The Role of Freedom in Economic Well Being: A Look at Evidence

0:00Since Ed mentioned that I'm from New Orleans, I have to tell you my New Orleans joke. George Bush was thinking of invading New Orleans because we have all sorts of weapons of mass destruction and chemical weapons like Tabasco saw, gumball, and things like that. And some moderate member of his administration said, No, no, George, don't invade. Send inspectors as a moderate way of doing that. And George said, No, no, no, we tried that. We sent inspectors down there. The talk that I'll be giving today is based on a book that I co-authored with James Wardney and Robert Lawson called Economic Freedom in the World. Before I go any further, I'm going to be showing some slides later and I looked at them from the back of the room and you can't see them.

0:53So I would ask everyone who's not in the first 10, 12 rows to come down this way if you want to see what I'll be putting up. And I'm told that there will be test exam questions based on this stuff, so you better get down here so you can see it. Because it's silly to attend a lecture and not be able to see what the lecturer is trying to show you. So please, let's say that guy in the back with the yellow shirt and the part with the black, if you're in front of them, you're okay, but if you're behind them, you're not going to be able to see, so please come on down toward the front. I'll be showing these in about five minutes, so you've got some time to get down toward the front.

1:42What we did in this book is we constructed an index of economic freedom. We compared 102 countries on the basis of how much economic freedom they had. And then we correlated economic freedom to try to see if there's any cause or effect relationship between economic freedom and GDP, or change in GDP, or life expectancy, or income equality, or a whole host of other variables. That in a nutshell is what we did, but before explaining and going into the statistical details, which I'll be putting up on the screen, I want to talk a little bit for a few minutes about why we did this. One of the motivating forces for me is a group called Freedom House. Now, Freedom House has done yielding work and good work in trying to measure not economic freedom but civil liberties and political freedom.

2:32Is there a fair trial in the country? Is there voting allowed? Are there juries of your peers? Is habeas corpus upheld? Do they engage in torture? Is there a rule of law? Things like that. And on those issues, which you'd call maybe political or civil liberties freedom, they were pretty good. I had no real objections, even though there was sort of a pinko-lefty group and I'm not usually associated with pinko-lefties, but on this they were pretty good. Sort of like American Civil Liberties Union. They're good on some free speech issues, but you can only go so far. But then what the Freedom House did is they launched a new initiative. And in this new initiative, they were now going to measure economic freedom, which is a big departure from political freedom or civil liberties freedom.

3:20They're now going to do economic freedom. And what do they mean by economic freedom? Well, what they mean by economic freedom is high taxes. The more economic freedom, or the more welfare payments, the more economic freedom, or the greater the percentage of workers unionized, the more the economic freedom, or if there's environmental protection, I don't mean private property rights, environmental protection, I mean, you know, there's watermelon environmentalists, watermelons who are green on the outside but red on the inside, the economy environmentalists, so that was their vision of economic freedom, and my thought was that if they get away with this, given their They would then veer the conversation toward this sort of a definition of economic freedom.

4:07And that's the last thing I wanted because I don't believe that that's really what economic freedom is. Another motivation for going to this book is to write what I thought I saw as an imbalance. Now, there is a branch of economics called economic development. Not every school has a course on that. I don't know if you have a course on that here, but if not, I'm sure you implicitly cover that in other courses. And what it is, is addressing the question is, why is it that we in the West have lights, comfortable existence, you can buy food very cheaply, we live a pretty good life. I mean, we might not all have Maseratis and Volkswagen, but we can get a Volkswagen or a ten-year-old in the water that gets us around.

4:52Where as in other countries, they're really on the verge of starvation. They have no electricity. Here everyone's got a TV, a radio, a fan, a telephone. In many countries of the world they don't have these things. Why? Are we so bloody smart? Or is it that we're efficient? Or is it that we have equity? So, to remind you of the subcategory of economics that addresses itself to these questions is that 90% they think it's efficiency, 9%, this is just numbers right off the top of my head, is equity, and 1% is freedom or economic liberty. Whereas the way I see it, economic liberty is way, way more important as an explanatory variable for why we have reasonable standards of living, we're not all Bill Gates, we don't have mansions, we don't have a tennis court, and so on, but by and large, world standards were doing pretty well.

5:50Why is it I contend it's because of economic freedom? So I'm very passionately interested in measuring what economic freedom is. Another reason is that economists love to correlate things. I mean, if you're going to be given econometric tools, you might as well try to correlate things. Well, the more variables the better, so you can correlate one more. It makes students' lives miserable, because you have one more variable now to worry about Another reason is, why climb Mount Everest, because it's there, well, why construct the newly-next of economic freedom, because it's there in our minds, and we want to give substance to what's in our minds, put it on paper, make people talk about it, or entice people to A little bit more about economic development. A lot of the mainstream people think that the way of economic development is government, government, government, have infrastructure, highways, ports, things like that, foreign aid is a big thing.

