A Statistical Calculation of Economic Freedom

0:00Welcome to the next session. I forget what section it is. I guess it's the seventh session. It's hard to keep track when you're having fun. Today, we are going to discuss an Econometric Empirical Study of Economic Freedom in the World. What we did in this book, my co-authors and I, Jim Gortney and Robert Lawson, is we constructed an index of economic freedom. We compared 102 countries on this basis. Namely, we took 102 countries and we rated their economic freedom and then we try to correlate the level of economic freedom in a country with various other statistical measures such as GDP or change in GDP or life expectancy or income equality.

1:00Income equality is a real good one to use with your friends on the left, who say that capitalism exacerbates income differentials and makes the rich richer and the poor poorer. Here you will see empirical evidence for the opposite, namely that the more economically free the country is, the less the difference between rich and poor. to give away the punchline before I even get into it. The reason for this is that in an economically free country, the tendency is the way you get rich is by enriching other people. Think Bill Gates. How did he get rich? By stealing money from the poor? No. He got rich by enriching the lives and wealth of everyone else by trade.

1:49And every time he sold a computer, he enriched someone else, at least in the ex-ante sense and usually in the ex-post sense as well or as take somebody like some dictator in Africa or South America who's got a big bank account in Swiss bank account how did he get rich did he get rich by enriching his fellow citizens no he got rich by pushing them down so you get a bigger differential but that's just one of the many things that comes out of the Study, let me get back into the study itself. Before explaining exactly what we did, let me explain why we did it. What was the motivation? To the best of my recollection, I was the one who started this thing at the Fraser Institute and the reason I started this is because, all because of Freedom House.

2:45It usually starts with Freedom House, at least in this regard. What was Freedom Freedom House is a left-oriented group that measures civil liberties and voting and is there a fair trial in a country? What they do is they compare countries on habeas corpus and juries and is there torture and is there a judiciary? Pretty much they do a reasonably good job, or at least I had no problem with what they were doing. it's a well-respected group by the New York Times and that's good enough for me so I figured you know things were good but then I learned much to my dismay that they were now launching out a new initiative and their new initiative had nothing to do with civil liberties and civil rights and torture and habeas corpus and things like that rather it was they were going to do economic freedom now their view of economic freedom was slightly different than my view of economic freedom Their view of economic freedom is, the higher the taxes, the more economic freedom.

3:54The higher the progressive rate, the more progressive the income taxes, the more economic freedom. The more unionism, the more economic freedom. The more welfare there is, the more economic freedom. The more non-discriminatory laws there are, the more economic freedom. The more environmental protection, and by environmental protection, they don't mean what we were talking about yesterday about upholding property rights. What they mean is compelling recycling or something like that. So I said, whoa, this is awful. If these people get away with this and they're the only ones doing it, then economic freedom will take a cut. It will be very bad for economic freedom.

4:40So I figured we should do it too. I was working at the Fraser Institute then and happily we launched a whole bunch of conferences with the support of the Liberty Fund and the whole bunch of conferences emanated in the or resulted in this book but when we started we weren't as clear as we were when we ended there were four or five different annual conferences that eventuated in this book so one of the big motivations was to head off the The Freedom House Index at the pass. Another is, you know, it's like Mount Everest. Why do you climb Mount Everest? Because it is there. And it seemed to be a challenge to...

5:26You see, we talk about economic freedom in a philosophical sense. And that's all well and good, and I'm in favor of it, and I try to contribute to that discourse. But it was a challenge to try to put numbers on this. And it's even more of a challenge because people say that Austrians, you know, the only numbers they have are on the page of the publications and, you know, I wanted to show that that wasn't true. Another motivation is that in the economics profession, the overwhelming mainstream received opinion was that the way to have economic development for underdeveloped countries is central planning. For example, here's a quote from Gunnar Myrdal, your favorite Nobel Prize winner. He won it alongside Hayek in 74.

6:14And here's a quote from him. Quote, the special advisors to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem of underdeveloped economics all recommend central planning as the first condition of progress. So, if this is, you know, central planning is the first condition of progress, that means that economic freedom, which is the absence of central planning, will not correlate with growth. And we wanted to make the case that this was not so. Peter Bauer is my guru in the economic development of underdeveloped countries. in all countries and he is absolutely brilliant and I recommend his writings.

7:01He has this thing called the three M's, as in Mary. The three M's of foreign aid were monuments first. It doesn't have to be a statue of the dictator, although it could be, but it could be a steel mill that costs five times as much to make the steel as you could have imported it. Or a domestic airline which costs ten times as much to carry people around within the country as you could have had with another outside airline coming in, but we don't want outsiders coming in and taking jobs away or whatever. The second one is Mercedes's. That's where the rulers drive around on the basis of the foreign aid that they are given. And the third is machine guns. And we know what the machine guns are doing. I see the point is that foreign aid is a very small percentage of the Western countries. Lauren, come give me the stuff. You'll be on TV. I'll make you famous here. Thank you.

8:01The foreign aid is a very small part of the donor country's GDP, but it's a gigantic percentage of the recipient's GDP. So without it, it doesn't matter that much which tribe in the African country is the government, because the government can't do too much. But when the government is showered with money for the three M's, then it's an imperative matter as to who the government is, and then you have tribal warfare. And also the best and brightest of the young people, instead of taking jobs like engineer or doctor or nurse or businessman, something that could help with economic development, instead they become lawyers. No insult to lawyers here, but lawyers isn't the first thing you think of when you think of economic development of a poor country.

