 90, 95, 2000 and 2005. As you get closer to the present, there are more countries represented, so I think I've got 50 or 60 countries in 70.

7:40By the time you get to 2005, there are 120 or so countries represented in the data. So there's about 815 cases where I've got data on the economic and political freedom environment in the place over time. That's the regression plot. This is the only paper I've ever written where there's no regression in the paper. This is not in the paper. And the reason is because the Friedman-Hayek hypothesis is not saying that there is a positive relationship between economic freedom and political freedom. and Political Freedom. There is. It's been well demonstrated by numerous scholars in political science and comparative economics. There's, you know, countries that are liberal in one dimension tend to be liberal in the other and vice versa.

8:29So there's nothing particularly interesting about this relationship in my mind. And again, it's not what Hayek and Friedman really were saying. They had this necessary but not sufficient kind of thesis. A straight line regression doesn't really get at that necessary but not sufficient kind of hypothesis. So anyway, what I wanted to do is I wanted to try to operationalize the hypothesis. And Friedman's quote is a bit more specific. If you recall, Friedman basically said, It's impossible for countries with a large measure of political freedom to exist without something comparable to a free market. So what I wanted to try to do is operationalize what does it mean to have a large measure of political freedom and what does it mean to have to be without something comparable to a free market.

9:19So those are words, but I needed to turn those words into numbers, I need to operationalize that numerically. So, somewhat off the top of my head, I decided that large measure of political freedom meant that your political freedom score was one standard deviation above average. PF is greater than 1, okay? I don't know, standard deviation, that's big. So a large measure, if you're more than a standard deviation above average, you've got a lot of political freedom. So I just stipulate that, pulled it out of, you know where, I'll tell you that. Now what does it mean to be comparable to a free market? Comparable is weaker. It's not large measure, comparable. So I said, well, comparable to a free market would be, I don't know, maybe a half a standard deviation above average, right? I don't know.

10:05And then, of course, it's without something comparable to a free market. So I wanted everybody less than a half a standard deviation above average without something comparable to a free market. So it turns out, in the 815 cases that I have, there are 248 cases where I've got large measures of political freedom on one hand, and there are 550 cases where I've got not something and Comparable to a Free Market and the intersection of those two is 76 country cases and I think it represents 30 or so distinct countries but 76 examples. So using sort of my first pass quick just guess about the Hayek quote there, the Friedman quote, I came up with 76 countries examples and Friedman said there should be zero because memory says I know of no example in time or place so I found 76 examples in time and place that violate the Friedman hypothesis, at least using the thresholds that I just used, which I thought were reasonable in my first pass.

11:02As I kept circulating the paper, my co-author kept saying, well, why'd you pick those numbers? Why don't you go with other numbers? And a few other people said, I think this number would be the right threshold and so forth. And it's kind of subjective. So I went ahead and I ran the numbers using multiple different thresholds. If you don't like the 1 and the 0.5 that I first chose, Here's a matrix that gives you sort of the idea, and I shaded in where you get the zeroes, so the zeroes are, that's basically where Friedman was right, and the closest you can get to is one, one for political freedom works, and then negative, once innovation below average for economic freedom. To me, once innovation below average is not comparable to a free market, so to make Friedman right, and let's face it, I kind of wanted Friedman to be right, and Hayek, you have to really push the data more than I think it makes sense to do if you use a reasonable reading of that quotation.

12:01So I think Friedman was literally incorrect and I think probably what happened is in the Capitalism and Freedom, which is a book written primarily for lay audience and lectures for lay audiences more than professional audiences, a little bit of a rhetorical flourish on Friedman's part to say, I know of no example, even again, at the time there was India, there were examples, Israel in other cases. So, I think he oversold his case. The fallback position, you don't need to see that. The fallback position is that if you look through time, the number of violations is diminishing. And so I think the fallback position, to sort of resurrect the Hayek-Freedman hypothesis, as I'm calling it, The fallback position is that the combination of no economic freedom with political freedom is not sustainable.

12:54Then over time, that combination just doesn't survive very well. If you think about India as a case, and Israel, both examples of countries that had borderline Soviet economic regimes. I mean, the central planning in India and Israel in the 50s and 60s and into the 70s was, I mean, it was Soviet-like, right? But they were liberal democracies with freedom of speech and press and religion and so forth, you know, pretty much. So that combination, I would suggest, I think Friedman would agree, is just not sustainable. And if you look at what happened in both countries, they both have liberalized their economies to match that, to match each other. Essentially, in that matrix, they moved from the upper left-hand quadrant to the upper right-hand quadrant in both cases.

13:41And then the last part of the paper, this is just doing some stuff, you know, is I looked at a few cases just for fun because it's kind of neat to look at the journeys that different countries have taken. Israel, this is Chile. Chile started in the lower left, went to the lower right and kind of ended up in the upper right. Never ventured into that upper left quadrant. This is the Israel example. You see Israel dallyed up there in the upper left for a long period of time, tried to have liberal democracy but repressive economics, and it just didn't work for them. The economy was terrible. You remember the Israeli economy in the 80s. It was just a disaster, and they finally started reforming. And now, when you think of Israel today, you think of Israel as being a modern market-type economy. It's not Galt's Gulch, but it's a good market economy.

14:28When I, you know, people that are older, my age or older, think of Israel as a basket case. Remember the old, you know, it was horrible. And then you can see Venezuela. Venezuela is going the other direction though. They started in the upper right, they went to the upper left, and now they're sinking to the south and going, and it's very bad. Taiwan, Singapore are in there too. So there's a few case studies in the paper that I think are thought provoking. Stop Provoking, and if nothing else, again, this is the lowest tech paper I've ever written, no regressions, no nothing, but it's probably the most stop-provoking paper I've ever written because it's just kind of interesting to think about how countries try to organize themselves politically and economically.