6:57They say that the more foreign aid an undeveloped country gets, the more economic development you don't have. Socialism sometimes. The special advisors to underdeveloped countries who have taken the time and trouble to acclaim themselves with a problem all recommend central planning as the first condition of promise.

7:35and we were trying to argue with that. People who, in addition to Myrdal, who are famous for this sort of a thing are F.Z. Delmar and Walter Blosdell. My favorite economist in the development area is the late Peter Bauer. Peter Bauer was my favorite developmental economic economist. And he had a very different view as to what creates economic development in these third world countries. And in his view, it was free enterprise and economic liberty. Another reason for pushing to get an index which would measure what had been or not been measured. Peter Bauer is famous for the three M's.

8:23You've heard of M&M candy? Well, this is M&M&M. And his three M's were in an attempt to indicate what the result of foreign aid was. And the three M's were first, monuments, second, Mercedeses, and third, machine guns. And that's what he said that most foreign aid like people are, and I think that's true. Now it doesn't have to be a monument, it doesn't have to be a statue to the dictator. It could be a steel bill that makes steel that costs five times as much as the steel that you could import. Or it could be an airline that has charges, prices due to this so inefficient that ten times the price of any other airline that could have come into the country. Monuments. Mercedes is, well that's what the dictators would drive around in.

9:10And we all know what they use machine guns for to keep the people down. So that's his view of economic development, foreign aid subcategory, and I agree with him entirely.

9:28If one of you wake up tomorrow and find that you're the president, the prime minister, the dictator of a third world country, if you attend this lecture and pay attention to it, you'll know what to do to bring your country into economic prosperity. And don't think that this is impossible, you know, we have Star Trek, we have X-Files, we have all sorts of weird things, you know, we have these movies where someone was an actor, a big heavy guy became king of England, so it can happen to you. And if it happens to you, thanks to this lecture, hopefully, you will have a much better idea of how to lead your country into prosperity and away from starvation and warfare and other horrible things. namely, to promote economic freedom, which is a lot easier than getting more technology or more education or more investment, all those things cost resources.

10:24It takes a lot of effort to get new investment into the country or to teach people. Education obviously will help. But economic freedom is the sort of thing that you can do with a snap of a finger. All you have to do is change the laws. Now, it's not that easy, because the minds of the people are pretty indicative of what's going to happen. My colleague, Jeff Hummel, is never tired of saying something that has inspired me, namely that the pen is mightier than the sword. Why does Jeff say that the pen is mightier than the sword? If you think of a duel between a pen, which is as big as my finger, and a sword, which is as big as my arm, you'd think that the sword would beat the pen. Professor Hummel's point is that the pen determines in which way the sword is aimed. If you can convince people's hearts and minds, the sword turns around.

11:12So in that sense, the pen is much mightier than the sword. And what I'm peddling here is pens, not swords. The hope is that you can take these ideas and utilize them with the benefit of mankind. Another motivation for writing this book was to promote economic freedom. To promote freedom. Does freedom consist of welfare rights? Does freedom consist of equal income? Or egalitarianism? I don't think so. I think freedom is something different. Non-invention, non-aggression. And also, my last motivation, as I'm listing motivation, is that a statistic tends to lend reality to a concept. Before unemployment was measured, the concept of unemployment was more vague and nebulous than it was after we could measure it.

12:00It's still real to individual people, but when you measure it, it adds some more impetus. Well, my hope is that when you measure economic freedom, it'll make economic freedom come more alive than it would otherwise be. Okay, so those are the motivations, and now let me discuss what I think economic freedom is. As a rough approximation, anyone should be free to do anything they damn well please, provided only that they respect the equal rights of everyone else to do the same with their person in property. So the free market consists of the concatenation of all voluntary events. If I trade you my time for your wristwatch, it must mean on your part that you value the time I'm more than the wristwatch you give up, and you gain the difference between them and your evaluation.

12:48And it must mean that if I am willing to give up my time for your wristwatch, that I value your wristwatch more than the time that I'm giving up. So we both gain. Markets are mutual benefit machines, if I can call them that. Markets are not exploitation. There's no exploitation. This is the way we cooperate with each other. And that's exactly what a market is, this sort of bar for a wristwatch for its time. And every market incident is just like that. I buy a newspaper for a dollar. It must mean that I value the newspaper more than a dollar, otherwise I wouldn't give up a dollar for it. It must mean that the news vendor values the newspaper less than a dollar. He's got tons of around, he's happy to take a dollar for his newspaper. I go to work for $20,000. It must mean that my employer values my labor services more than $20,000 and I value them less than my four-door leisure.