8:53Lawyers, the better to get some of this boodle. So foreign aid is a disaster and the foreign aid is usually to support central planning and it's given to the people who screw up their economies. So foreign aid is just a disaster and this was one more motivation for trying to get an index of economic freedom that was more consonant with our views rather than the Freedom House's views. Then two, there's nothing that the mainstream economist loves more than to correlate things with other things. M1, M2, M3, M16, no that's not right. Unemployment, trade deficit, interest rates, budget deficits, you know, correlate this with that and see what happens because they're sort of lacking in economic theory, so they have to, you know, just sort of throw numbers out and see if anything comes out comes out and that's how they develop their economic theory in some ways so as a matter of outreach from an Austrian to the mainstream I figured I'd offer them another thing to correlate and something that might make more sense to correlate

10:02because economic freedom is important so we get the relationship between economic Freedom and GDP or whatever and another reason, another motivation was suppose you wake up tomorrow and you're the dictator of some small country. Now I know it's not likely but you know I've been watching a little too much TV and you know it could happen and suppose you wanted to stay on as benevolent dictator only you didn't know how to create economic development in your country. Well, the answer would be promote economic freedom and look at our index and see what the index is composed of and then do what the index implies.

10:48Yet another motivation for this is that for some people a statistic lends reality to a concept. And if it's just airy-fairy philosophy, you know, it doesn't mean as much, but if there's a number, then it means something. And there are lots of people like that in the economics profession and we figured we might as well do it. Yet another motivation is that the big correlation with economic development for the mainstream profession is a percentage of investment. You know, that's why the foreign aid is popular because you can now have more investment. For them, the key crucial element is the ratio of investment to GDP. and what we wanted to see and perhaps to find out or to prove or to suggest is that there's something more important than investment that even determines investment and that's economic freedom. Yet another motivation for this was to just promote economic liberty and one way to promote economic liberty is to put some numbers on it and it'll convince some people who would not otherwise be

11:59Okay, so much for motives. So that's what we did and that's why we did it. Well now, what is economic freedom? Well, philosophically, we know what economic freedom is. It's the ability to do whatever you damn well please, provided you keep your myths to yourself and you don't steal other people's property. Economic freedom is the right to buy and sell and invest and interact with your fellow creatures in a voluntary way. in a voluntary way. It's very simple. All commerce is allowed, it's uncontrolled, it's unregulated, except for fraud. Violence, invasions of person or property would be incompatible with economic freedom.

12:44What is the relationship of government and economic freedom? Well, this was not an anarchist exercise. This was a limited government exercise, so if we correlate economic freedom with percentage of government out of the GDP for the anarchist, The relationship would be some sort of asymptotic thing like that, where you get infinite amount of economic freedom if there's no government, or indefinitely large, and by here we define government, not just as official government, but any governmental act, such as theft.

13:32In other words, if a private criminal comes over and mugs you, that's a governmental kind of a thing. So that would be the strict way of looking at it. But the way we looked at it was, and one of the criteria was, what's the percentage of government expenditure in GDP? The way we looked at it, it was like this, and this is about 10%, namely, for the limited government person, the minarchist. If the government is zero, well then so is economic freedom because you have the Hobbesian jungle of all against all or something like that. And then as government increases up to the 10%, you get more and more economic freedom, and then you reach the apex at around 10%. Milton Friedman, who was the intellectual eminence gri behind this, somehow picked 10% as, you know, I think tithing or something like that.

14:28He had some reason why 10% was great. Well, what the heck, you know, if you have to pick a number, 10% seems reasonable. At least it's not 50%. So, what we do is we, one of the criteria is to rate the percentage of government in GDP and compare countries on that basis. Okay, all well and good, probably there's widespread agreement, at least in this group, if you want to adopt a minarchist view. But how do you operationalize this? How do you get actual numbers? What are the numbers? Well, we picked 17 sub-components based on four categories. Now, I've given out stuff to everyone. You've all got those handouts? Okay.

15:17Let me see if I can get myself in gear here. The first way to look at this is here are the overall components. There are four categories and the four categories are, let me get my notes here, here they are. The first is money and inflation. Can you see that? I guess you've all got a hard copy of it, but I'm worried about the studio audience or the people out there. Chad, is that okay?

16:05Okay, so the first one is money and inflation. The second is government operation. Here's that percentage of GDP business. The third one is takings. The government takes from this guy and gives to that guy. That's a no-no. And the fourth is international free trade. And then among those four categories, there are subcategories. So that's sort of the overall thing of what we're doing. Let me give you the results before going into the details. And here is one way to look at the results, what we do is we have a hundred countries, if I did it this way, no that wouldn't work, I couldn't turn this machine around, could I? No, okay, so I'm going to have to make it a lot smaller, so you can get all hundred countries in there.

17:08What we do is we rate all the countries and you can see that this was 95 before Hong Kong was taken over by China. So the freest countries in the world were Hong Kong, Singapore, New Zealand, the US, Switzerland, Malaysia, United Kingdom, Thailand, Canada, Japan. The least free, we're at the other end of the spectrum, we have Oh, Burundi, Ivory Coast, Romania, Haiti, Syria, Iran, Algeria, Zaire, Somalia, you know, the rogue's gallery of countries in terms of economic freedom. Okay, we did this, remember I said there were 17 different criteria in four categories?

17:56Well, we have to talk a little bit about the weighting system, W-E-I-G-H-T-I-N-G, the weights of each of the criteria.

18:09There were three ways to calculate the weights. One was to calculate the weights so that each of the 17 criteria had a equal contribution to the overall index. And the way you do that is you make the weights in inverse proportion to the variance of each category. So if a category stretched from here to here, you have to reduce it. If a category was very close like that, you had to expand it a little bit so you'd have an equal contribution of all 17. That's one way to do it. Another way to do it would be to just take a survey. And we took a survey, we took two different surveys. One I think was, if I remember correctly, was all the participants at these conferences.

18:59And there were, oh, 20 people at each conference. And the third way we did is we picked the Mont Pelerin Society as a large group that would roughly be freedom oriented. And we gave them a survey and we said all the weights have to add up to 100. What do you think are the most important of these components? And I'm going to present two different versions of this business. Here's one version of the business and this is a summary index of all three. And this heavily weights income transfers. So you can see that France and Denmark are tied for 32. for 32, whereas when I do it in a slightly different way, here, France and Denmark, which specialize in redistribution, move up to 16 and 20 respectively, or 20 and 16.

