Economic Freedom of the World: One of Many Big Questions for Students at Hespérides

By Nikolai Wenzel, Director of the Master’s in Economics at the Universidad de las Hespérides

A few days ago, without any fanfare, an important document for world liberty was released, as it is each year, quietly: the 2024 index of Economic Freedom of the World (www.freetheworld.org).

The idea of measuring economic freedom was first proposed by Nobel laureate Milton Friedman in the 1980s. It was picked up by the late great economist James Gwartney and his student Robert Lawson. Jim was my teacher, even if I never had a formal class with him. I always learn from Bob, although we are friends and he never was my teacher. Jim and Bob produced a prototype in 1990, and launched the index in 1996.

The EFW (Economic Freedom of the World) index measures economic freedom for each country in the world, using a five-point index. It’s a fun way to spend an afternoon. First, the world map shows countries with a color-coding. The top quarter of countries are in blue, the next in green. Mostly unfree countries are in orange, while the world’s least free economies are in red. Second, after an overview of the world, one can visit each country to see how it ranks, according to five dimensions. Finally, one can click on a country and watch its evolution since 1970. We can see Chile’s evolution from red to blue between 1970 and 1990, China’s move from red to orange (where it remains!) in the late 1990s, or Venezuela’s drop from blue to green in the 1980s, then to orange, and then to red, where it has remained for the past 25 years.

Friends of liberty are mostly preoccupied with political liberty (voting, free speech, fair trials) – and with good reason! But the importance of economic freedom is often neglected. Think for a moment what political freedom means without economic freedom. Free speech means nothing if the ink, paper, presses, microphones, radio stations, television, internet, newspapers, and universities all belong to the state. And it is hard to live a life of human thriving and dignity when one has little economic opportunity or income.

The EFW index measures economic freedom according to five categories:

1. Size of government. Government may be necessary to protect individual rights and (maybe) to fix market failures. But bigger government means that greater portions of national economic activity are controlled by politicians and bureaucrats, rather than by consumers and entrepreneurs. Political activity comes to be rewarded more than economic activity. 
2. Legal system and property rights. Without security of property and contract, and without independent courts, rising uncertainty makes economic activity more challenging.
3. Sound money. Inflation takes from consumers, redistributes wealth from savers to borrowers, and creates uncertainty for the entrepreneurs who drive the economy.
4. Freedom to trade internationally. Economists have long demonstrated that the ability to exchange internationally expands market opportunities and wealth. Tariffs are essentially taxes on foreign goods – but also taxes on foreign specialization, labor, and knowledge.
5. Regulation. Some regulation may be necessary in a market. But regulation can become a barrier to business creation, job creation, and opportunity. And, in many cases, it is driven by special interests, rather than some idea of the common good.

It is no surprise, then, that economic freedom is so closely related to a country’s economic output – overall, but also increased opportunity for the poorest, for women, and for various measure of health and well-being.

So, what do we make of all this? Why are some nations rich and some nations poor? How do we approach the problem of world poverty? Is economic freedom enough, or is there a broader role for the state? 

At the Universidad de las Hespérides, we explore such questions, using the tools of both standard and heterodox economic theory. From standard (neoclassical) economics, we examine opportunities from trade and specialization, and the effects of state intervention in the economy. With Austrian economics, we examine the extent to which bureaucrats and politicians have the requisite knowledge to fix market outcomes. With Public Choice theory, we examine bureaucrats and politicians, to determine when they will have incentives to serve themselves or serve the common good. With New Institutional Economics, we look at the importance of the institutional environment for human flourishing and economic growth. We employ both quantitative and qualitative tools to answer these and other exciting questions.

Join the conversation! Find out more here: https://hesperides.edu.es/