13:41So that's what the market is. It's voluntary trade based on private property. And economic freedom is just the right of everyone to engage in market transactions. Okay, those are market transactions. What's a non-market transaction? A non-market transaction is conversion. It's punching. It's shooting. It's raping. It's murdering. It's stealing. It's committing fraud. It's committing counterfeiting. There are many, many ways of... No, there are only two ways that we can interact with each other. One is the voluntary, sometimes called the economic means, where it's based on mutuality and agreement and voluntariness. That's one way we can interact with each other. And the other way we can interact with each other is punch each other and grab their stuff.

14:29And what economic freedom says is, let's interact in the first way. The first way is a good way. The second way is not a good way. If I had a blackboard here, which I don't, then I ought to. We're not going to be able to make it. Wait, wait, wait. Let me move the blackboard. Move the blackboard towards me.

15:05I didn't. I didn't. I think I have some way where I can... Sort of like an attack ball. You don't have to worry because I can't go... What some economists do is they draw a curve like this, and this is the percentage of government involved in the economy, and this is economic freedom. And the contention is, and here we'll see, we'll say 10 percent. 10 percent of the economy is run by government. And what the contention underlying this book is, is that once you get past this point, the more government you have, the less economic freedom.

15:53Now there's some people that say that the curve goes like this. There are other people who say, no, no, no, the curve goes down this way, namely the more government you have at any range, the less economic freedom, or the less government, the more economic freedom, and I'm not going to be involved in this range of things, I'm I'm just concerned we're this way, namely, when government gets past a certain point, the more you have of it, the less economic freedom you have. Okay, I don't think that there's too much dispute, at least at this point.

16:41Most people, most economists, most economic students, would tend to agree that roughly what I said is correct, they might disagree on some jot or a tittle, But mainly economic freedom consists of engaging in market activities and non-coercive, non-invasive kinds of activities. But how do you operationalize this? So far I've just been giving you the theory that talk is cheap. How do we get down to the nitty-gritty? How do we get a statistic up? Well, the way we did it was on the basis of 17 sub-components based on four categories. And before I tell you what they are specifically, they have to meet the following criteria. First, they have to be objective. They can't be subjective. They can't say, well, there's more freedom here than there because I feel freer here than there, because you can't, operational wise, you can't give a number to feelings.

17:36So you have to have some sort of number. I'm losing myself here. It has to be duplicatable. Namely, we did it, other researchers should be able to get the same numbers as we got if they apply it to our definitions. Second criteria has to be updatable. Namely, not only do we want to measure economic freedom at a certain point in time, we also want to have what's called a time series. The third is we want to have a large number of countries. We don't want to just have ten countries, but the more criteria we have, the fewer the countries will have, because each criteria, not every country, will have each statistic that we want.

18:33For instance, in the first iteration of this book, and there have been several subsequent publications, we couldn't include China. And that's a problem, because China is one of the biggest countries by population. It's not the biggest country in the world. But they didn't have the 17 criteria that we thought were important, so we couldn't include them. Later on, they were able to. Okay, what I'm going to do now is show you the results of our research. Namely, we're going to rank all the countries in the world in terms of economic freedom. And then later I'll tell you what these 17 criteria are on the basis of which we generated these rankings of the various countries. So here comes the first flyer. And it's for this reason that I ask people to move forward because they're not going to be able to see everything as clearly as they might be able to see it.

19:30As you can see, the freest country in the world is Hong Kong with a 9.2. If you can't see this stuff, please look forward, you won't be interrupting anyone, and maybe your eyes are better than mine, but mine was in the middle of a place I couldn't see, so please feel free to move up if you can't see this stuff. Again, I hold this thread over you, that if you don't get these things, you have to memorize every statistic here, otherwise you're going to fail the course. I'm just kidding, I'm just kidding. You don't have to memorize every statistic, but it's silly to attend a lecture and not be able to see what the lecturer is asking you to say. I apologize for not making this bigger, but I've never lectured on this in such a big room, and that's the way there could be troubles on that.

20:20So Hong Kong is the freest country. It gets a 9.2 out of a 10 on a 10 point scale. The best you can get is a 10, the worst you can get is a 0. Hong Kong leaves the pack with a 9.2. Singapore is 8.2. This is when Hong Kong was a country. This was in 1995, long before they became a province of China. Third is New Zealand. Some people are fond of saying that the United States is the freest country in the world. Well, according to our research, they're only the fourth freest country, or weirdly, only the fourth freest country. Other very free countries, relatively speaking, are Switzerland, Malaysia, United Kingdom, Thailand, Canada, Japan, and Australia. At the bottom of the pack, the last 10 countries or so are Zimbabwe, Hungary, Nicaragua, Brazil, Burundi, Ivory Coast, Romania, Haiti, Syria, Iran, Algeria, Saida, and Somalia.

21:18These countries have ratings 3 out of 10 or less. Now, I have another way of doing this. It's based on the weighting system, and this is one way of doing it, but we had a slightly This is a slightly different way of looking at this. Again, Hong Kong is number one, and Singapore is number two, and New Zealand is number one. On this one, Hong Kong is number one, New Zealand takes over the number two spot, and New Zealand and Singapore switch around. The reason for this slightly different way of looking at it is based on the weightings of the 17 criteria. If you have 17 criteria, the obvious question is, well, how do you weight them?