19:58So there are slight differences in the weighting systems, but as it turns out, the weighting systems don't matter too much. So I'm just going to ignore it. Here is a sort of a look at how the weighting systems came about. Over here, we have the 17 different criteria. And the weightings come out differently based on whether we purposely try to make each component be responsible for the inverse of the variance, namely an equal contribution, or we take one or the other of the surveys or we take all three and most of what I'll be reporting would be all three of the systems averaged out.

20:49It's a little complicated but and as a reward for listening to all this stuff about statistics, I'm now going to give you my favorite cartoon, my favorite cartoon in political philosophy. I don't know if you can see that clearly. Helping the poor, the big government, in both cases you have people at the bottom of the pit and other people at the top of the pit who are helping them. And in the one case it's the big government answer and they're handing down buckets of food and the guy is crying out more food. And in the second panel, the free market answer, again you have people at the bottom of the pit and now what they're handing down is rungs of freedom and the guy is yelling out, more rungs.

21:36And it sort of indicates to our friends on the left who think that we're against the poor, that we're not against the poor, it's just that we have a different way of trying to help the poor. And our way of trying to help the poor is not to give them food, it's to give them economic freedom. Okay, let us now go over each of the 17 criteria. 17 criteria, and the first one, the first one I'll illustrate this with is with the United States, and I'm now focusing just on this component here, so I'll make it a lot bigger, I can't make it any bigger than that, there we go. So just look at this part, the top four. Money is an important part of economic freedom and a sound money is part of economic freedom just as the blood is an important part of the body so is money an important part of the economy because money is sort of the bloodstream of the economy if I can make that analogy.

22:46Money touches almost every interaction in the market except for border, so money is very important. Okay, well what's the first one? The first one is annual money growth. Well that's a problem. Why are we picking annual money growth? Because you see, what we want to do is we want to pick things that have to do with economic freedom. We don't want to pick things that have to do with GDP because if we do then we'll be accused of fudging. You know, of course there's a correlation because you defined your index on the basis of it. So what we should have done ideally, well, what would be a free market money? Obviously, a free market money would be gold. Why would a free market money be gold? Because whenever the market was free to pick a money, it always picked gold and sometimes silver.

23:37Initially, it would pick things like, I don't know, herring or bananas, those weren't good moneys for various reasons and then they got the fishing hooks and salt and those weren't as good as gold because gold was, you know, easily divisible without loss of value like a diamond, you break a diamond and make change and you lose most of the value of the diamond whereas you break up a gold piece and, you know, it has its value cement wasn't a great money because, you know, it's hard to carry around cement You don't get much value per weight or per cubic in cement, whereas in gold was a good money. Okay, so what we could have done is said, okay, look, how many countries are on the gold standard? Zero. So, let's give every country a zero.

24:23We could have done that, and that would have been philosophically satisfying. But the whole point of making an index is to distinguish between countries, and if we gave them all a zero, If all was zero, it would have been as if we wouldn't have included that as a criterion, so we couldn't do that. So our reasoning was, well look, what's one of the benefits of the gold standard is you're not going to get inflation, because the government can't, you know, create gold, whereas they can create zeros and paper. And if they were on a gold standard, the inflation rate would be zero, or something, or be very low. Well, what we then did is we went around to all the countries and looked at what their inflation rate is, or their increase in the money supply rate was, and that's how we rated them.

25:15So, you have to realize that when you get into empirical work, you can't be pure, you have to make compromises. There was even a compromise, why did we pick 17 criterion? And only 102 countries, 101 countries, I forget how many countries there were. Well, this seemed reasonable to us. Our competitors, the people at the Heritage Institute, picked nine criterion, nine criteria, and that way they got about a hundred and eighty countries. So in other words the more criteria you pick the fewer the countries you'll get. You could have picked a thousand criterion got no countries or you could have picked you know one criteria and got every country but neither one would tell you as much as the compromise. Now I don't think that our decision was better or worse than the heritage's it's just a different way One of the problems I got into, at the time that this book came out, I was going for tenure at Holy Cross and one of my colleagues who was deciding on my tenure was an expert in China and we didn't include China and he was livid.

26:25How could you not include China? China is a big country, yack, yack, yack. And the point is, if we would have included China, we would have had to lose six or eight other criteria. And we decided, you know, to go that way. Okay, so the first one is money and inflation and annual money growth in the last five years. And the higher the rate of growth in the money stock, the lower the rate you get, and you're rated 1 to 10. So, in parentheses, you see like for 1975, the last five years previous, the money increase was 3.5 and you got an 8, for 1985, the number was a little higher, 5.8, so you got a lower number, in 1990 it was, you got a 9, which was a higher rating because you had a lower rate of money inflation, you get the point?

27:19In other words, the higher the annual money growth, the lower the mark you get, and that's how you get the numbers. The second criteria is inflation variability, because it was seen that if a country inflated at a solid 5% all the time, That was somehow more economically free than if one year they would do zero and another year 10 and then zero and then 10, another minus 10, another plus 20, and you know, they would add in a certain amount of, gold wasn't like that. Gold was much more steady, so in effect, this is yet another way of capturing what economic freedom would mean in money.

28:05Now, I'm not going to go over all 17 of these criteria in the fine detail that I'm doing on the first one or the first two, but I will go over them and I'll illustrate different countries. But let me look at over here at the top. See, these are the three ways of doing the summary for the five, five-year periods. And here is the summary rating for the average of all three And you can see that the economic freedom in the US is slightly increasing From a pretty good, this is out of 10, and 6 is decent but not really anything to write home about And 7.7 is a little better You know, one of the things that comes out of this is when people like George Bush say We're the freest country in the world economically We can say, oh no, no, no, we're only the fifth freest or something like that.

29:00But one of the objections I've found whenever I show this to people is everyone, especially from foreign countries, says, you know, this is pretty good, but my country, you rated too high. Because everyone knows their own country and they hate their own country and they know their own country pretty well. I say, we couldn't be that good. The point is that other countries are pretty crappy too, so... Okay, so we did the first two, 1A and 1B. 1C is can you own foreign currency? And if you can, you get a 10, and if you can't, you get a zero. And you can see by some of the other countries that I gave out in the little thingy, for example, In Israel, as we'll later see, you cannot maintain a bank account abroad, which is the fourth criteria.

29:54In the U.S. you can, so you get tens all the way across. Okay, so that's the first category. And the data we came from the IMF and the World Bank and a World Currency Yearbook from the IMF. In other words, the data we're getting is, for the most part, not made up by us. It's rather reporting from what is seen by most people as legitimate sources, because we're going to be trying to convince the enemies of economic freedom that this has some merit. Therefore, it was incumbent upon us to pick sources of the data that they would at least grudgingly respect.

30:40Okay, the next thing I want to do is to illustrate the second category of government operation and now I'm picking Sweden to illustrate this. And before I get to that second category, let's just talk about Sweden a little bit. You can see Sweden is also increasing their economic freedom, but they're starting from a lower base and ending at a lower place, although there is improvement. But the interesting thing about Sweden is if you look at the four summary numbers, on money and inflation they get a 6.9 which is pretty good, on government operation they get a 6.7 which is pretty good, on international trade, this isn't as clear as in the past, Is there some sort of focus that I could do to make it sharper or is this it?

31:34That's it, okay. Maybe if I make it smaller. See, I'm not worried about you here because you've got it on paper and you can see it clearly, but I'm hoping to, you know, get everyone else to see it. Well, I'll say what the numbers are. And on international sector, they get an 8.7, which is very, very good. So, in a sense, Sweden is a free market country. country. You know, this is a way of dealing with the people who say, ah well, you know, Sweden is great and yet they're all socialists there. There's only one area on which Sweden falls down and that's takings and there they get an 0.5 which is horrible because Sweden is a redistributionist country par excellence.

32:19So what Sweden is, according to our numbers, is a reasonably free enterprise There's a country that keeps switching money from here to there. Well, it's not good to do that. But still it's, you know, in these other three categories, which comprise 14 out of the 17 categories, or rather criteria, they're pretty good. Okay, now let me use Sweden. I'll focus down a little bit so we can just look at area two, which is our main focus in this. In other words, what I'm doing is I'll take four different countries to illustrate the four different categories. So we're now on Sweden and we're now on Roman numeral two, government operation.

33:05So what's going on here? The first one is government consumption percentage of GDP. In parentheses, it's the percentage of government out of the GDP ignoring transfers, because transfers we consider in category three. Everyone with me on this? Is it understandable? Okay. So the first one is what percentage of GDP is government accounted for and Sweden is getting zeros all along here because their criteria is too high. The second one is government enterprises, you know, do they have a steel mill? Do they have a radio station? Things like that.

33:51The more of those sort of things they have, the lower the mark they get. The third one is price controls, and we don't have data for every year, but at least we have data for the last two, five years, and they're pretty good. They get a six and an eight, which means that they don't have too many price controls. Entry into business. How easy is it to get into business? There's this guy, what's his name, from Peru? Sorry, help me out. Who's the... De Soto, Hernando De Soto. And what he does is he goes around to various countries and he sets up a business. No bribes, just doing it legally. And he, you know, some business like selling watches or repairing shoes or something like that.

34:44and he calculates, well, how many days does it take from the first day that he goes down there and asks for permission to set up a business and how much money does he have to pay legally and, you know, three years, five years, you know, never or, you know, and in some countries you can do it in one day or in some days, in some countries you don't even have to ask permission. So, here, that's the criterion. The quicker you can set up a legitimate business in a country, you get a 10, and if you can't, you get a 0, and we rate the countries for how long it takes. The information on the first one was from the World Bank and the IMF. Government enterprise came from the OECD and the World Bank and the IMF.

35:29The price control business came from the World Competitiveness Report. Entry into business came from Freedom House. Notice we're taking their their numbers on on limited things. The legal system came from Freedom House namely if you sue a national will the court just throw you out because you're a foreigner and they're a domestic person and the last one is a measure of credit market freedom. So you can see that Sweden got an and 048-1010-10 for what do you call it, a weighted average of 6.7, which is pretty good. Okay, so I've now used a second country to illustrate the second category.

36:16We're going to take a third country, Israel, to illustrate the third category of takings. And in the Israeli case, you can see that they start at a very low number. They're increasing, but they're pretty pathetic in terms of economic freedom. Now Israel is a very interesting country. They're interesting on two bases. One, the Jews in this country have the highest income of any category. And there's mostly Jews there, so you'd expect, you know, that they'd be doing pretty well in terms of GDP and economic freedom.

37:04You'll see that the Israeli GDP is not very good. It's consonant with their economic freedom. And this is a puzzle. It used to be that the Chinese were like that too, that they were very, very poor in China. It's changing now because there's more economic freedom in China. But 10, 20, 30 years ago, China was an economic basket case. The Chinese were practically starving. But the Chinese who lived in Malaysia or who lived in India, or I don't know if there are any in India, but in the US, are doing very well. So you get a very sharp, dramatic contrast showing that you sort of have a ceteris paribus on the people. Not perfect, you know, the Chinese who live here and there might be different, the Jews who live here and in Israel might be different.

37:52But by and large, you know, you sort of say when you're doing rough historical or empirical work and you're not in the area of high theory, you sort of say, okay, the people are about the same, the talents are the same, the IQ is the same, give or take. and yet the economic system is so crucial and this is a dramatic way of pointing it out. The second way that Israel is of interest is that there is this, I told you about one competitor for our index, the Heritage, there's another competitor with our index and that is the IQ index and what they do is they take the IQ of every country and they correlate it with GDP just like we do and they get better results so we have to be very modest about economic freedom here the point is that it's not a praxeological issue treating with GDP and GDP is as we know has got a lot of problems not least among which is leisure

38:49I mean suppose that there's economic freedom but we in the country of Auburnia we have total economic freedom but we're lazy so-and-so's and you know Well, we're very rich, but what we decide to do with our wealth is work three hours a week and go play golf the rest of the time. So our GDP is going to look pretty crummy, even though we've got a lot of economic freedom. So you don't have this proxeological element going on. That's why you need some sort of empirical measure. The other reason that Israel is interesting is that in the IQ studies, Israel has a low IQ, Which was really puzzling to me because the Jews have the highest IQ, especially the Ashkenazic Jews.