22:06The first way is you weight them all by weight. Not w-a-i-t, but w-e-i-g-h. How important are each of the components? Now the obvious and easy first crack at it is that they're all equal. All 17 get one-seventeenth of the weight of the overall index. Another way to weigh this, and we've tried several different ways, one is based on the inverse of the standard deviation, namely the ones where the countries are very diverse, we give less weight to those, and the ones where they're more narrow, the variance of the standard deviation is narrow, but we give a bigger weight, that's one way of doing it. Another way of doing it is we took a survey of people in the Ron Pellerman Society, which is an organization which has three enterprise types, and we just said, well, here are our 17 criteria, what do you think is the most important, and all the weight should add to 100, obviously.

23:04So we have different ways of doing this, and on the first one, countries like France and Denmark were timed for 32. Here, Denmark is 16 and France is 20. And the reason for it is that this one here, the one that's now on the board, has less weight to transfers. Because one of the indices or indications of lack of economic freedom is the government taking money from Peter and giving to Paul. And Denmark and France do that a lot. So this one, they're ranked higher because this doesn't give as much weight to income transfers as the other one, which ranked them lower, does. Is that clear?

23:50If you're using a weighting system that gives great weight to income transfers, then negative. Then countries like France and Denmark that do it will be lower. Here, they're a little bit higher. This will give you a little less weight to that criteria. Here is an indication of the weights. Those are the 17 criteria up and down, monetary expansion, etc. I'll get into these 17 in a little bit. We have different ways of doing it. The first way is the standard deviation way. And then we had various surveys. The first one is E for equal, and the other two were one survey of the Montgomery Society, one survey of the people that worked with us in generating this volume of research.

24:46Okay, now at long last, I'm ready to get into the 17th criteria.

24:56I must be dyslexic or something. Let's stroll along. Getting this going. What I'm going to do is go over the 17 illustrated with four different countries. The first country is the United States, and I'm going to illustrate the first four, namely money and inflation. And I'll talk about rule two, three, and four, illustrating the different countries. Okay, so what's going on here? You can see that the United States is a pretty free country. In 1975, we had a 6.0. Can you see that? If you can't see it, move forward. I'll continue over the frame. It went up to 6.2, 6.5, 7.177 in 1993-95, the last year for which we had data at this time.

25:48So, the United States is pretty free with the 4th greatest in the world, and we're getting freer over time. The summary ratings to the left of that indicate the various waiting schemes for the various years. But now let me talk about the four components of money. The four main headings are money, government operation, free takings, and for the international sector. First, money. What we're saying is that money is an important part of economic freedom. Money is the lifeblood of the economy. Money is to the economy as the bloodstream is to the body. The bloodstream circulating facilitates movement.

26:36Well, money facilitates trade. It's very hard to trade the swatches for time. The problem is that all coincidence of wants, if I have a chicken and I want a pickle, You know the odds of finding a pickling chicken hunter? Very low. So what I do, instead of looking for a guy who's got a pickle and wants a chicken, is I make a two-stage trade. First, instead of bar, this is the beginning of money, first I trade in my chicken for something that I think will be acceptable to most people. It could be fish hooks, it could be silver, it could be calorie shells, and in history various things have functioned as the money. And then I take the money and then I go buy pickles.

27:22Now you think it's difficult, it's silly on my part to make two trades when I could have made one, but due to the lack of dull coincidence at once, it would be very hard to trade pickles for chickens. Much easier to go chickens to, I don't know what, the silk, and then silk for the pickle. Now, over the course of history, various things have tried to be money. You can see why bananas wouldn't make a good money, because they get rotten. You know, who must be left holding the banana when it gets rotten? So, certain things are good monies and certain things are bad monies. And in the free enterprise community, one of the best things that ever became money was gold. Gold is good because it's portable.

28:08Cement isn't portable because per unit value, you need a ton of it to make any value at all, and it's hard to transport a ton of cement, whereas an ounce of gold would be worth as much as that, or a tenth of an ounce of gold. Plus gold is malleable, you can cut it pretty easily without losing value. Diamonds, you can't make small change in, because if you break up a diamond, the two halves are not equal to all, they're equal to much less value than the whole, whereas if you break up a gold bar, the two bits of it are equally valuable as the whole thing. So, gold had advantages that other materials didn't have, and in the heyday of free enterprise in the, I guess, 18th and 19th century, gold was pretty much the money. How many countries are on the gold standard now?