39:35And maybe the highest proportion of Ashkenazic Jews in the world is in Israel. So I guess what I'm saying is a lot of term papers and PhD dissertations in this stuff. And indeed, one of the benefits of our index is that a lot of PhD dissertations in mainstream places in some extreme places where they want to correlate, correlate, correlate, they use this stuff to correlate all sorts of other stuff in international comparisons and those of you who are on your way toward doing a PhD dissertation might consider, you know, taking our data and correlating with something else and maybe that'll get you a good dissertation. Okay, so let's get back and now we're talking about takings, so I want to blow up the third part of it and the first one is transfers and subsidies and the more you transfer, the lower the market you get and the less you transfer, the higher the market you get.

40:36The second one is marginal tax rates, and what we did there with marginal tax rates is that the sooner a thing kicks in, the lower the mark you get. So if it kicks in at a low rate, let's look at a 56 to 60 percent marginal tax rate. If it kicks in at less than $25,000, you get a real low mark, but as it kicks in higher and higher, you get a higher mark. You get it? And also, going up and down, the lower the marginal tax rate, the higher the... Boy, every time I touch it, it goes crazy. The higher the marginal tax rate, the lower the mark you get.

41:24So that's how we calculated 3b. And then conscription was a dummy variable. If you had conscription, as Israel did, you got a zero, and if you didn't, you got a 10. Conscription doesn't really belong in with takings, although it could because you're really taking labor. Ideally, what I would have loved to have is another section on labor, labor market freedom, and where we could have got unions, percentage of unions, and the higher percentage of unions, the less economic freedom and the lower, the higher. And in subsequent iterations of this, I dropped off, my co-authors kept going and now they have unions and they've rearranged the criteria. I think we're up to maybe 23 criteria instead of 17.

42:11So it's an ongoing thing. Okay, so that's it for the third category and the third country. Now, the fourth country is Hong Kong. I don't seem to be able to run from my notes. Here's Hong Kong, and you'll notice that Hong Kong is way up there. They're the best country in the world, or they were when they were a free country. You know that movie The Mouse That Roared with Peter Sellers? You must watch that. It's a great movie if you've not seen it. What happens is that Peter Sellers is in a little country in Europe and they're very poor.

42:56Think Liechtenstein or something like that. How many people have seen that movie? None of you? That's a disgrace. Oh, one person, okay. You're saved from disgrace. So you check... You're an older person, okay. This was a movie in the 50s, I guess, a black and white movie. I think it's about 68. 68? Okay. I'm not a historian, so I don't know. Well, Dr. Strangelove was a good movie too, but this is a different kind of movie. And what it was was Peter Sellers' country was a very small duchy and they were very poor. So they figured the best way to get rich is to get foreign aid. But the only way to get foreign aid is to lose a war to the United States. But the United States was ignoring them. So what they did is they went over to the United States, Peter Sellers and about 20 soldiers, and they attacked the U.S., and they figured that way the U.S. would sort of put them in jail, and then they'd give them welfare or foreign aid.

43:54Instead, somehow, don't ask, Peter Sellers and his little band of 20 soldiers, no guns but pikes and bows and arrows and stuff, it was very funny, they somehow managed to win the war. Now, Peter Sellers plays about six or eight of the category of the characters, you know, he's the queen, he's the king, he's the duke, he's the general, and the funniest part of the movie was when you saw two half split screen, you know, where Peter Sellers, the general, is reporting back to Peter Sellers, the prime minister, saying, we won the war, and the prime minister was saying, you fool! What do you mean you won the war? You're supposed to lose the war. There's a point to this, you know, it's not just total silliness.

44:39The point is that, in a sense, Hong Kong could be looked upon as the mouse that roared. You'd think, you know, Hong Kong versus China, 10 million people versus a billion people. Who's going to win the war? Obviously, the big elephant will win the war, not the little mouse. But in the audiological war, it seems almost that the Hong Kong mouse beat the giant of China, Because now China is taking the Hong Kong road, at least economically. Okay, there's a Tiananmen Square here and there, but heck, there's also a Waco, which is roughly the equivalent, and no one would say that we're not economically free because of a Waco. But you have to distinguish between economic freedom and other kind of freedom.

45:25Waco is not a free thing, but it wouldn't get on our index. We've got no Wacos here. We're limiting our vision to economic freedom. Okay, so we're now illustrating the last of the, well, I've got my notes there. Maybe I'll use a different one for the four.

45:57Okay, so the first of these, 4a is taxes on international trade, which is an obvious no-brainer. The second one is exchange rate control. The third one is an econometric attempt to estimate what the level of free trade would be if there were no tariffs. And I won't get into that. And the fourth one is, are you able to engage in capital transactions with foreigners? Okay, so we've now illustrated four countries and four categories and 17 subsections of it.

46:43And now we're ready for Exhibit A. We're ready for the denouement, the final cataclysmic, econometric equation, And if I can put it in those terms, we're ready now to correlate economic freedom with GDP and change in GDP. And what we have here is first, let's take GDP. Now, what we did is we took anything with an eight or eight or above was an A, seven was a B, six was a C, D was a five, F was a four and F minus was a three. or below okay now you remember that these 17 criteria had nothing to do with economic growth there was no IQ there there was no capital there was no resources there was nothing no investment there was nothing that most people think accounts for GDP instead there was all this stuff about how much busy-bodiness is the government doing and can you set up a business quickly or You have to wait three years before you can open up a fish shop or something like that.