28:54None. So what we could have done is given every country a zero. I mean, that would be the just solution. Give all a zero. That would. There are a bunch of commie pinkos, you know. They get a zero. But let's get back to reality. What we're trying to do is distinguish between countries. And if we give all countries a zero, we might as well toss that criteria out, because it doesn't make any distinctions between countries. So when you get into empirical research, it's a lot dirtier than pure theory. You have to make compromises, you have to sell out, you have to do all sorts of things. And we did it. What we said is, look, one of the bad things that the government does with money is it inflates it. One of the, and this is serious business, you might think, well, you know, it's a little boring crap economics, but you know, it's really important, because one of the causes of World War II was the German hyperinflation of 1923, which ruined the German economy, which allowed Hitler to come in.

29:52Now, I'm not saying that we know antecedents to that. Historians might say, well, it's the Treaty of Versailles, maybe you can go back further. But the economic cause of Hitler's rise was the hyperinflation of the 1923, where the value of the money just dissipated. People would take wheelbarrows full of money to buy a loaf of bread, and instead of working on producing things, they were oriented. It's as if the blood wasn't circulating. You sort of have to push the blood around instead of it automatically circulating. So the whole economy sort of bombed around. So one of the worst things that a government can do with money is inflate. Now again, we can't give every country a zero because that's in effect saying we're not using that criterion. We need some monetary criteria. So we decided inflation.

30:39The higher the inflation, the lower the value the country got in terms of the monetary freedom. It's a little bit of a reach because it's not exactly directly related, but that's what we did. The second criteria is inflation variability. The more variable the inflation, the worse, because people depend upon money to do a certain job, and if the value of it keeps going up and down wildly, it's not going to do its job. The third one is ownership of foreign currency. By the way, we started at 5.20, I'm supposed to go about 45 minutes, so I've got another 15 minutes, is that right? 15 minutes to 29. I got 15 minutes, I got 15 more criteria, I'll race right through them. 1c is ownership of foreign currency. This we give a dummy variable.

31:25Either you're allowed to own foreign currency, in which case you get a 10, or you're not, in which case you get a 0. The fourth one is maintenance of the bank account abroad. Are you able to maintain a bank account abroad? You get a 10, if not you get a 0. Okay, so much for the first criteria. We're up to the first four of them. Now I'll use speed to illustrate the second group, number two, the government operation business. 2A is government consumption as a percentage of GDP. And by the way, all of our statistics The statistics are from places like the World Economic Forum, Pricewaterhouse, the World Bank, Freedom House. Freedom House supplies some of the data.

32:11So what we're doing here is not so much creating new data, although we do it in some of the criteria. What we're doing is using extant data to define economic freedom. So the higher the percentage of government consumption, the lower the economic freedom. And you can see that Sweden is doing pretty badly. They get a zero because of, in parentheses, that's the percentage that they use, or percentage of the government in the GDP. The third one is government enterprises. Do you have a lot of government enterprises? Well, you get a lot more. If you have very few government enterprises, you get a higher market. 2C is price controls. Price controls are a violation of economic freedom. If the government says, no, no, it's got to be two ties for one risk watch, or we have a price control on beer or something like that, or on record units, rent control, that's a lack of economic freedom. That's not allowing people to trade on a mutually agreeable basis.

33:19Entry into business. There's this guy, Hernando de Soto, who wrote very glowingly or very tellingly about Peru. And what he did is he tried to open up a store in Peru selling, I don't know, shoes or something. And it took him three years of intensive effort and a lot of bribery to get a legal shoe store open in Peru. Which is one reason that the Peruvian economy is not a good one. Whereas here, you want to open up a shoe store, you open up a shoe store. There might be some government permit you have to get, but it takes, you know, 20 bucks in one day. Places like India, it's like Peru. So you have economic arteriosaparosis, you know, frozen economy, and you just can't open up a business. And that can't help economic development, and it also is, we operationally define economic freedom in that way.

34:10The legal system, is there a rule of law that does the government just throw you in jail or banning an eyelash? Well, in Sweden, no, they get a 10. Notice Sweden in terms of the four major categories. They get a 6.9 in money and inflation. They get a 6.7 in government operation, which is pretty good. They get a 0.5 in takings. They're big takers. And in the international sector, which I'll get, they get a deep 0.7. In the 1970s, they were very economically free internationally, which is what you'd expect as Sweden is a small country. And if they don't engage in international trade, they're not going to have much of an economy. So a lot of people say Sweden is a socialist economy. They're not. In three out of four of these criteria, Sweden is a very free enterprise economy, relatively speaking, to other countries.

34:58Not relative to the ideal, but relative to other countries. It's only in these takings, which I'll get to when I illustrate the next country, that sweep the falls down because they redistribute a ton of money. That's the big thing. Okay, the next one we'll get into is redistribution, and here we'll use the case of Israel. Sorry, I'm losing it. Pretty soon I'm going to start drooling. So you'll love me if I drool again. The Israeli economy, you'll notice, that the Israeli economy is very, very hungry, and later on you'll see that their income is not very high.