47:56So we tried our best not to fudge, not to pick things that could lead to wealth. We didn't put natural resources or anything like that. We put things to the best of our ability, given, for example, that there's no gold standard. We had to use something for money. To the best of our ability we picked 17 things that had nothing to do with wealth or GDP or anything like that and now we're going to correlate it with it and lo and behold we find that there is not a perfect correlation but certainly a very strong correlation and I'll get to the exact correlation when I give you the econometric equation namely that the richer the country the more economic freedom or obviously the more economic freedom the richer the country on a per capita basis and this is the the final conclusion of the of the piece and not only that not only are countries that are economically free relatively rich they're also have the highest growth rates and you can see that the

49:14The very rich countries are growing faster than the, rather the very free countries are growing faster than the intermediately free countries and that the most unfree countries are not growing at all but retrogressing. You know, sometimes they call it developing countries, these economic basket cases. We can now see that they're not developing countries, they're retrogressing countries. and you know our friends on the left are always calling things names by you know good learners or something for people who fail exams you know there's no more failure you can't fail an exam it's somebody who didn't pass this time or something like that and and every kid has to get an award and you know all countries are developing countries but they're not some of them are retrogressing countries okay now let me put up the econometric equation that that underlies this whole business, let me blow that up a little bit, what's going on here, what we're comparing is the dependent variable is the growth rate from 75 to 94 and we're comparing the level of economic freedom

50:34With the change in economic freedom, LEF is level, CEF is change in economic freedom, with the criteria, with the thing that most development economists think is important, namely the percentage of investment compared to GDP. Now our t-values in percentage, in brackets are all statistically significant at the 5% level, which shows that the t-values are above 2. The important thing to look at is the coordinates there and you can see that for every 1% increase in growth rate there's a 20% contribution by investment But note that the change in economic freedom is five times more important because one is five times higher than 0.19 and the level of economic freedom is roughly twice as important as investment So if you one day wake up and become a dictator and want to be a benevolent dictator and want to bring your undeveloped country into economic development Yes, the more investment the better But investment costs money, where do you get it from?

52:03Whereas with a stroke of a pen, you could just sort of write stuff and say, okay, we're getting rid of this law, we're getting rid of that regulation, and the power of it will be either twice or five times as much in terms of either level or change in economic freedom. Okay, this is sort of the high point. The rest of the stuff is just implications of that. So let me go over a few of the implications, for example, first we take countries, I'm going to have to make that a little smaller.

52:54Income levels and growth rates are persistently high and persistently low rated countries. So you can see Hong Kong, Switzerland, Singapore, US, there's their economic freedom and there's their per capita wealth. And then you take countries like Somalia and Zambia and Hungary and they're doing very badly. And that's in terms of levels, and here we have it in terms of growth. Now this is an interesting point, you can see my handwriting notes, there's more to growth than economic freedom. There is more to growth than economic freedom. Notice that Hong Kong and Singapore are growing a lot faster than the other four or five places that are about as economically free, which indicates that there are other things that determine growth beside economic freedom.

53:44No one is claiming a monopoly for economic freedom. I mean, resources and the human capital also are important. And also, the higher the level you start from, the harder it is to grow percentage-wise. I mean, if you started practically zero, like Hong Kong and Singapore did in the 70s, you can grow a lot faster in percentage terms than if you start, say, with Switzerland, which was a wealthy country. Okay, so that's one way to look at this. Another way to look at this is

54:23the economic freedom ratings from 75 to 95 and the growth rate for high rated non-industrial countries. So these are all non-industrial countries that are high rated and they're all doing pretty well. We've got Hong Kong, Singapore, Malaysia and Thailand And then what we do in the next bit is low rated non-industrial countries and you can see that they're doing pretty badly, Brazil, Syria, Algeria and Nigeria. These are low rated countries. They are have a low level of economic freedom and their growth rate is very low.

55:09Where as before, they had a high rate of economic freedom and their growth rate was pretty good.

55:18Okay, we're ready to reconvene and as is our usual practice, a few of my stupid jokes. Okay, we're on to the very important question of why did the chicken cross the road? And here is Jerry Falwell's analysis of why the chicken crossed the road and it is because the chicken was gay. Isn't it obvious? Can't you people see the plain truth in front of your face? The chicken was going to quote the other side. That's what they call it, the other side. Yes, my friends, that chicken is gay. And if you eat that chicken, you will become gay too.

56:05I say we boycott all chickens until we sort out this abomination that the liberal media white washes with seemingly harmless phrases like the other side. Ernest Hemingway, why did the chicken cross the road? To die. In the rain. Alone. Martin Luther King Jr., why did the chicken cross the road? I envision a world where all chickens will be free to cross roads without having their motives called into question. Grandpa, in my day we didn't ask why the chicken crossed the road. Someone told us that the chicken crossed the road and that was good enough for us.

56:51Okay, enough with chickens. Okay, the next category of countries that we illustrate in the book is countries that are less developed that became more free. So just because you're a less developed country doesn't mean that you can't have a good economic growth rate. And you can see that pretty much these countries are having positive growth rates. And we've got Chile, Portugal, Pakistan and Mauritius. The next category is economic freedom ratings and growth rates of less developed countries that became less free.

57:47Now look at Venezuela, they were pretty good at the beginning of the period and they kept declining and their economic growth rates indicate, are consistent with our view, similarly with Honduras, similarly with Iran and Nicaragua. And remember this is Iran before it became the devil incarnate, long before the recent issues. Okay, now here we have growth rates of the 10 countries with the largest increases in economic freedom during 75 to 90.

58:33And you can see what the change in their per capita GDP is. And on the same page, we have the 10 countries with the largest decline in freedom ratings. In parentheses here is the decline and you can see what their growth rates look like. So these are just other ways of teasing out the implications of the first one that I showed you as Exhibit A and I gave you the econometric equation thereof. Just different implications of that. the lesson goes on and on every country with some slight exceptions but most countries that have had a high level of economic freedom or an increasing level of economic freedom did better on growth rates than countries that were either low The next exhibit to buttress this point is growth per capita GDP during 80 to 90 for countries that had a one-unit increase in their economic freedom rating between 75 and 85, namely five years before compared to the growth rate with countries that had a one-unit increase in their economic freedom rating between 75 and 85, namely five years before

59:55So you can see the countries that had a one unit, actually Mauritius shouldn't be there because it's a 2.1, that's a typo. And also here are the countries with a one unit loss and actually Iran and Nicaragua shouldn't be there because that's a typo. loss, and actually Iran and Nicaragua shouldn't be there because that's a typo also that I just discovered this morning because they have more than a one unit loss but all the other countries had a one unit loss and you can see what their growth rates are like. Okay, so much for all the countries now what we're going to do is compare the with different rates of economic freedom change of the whole world.