35:49This is an interesting, instructive country, because Israel has probably got a much higher proportion, per capita, of people with an engineering degree, PhDs in chemistry, PhDs in physics. They're a very smart people. And yet, their economy is intolerable. Part of it is because of the wars, but I think an awful lot of it is because of the socialism that they inherited from the beginning of their country. Who do you think would win in a regatta, you know, an eight-band show? Eight little nerds, all rolling in unison, or eight Mike Tysons, all rolling in different directions? Well, obviously the eight nerds who were coordinated, because the eight Mike Tysons would just cancel each other out.

36:37Well, economically speaking, Israel is like a bunch of Mike Tysons, they're very powerful, they're very strong, But they are discoordinated, and the price system in economic freedom is the way you coordinate them. There are two ways to coordinate. One, an orchestra conductor. I conduct you, and now you're the flute, and I tell you to play, and you're the violin, and you play. I used to play the violin, and every time I'd play a bad note, the guy would turn this baton and say, you know, block, shape up, do it better, and start again. You know what they did with the wind players? They would tell them when to breathe. Anyone play a wind instrument here in an orchestra? It's written in the music when you're supposed to breathe. Now, you can't get more totalitarian than that. They didn't tell you when to breathe. I mean, even doing slavery in 1850, the boss didn't tell the slave when to breathe.

37:24I mean, he could breathe whenever he wanted. But in an orchestra, they tell you when to breathe. But it's solitary, so it's okay. The point is, that's one way to coordinate activity, and the analog of the orchestra is central planning. Well, what's the decentralized way of coordinating? The decentralized way of coordinating is through the market. Look, suppose we decide to do a big fat swap, so we've got to stop eating chocolate, we've got to start eating celery. Do we have to position George Washington and say, George, please get him to produce more chocolate or less chocolate and more celery? No. That's the central planning way. We don't do that. Rather, we just stop buying chocolate and start buying celery. What happens if the price of chocolate falls? What happens if the price of celery arises?

38:13Entrepreneurs are led by Adam Smith's invisible hand to stop making so much chocolate and start making more celery. And that's the way we could make it, in a decentralized way. Well, Israel doesn't do much of that, which is why they have a very poor economy. And you can see that they don't do too well in takings just like Sweden. Okay, let's now take Hong Kong to illustrate the last four in the last four of the criteria. This is an international trade.

38:53It's so humiliating. I'm trying to pass off as a guy who's, you know, with it. I can't even... The last one is the international sector. Hong Kong, as you can see, has got 92, 94, 95, 93, 91. They're always good. This is the first slight variation. They're way at the top. And in terms of the last four, there are taxes in international trade, tariffs, the black market exchange rates, which is exchange rate control, which is another interference with trade. The third one is our attempt to measure non-tariff barriers, and since I'm running out of time, I'm not going to get behind that one. You have plenty of time.

39:38Oh, okay. I'll speak slower, and I'll do more now. I've been given an extra five minutes, I guess. I don't know. And the last one is, are you allowed to engage in capital transactions with foreigners or not? And you can see Hong Kong is getting nines and tens all over the place. And now what I've done, I've completely described, at least roughly, what the 17 criteria are. And now we come to Exhibit A. Exhibit A is to relate economic freedom with a whole bunch of other things. Remember, we said one of the purposes of inventing this new statistic is to see whether and to what extent it explains things that we're interested in. So let's look at some of these things that we might be interested in. And obviously, one of the things that we're interested in is GDP.

40:30There we go. Now, what we have here is A is an eight or more, B is a seven, C is a six, D is a five, F is a four, and F minus is a three or less. So we're converting our numbers into grade point averages, or the kind of letter grades that you get in college. And notice that all of those countries that have A level of economic freedom, 8, 9, or 10, there are no 10s, but there are 8s and 9s, their per capita income is almost $16,000. Whereas the next freest set of countries, their income is almost $14,000 per capita. The C's get about $8,000, the D's get about $3,700, the F's get $3,000, and the F minuses get $1,600 per capita.

41:20So the A's get about 10 times as much as the F minuses. Is that all clear? Now notice, when we defined economic freedom, we didn't, what's the word, bunch the books, cook the books, we didn't engage in chicanery. We didn't put in a definition of economic freedom if you think that has to do with GDP. We didn't put in wealth, we didn't put in investment, we didn't put in human capital or education. We didn't put any of that. We just said, is the country economically free or not? And if it is, they're very rich. And if it's not, they're very poor. And this is what I call our exhibit end. This shows that economic freedom really means something.

42:06And remember, what economic freedom is, is a, if you become the dictator of some country, it's a guide for your action. And the guide is, free up the place. Free up the place and the people, your citizens, your family members, your tribe, what have you, your clan, will be richer. Now, richness isn't the greatest thing, you know, there's love and other things around there. But if you can't eat it, you're hungry, the rest of life isn't going to be good either. I'm not saying that wealth is the be-all and end-all. Although I'm an economist, I'm supposed to have a cash register for a heart and dollar signs on my eyeballs and stuff. I don't. But the point is that wealth is important. If you want to have medical care, if you want to have a Stradivarius violin, if you want to have culture, you have to have some wealth more than the animals have.

43:01And there are people that are living a jungle-like existence. It's a horrible existence. They die like flies, their child mortality is horrible. That's no way to run a place. So what I'm saying is, if you want to run a good, taut ship, you have to have some sort of economic freedom. You have to have some sort of decentralization without this command and control, where you're more and more sure. Now more somebody tells you what to do and has price controls, but Hillary runs the health care industry and what not. Okay, so that's Exhibit A. Exhibit B is the relationship of economic freedom, and not with GDP, but changes in GDP. In the diagram below, what we have is the growth rate of a country, or the growth rates of the A, B, C, D, F, and F- countries, and you'll see that the rich, that the more free the country is, the faster it's growing.

43:56And the less free it is, the lower it's growing, or in the case of the F-minuses, they're not growing, they're retrogressing. Sometimes they call them the developing countries. That's just PC crap. You're not developing, they're retrogressing. Now, you know, they call them developing, maybe if you call them that, that they'll be there, you know, you say, here's this rotten kid, you call him a good boy, maybe he'll behave. But that's not a scientific way to approach this. You want to be accurate in your assessments of what's going on. These are retrogressive countries, and the reason they are retrogressive countries is they don't have any economic freedom to speak of. Okay, so that's Exhibit A and B. And I have an econometric regression that I suppose I could toss at you.

44:47I think I can. There. It's at the bottom of that econometric equation. What it does is it relates LEF as the level of economic freedom, CEF as the change in economic freedom, and I divided by GDP as the percentage of investment or rather investments percentage in the GDP. Now, all these have a t-value above 1.96, which is the statistically significant level, the 5% level. Those are the numbers in parentheses underneath, those are the t-values. For those of you that are into this statistics stuff, how many know what I'm talking about? Oh, okay, well that's kind of through to the group.

45:35The rest of you I can bring along. See, I, investment, the mainstream investment, the mainstream development economists focus almost totally on I over GDP. What they say is that the more investment a country has, the richer it'll get, and the bigger the growth rate, the deeper the growth rate, the more likely the equations. And it's true that it is statistically significant, but notice that the correlation coefficient is only 0.19 or roughly 0.2 or 0.50, whereas the level of economic freedom is roughly twice as high.

46:21So the level of economic freedom contributes twice as much, roughly, as an investment as and the change in economic freedom is very, very powerful. It's five times more powerful than the percentage of investment in GDP. And this is something that the development economists are even knit out just to become aware of because we've just invented this statistic. By the way, the publisher of my publication is called the Braser Institute, or Braser Cato. There is another group, the Heritage Group, which is also doing the same thing from pretty much our perspective. And only they have, instead of 17 criteria in 100 countries, they have like 9 or 10 criteria in 200 countries.

47:11See, the idea is that more countries, the fewer the criteria, because fewer countries have that many criteria that you can get data for. And these are two different ways of looking at it, and the correlation of countries that we rank and they rank is very, very high. So we're doing the same thing in different ways, and one is sort of a check on the other, so each one sort of lends support to the other. Okay, so much for the econometrics. What I now have is a whole bunch of very detailed country analyses, and I think I'll skip most of these, I'll just show you one. What this is, is the level of incomes and growth rates of persistently high and persistently low rated countries.

47:58So we have the, in other words this is a breakdown of our exhibits A and B respectively, In the United States, Hong Kong and Singapore are growing much faster than Switzerland, the U.S., Canada, and Germany. So there's more than economic freedom that determines the growth rate, and when there are other things beside economic freedom, economic is important, economic freedom is important, but there are other things too, might be necessary but not sufficient. But look at these other countries on the right side. There you have countries that are very low in economic freedom, and their capital GDP in the upper right hand box is very low, So, in the lower right hand box, they're retrogressive.

48:57Now, I have a whole bunch of slides that I can show you, and I will just humiliate myself further by the middle left side of the screen. So, I'm going to go past all of them, and I'm going to go to something of maybe more interest to you. Let me see where I am. Oh, here we go. And I'm going to first talk about economic freedom and serial deals, if I could find a view from skipping way ahead. And here we go, we've got serial deals.

49:36Economic freedom and serial deals. You can see that the more economic free the country is, the more serial it produces. Why are we worried about cereal? Well, cereal is important. Before the communists took over the Soviet Union or Russia, they were exporters of grains. During the communist 70 years, they were importers. And now that they've thrown off communism, they are again becoming exporters of grain. So, great is nothing to write home about. You don't write home about me while I had my cereal. It's no big deal if you have cereal. But if you don't have cereal, then it's a very important mission. The next indication is economic freedom in life expectancy. Now, again, the way we define economic freedom has got nothing to do with life expectancy. We didn't say, well, how many childhoods are you having?