1:00:54We're taking all countries together and we're showing it with different weightings. And the purpose of this is to show that the weightings don't really matter that much, no matter how you weight the various components. It comes out to be the same thing, namely that economic freedom is growing slightly from 75 to 95. Here it grows from 4.1 to 5.2, here from 3.9 to 5.2, and in the overall summary index, the one that we've been mainly using, it's 4.2 to 5.2, so it doesn't matter much. The next batch of analyses shows each of the 17 different criteria, like here's the money expansion, here's the inflation variability, The first three here is foreign currency accounts and here is deposits abroad.

1:01:50Let me just take the top six here. This will be a little bit out of order. Take the first three here, money expansion. We started at 3.6. We got freer to 5.1 in 1985 and then 10 years later we got to some intermediate point. In terms of inflation variability, and this is for all the countries in the world, They're slightly better in terms of foreign currency accounts, much better from a 2.5 to a 2.8 to a 5.0, sorry from a 3.2 to a 3.8 to a 6.0 and deposits abroad are 2.5, 2.8 and 5.0. Here is government consumption, a slight loss.

1:02:35Here is government enterprises, no real change, credit market, significant improvement from 75 to 85, but then pretty flat from 85 to 95, transfers and subsidies, the world economy or all the countries on average are doing slightly worse, marginal tax rates much better. In the US, the marginal tax rate was in the 93-94% level 20 years ago. Sweden had a marginal tax rate of 110%, something like that. And it was interesting because Björn Borg, a Swede tennis player who was making big bucks, let's say he was making 10 million.

1:03:20And if he made another million from 10 to 11, they would tax him 1.1 million, because it was 110% marginal tax rate. Can you imagine that? So if you're making 10 million and you're thinking of going to another tournament to make another million, and if you succeed, they'll take a million and a hundred thousand away from you. So what he did is he left Sweden and he went to Monaco. There's a movement afoot nowadays to reconcile tax rates across countries because it's really unfair. Those countries that have low tax rates, the Bjorn Borgs leave and go there. And in the EEC, or in the European Economic Community, they're trying to, you know, France and Germany and the bad guys are trying to make those countries that have lower tax rates level up to their level.

1:04:11And similarly with the countries in the Caribbean that have low tax rates, you know, because it's unfair to whatever to have such low tax rates, because then you get the Bjorn Borgs. Well, marginal tax rates are, you know, part of the story and we are doing better overall in marginal tax rates. The US is a big part of this because we're a big country, relatively big. China is not in there, India is, but China is not. So in marginal tax rates we're doing a little bit better. Conscription, worse. And here is the international sector.

1:04:56Trade taxes, better. Exchange rate controls, better. A little slippage from 75 to 85, but then a recovery to 95, the non-tariff barriers, about the same, and capital mobility constraints, restraints, better, but we started off from a very bad 2.1 level out of 10. Okay, now we get to stuff that in my view is the most powerful argument that you can use with your friends from the left. And that is economic freedom and inequality.

1:05:50I can't get the whole thing on the page, so let me make the page a little smaller. There we go. Now, you can see that it's not a perfect correlation. What we do is on the vertical axis, we have the ratio of the top 10% income to the bottom 10% income. There are a lot of ways to measure income inequality, but that's a reasonable one. What's the ratio of the people at the top 10% to the bottom 10%? There are other ways, but that'll do just fine as a rough measure of what the inequality is within a country. And on the right, or rather on the horizontal axis, we have levels of economic freedom. And you can see that in the countries with the greatest inequality, they are the country with the least economic freedom.

1:06:41And the country, well, I can't say the country with the top rating has the most inequality, because that's the middle country so you don't get a if you connect all the tops of these things you don't get a clear and unambiguous downward trend but if you take the least squares line between those points you can see the trend is downward this is a very very powerful argument against people on the left Because whenever I give this talk, this summary of the book, to a mixed audience, the big, big question is, well, what about income and equality? For them, that's more important than whether you're starving. I mean, if everyone is starving equally, that's sort of okay, because, you know, equal...

1:07:31You know, I used to think when I was younger and more naive that when push came to shove, human life was more important and then their crappy ideology and I learned that it's not so. For example, the Red Cross took blood from homosexuals even though they knew that they had a higher incidence of AIDS and gave it to hemophiliacs who needed blood transfusions who got AIDS. This was the triumph of ideology over human life. The ideology was to not insult homosexuals and so if people died, they died. Well, this ideology is very powerful stuff. It's even more important in life for a lot of people.

1:08:16So what we're doing is something very important, dealing with ideology. We're ideologues, namely people who study ideas. I don't see why that's bad, or you're an ideologue, you're evil. I mean, you're studying ideas. Okay, so this is maybe the second most important chart in the whole thing. The first most important chart was showing that the freer you are, the wealthier you are, and the freer you are, the faster you're growing. But maybe this is even more important, at least for converting people on the left. And I think that's a great idea to try to convince them that on their own principles of egalitarianism, the free enterprise system is better than its opposite. And again, the reason is that when you have economic freedom, most of what goes on is based on trade, and trade is mutually beneficial.

1:09:09Yes, the rich get richer, and they pull up everyone else with them. So the relative distance between them is not so great, whereas in countries that don't rely mainly on trade and markets and private sector, The rich get rich at the expense of the poor and the gap widens. Very, very powerful debating point or insight with regard to our friends on the left. Now, there are some other charts. These came not from the book that I co-authored, but one of the subsequent volumes. This, too, is important. Economic freedom in cereal yields. Why cereal? Well, cereal is the difference between starvation and not.