50:30and if you do your exercise and you eat the bacon foods or whatever, we didn't have any of that. We talked about monetary policy and tariffs and government intervention and taxes. And lo and behold, the countries that are the most economically free, you live the longest. And in those countries that are the lowest quintile, that are not economically free, you don't live that long. And it's no accident. Okay, now the last one I'm going to show you, I think is sort of the peace state of existence. My French isn't that good, but here we go. Where are we? Ah, there are a lot of people that worry about income inequality.

51:18They say, well yes, the capitalist system can produce the goods, but there's someone there, The rich get richer and the poor get poorer. Well, here is the statistical reputation of that. What we have here is the ratio of the top 10% of income earners to the bottom 10%. Namely, the higher the ratio is, the more unequal you are. The higher the percentage of the top 10, these would be the bottom. There are various ways to do it. You can do it with a cheating coefficient. You can do the top quintile versus the bottom quintile. The top half versus the bottom half, they all come out the same, probably the same. And you can see that there's not a perfect correlation. If you were to draw a least squares line, touching the tops of all these, you know it would be downward slope.

52:08Which means that the freer the country, the more equal it is. So, our friends on the left, whom egalitarianism overpowers, should be satisfied with this. They won't be, but they should be, if they were consistent with their own views. It's just that their own views are just to bash capitalism. We don't care what the results are, but we don't have to worry about such a thing. Let me explain to you why it is that this way, why this makes sense. Look, if I'm in real gains, I get fabulously rich. But how do I get fabulously rich? I get fabulously rich by enriching everyone else. By making their life a little bit better, because remember they pay a thousand for a computer, it means that they value that computer at a thousand and a penny or more.

52:56So they gain consumer surplus. So by enriching myself, I enrich everyone else. Take Henry Ford. Before Henry Ford, automobiles were a plaything of the rich. They were a luxury. You wanted a car, you'd get a Rolls Royce or a Stutt's Bearcat or a Camelac or something like that. And only the rich could do that. Now it's true that Henry Ford, when he made his Model T and his Model A, didn't get many people into cars, but he got middle class people into cars, which is the way these things start. The poor don't get it first, and that's why the critics of the market say, well, the poor don't have a cause. Well, I remember when they used to show the Olympics, and right after the Olympics, some Soviet, some person would win a gold medal, and they'd sort of give you a behind-the-scenes look at his life, and you'd see what it was like, you know, if he was from the U.S. or New Zealand or the Soviet Union.

53:52The Soviet Union, you know what they don't show? They show the gold medal winner of a little car and an apartment. And I wonder why? What's the big deal? You know, you can work in McDonald's and have a little car and an apartment. What's the big deal? The big deal is that in the Soviet Union, to have a car and an apartment, you've got to be fantastically wealthy. And the gold medal winners in the Soviet Union, which were your moral people. But so is anyone with an high school education. If you work at McDonald's, you get a carpool of money, maybe not the richest area. Look, Ray Kroc, the creator of McDonald's, got fabulously wealthy. How did he get fabulously wealthy? He got fabulously wealthy by enriching the lives of everyone else. It's not like when you're drowning and you push someone down so you get up.

54:39That's not the way capitalism works. The way capitalism works is you get up and you pick everyone else with you, behind you, on your hometown. Ray Kroc enriched the lives of millions of people. Before Ray Kroc, a poor family could not go out to a restaurant and kill them. They had to eat at home. Now they can go out to a restaurant. It's not the greatest thing, but it's nice. It certainly attracts people in France and Russia and China and everywhere around the world. So the reason for this curvature of these squiggly lines here is because in a free economy that relies for the majority of its economic activity on markets, rich... No, no, you're fine.

55:24Oh, okay. Just another few minutes and then I'll call for questions. The reason that the rich countries have more egalitarianism, not as an adult, but as a side byproduct, or by benefit, or whatever, is because in capitalism, to become rich, you enrich other people. How does EDM then get rich? How do these dictators get rich? How do these 3M types, Mercedes, machine guns, monuments, how do they get rich? Do they get rich by enriching everyone else? No! They get rich by ripping off everybody else. They get rich the way a guy with a gun comes up to you and says, give me your wallet or I'll plug you. Well, you give me your wallet, and I'm richer, but you're poorer. And that's what governments, they're kleptocracies, governments like that, that just engage in lack of economic freedom.

56:17So, to conclude my remarks and I'll call for questions and discussion and dialogue, if that's your pleasure, is that economic freedom is a good thing, and that we've tried to find a new statistic to develop students and make them correlate in one more thing. And we're very happy because a lot of PhD students are now using our indices to study all sorts of things that we never contemplated that they correlated with. But that's what you do when you have a successful new statistic. So thanks for your attention.

56:53Thank you very much.