1:09:55And there you can see that there's a positive correlation without any dips. And now you have economic freedom in life expectancy, which is also clearly the more economic freedom, the more life expectancy. and life expectancy. So if you want your country as the benevolent dictator to have more economic, more life expectancy, then you have to go that way. Okay, this is the end of my formal presentation on this subject. So, questions? Discussion? Noah? I'm wondering on this inequality chart, how do you answer someone who would look at this and say, well, I don't see a completely downward trend and among those in the top rating, we don't have complete economic freedom.

1:10:53Who's to say that if the top rating became a perfect ten, completely economically free, you wouldn't have something as high as the bottom, bottom rating. It's not like a U shape maybe. We just don't have those, we don't have anybody economically free enough to show that. There's nothing in my study that would counteract that. It's possible that if we went from the highest rating of say an 8.5 or whatever it is and everyone was like Hong Kong at 9.9. Well one way is to look at the Hong Kong one. or to look at Hong Kong, Singapore and the US and New Zealand which are the top four and see if you can see if you if it's u-shaped that would be that would be an interesting dissertation there's nothing I've done that precludes it I don't expect it I'd be puzzled by it but you know once you're in the empirical world anything can happen and what we would say then is that Given this analysis of trade improves both people, whereas non-trade deviates them,

1:12:08we would have to say there's something wrong with the data. Either it's GDP that's screwing up, or it's leisure, or the measurements aren't that good. But you see, this is the praxeological part. This part we don't give up. This part we know it's a synthetic a priori that trade benefits both parties and violence helps one and hurts the other. We don't give that up. Now, whether we can illustrate this, if we can't, then we need finer empirical measures that the next generation of students, such as yourself, will hopefully refine this stuff. This is a first hack at it. This is the first time this has ever been done. Conceivably, it isn't as perfect as it can be, as the years go on.

1:13:01Yeah. How has the index evolved since this was first published? Chris Lawson and Gortney have continued. They've added more countries and more criteria, because they unearthed more things that they got data for. But other than that, the same things are continuing. We're still showing the evidence is that the more economically free you are, the wealthier you are, the faster you're growing, the more economic equality, what have you. There's no U-shape, no U-shaped thing. In 2005, it's the same thing as 75, 85, 95.

1:13:51These things aren't changing. Has China been added to the EU? I can't hear you. Has China been added to the EU? Yes, China is now in there. I've sort of dropped out because I decided that my own comparative advantage and interest was more in things like, you know, what do you do about abortion or stem cell research or you know these philosophical issues and once I I was sort of in on the ground floor with the ideas for this but once it got going my own personality wasn't really into the numbers I mean advice for new people who are going to get PhDs in economics especially you have to have some numeracy and if you hate math well there are ways to get a PhD without it and I've written about I've learned about this a lot and it's on the web, on the Mises web, so you don't absolutely need the math, but it's a lot easier.

1:14:43It's just that my personality is such that I'm not into the math. I remember when I was getting my own Ph.D., when I entered Columbia in 65, you needed two languages to get your Ph.D. I'm pathetic at language, and I only had Spanish very little bit, but happily after three years or so they allowed you to substitute math as a language for your second language. So I snuck through on that, otherwise I wouldn't have a PhD had it not been for math. So I'm reasonably conversant with her, or at least I was 30 years ago, but my own interests are not in the statistical element, but I respect it. I respect it, it's okay, it's part of life, and I very much resist the notion, when Roderick said it, he was just kidding, he said, Oh, I thought, you know, we're Austrians, we don't do any math, us that. We do. It's just that we put a different interpretation on it.

1:15:40We're not going to say, ah, the numbers, you know, look at the third and the second quintile, you know, it shows, And then we say, oh yeah, maybe economic freedom isn't good. Even the Chicagoans, like I talked about with Becker and Farnes Welch and these guys, and the quote from Buchanan, even they, if you scratch a good mainstream economist, there's a core of Austrianism in there, we just have to bring it out. And the core is that synthetic a priori is praxeology, a la Mises. Great question. Let me repeat it in case it wasn't clear. She asked me before, and now I'm hearing it for the second time, The other day we had the question from an insolent, disrespectful student, not mentioning any names, Carrie, who said, suppose that there's a baby on the porch of your house, what positive obligations do you have?

1:16:59Do you have to notify anyone or anything like that? And now, Anka? Oskar is saying, well suppose either garbage or a bicycle or something else is dumped on your porch, what obligations do you have with that? And the idea is that sometimes when you can't answer a question, you ask a slightly different question and see if you can answer that and then you can go back to it. And I think that's a very good technique. And obviously, if you find garbage on your porch or a bicycle on your porch, you have no positive obligations as a libertarian to do anything with it. By extrapolation, ditto for the baby. Not that we think babies are garbage, or babies are bicycles, which our critics will then say, Aha, Block thinks babies are garbage, but that's not so. But the same implication follows.

1:17:49For example, or to take yet another example, suppose I see someone drowning over there, just right there and I could easily just toss over a life raft without any danger to me, I don't have to jump in. Do I, according to the libertarian theory, have an obligation to do that? And the answer is no. You know, sometimes after the session is more interesting, people gather around and we really get into it. The only example that I can think of, which is a counter example to this, is if someone is drowning, and I start swimming out there announcing to all the people on the shore, I'm going to save that person, and I've got a life preserver, and then when I get there, I go, haha, not saving you, there's sort of an implicit contract that I had with the people on the shore saying, don't worry, I'll save that person, and then when I get there, I let them drown right in front of me while I'm holding them down,

1:18:45As a living life preserver, here we get into the implicit contract business and I think now you can have a case on libertarian grounds without positive obligations which we want to abjure at all costs that I do have an obligation to save the person because I sort of told these people I would and they were ready to go save them but they didn't because they were relying on me. Statistical Issues. So, I'll see you then. Take care.