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Freedom makes you wealthier and happier

Politicians across the globe are disowning freedom orientated economic policies at the very moment in history when they should be doing the opposite.

From a populist protectionist Republican President in the US, to a left wing Labour Party Leader in the UK, the times are changing. Jeremy Corbyn argues that the political centre ground itself has moved to the left.

Statism and protectionism are back in fashion. Freedom and free markets are being sidelined across the political spectrum, at the very moment in history when their benefits are most evident. Freedom and free markets make you wealthier and happier. Let’s look at both aspects.

Firstly, in terms of the academic evidence showing the advanced economies could experience a surge in growth and vitality from shrinking the state. Secondly, in terms of the gains to subjective wellbeing and happiness, from economic freedom.

Over the past 20 years the economic literature on the relationship between government size and growth has become more sophisticated. Generally speaking, the more recent the study, the more sophisticated the methodology and the more robust the finding of a negative relationship between government size and growth.

There is an increasing consensus in the literature on the scale of the trade-off. A 10 percentage points of GDP increase in the size of the state, is associated with a 0.5 to 1.0 percentage points reduction in the GDP growth rate.

Moreover, economic freedom (the inverse of the size of the state) does not just mean the size of taxation and public spending. It also includes the effects of product and labour market regulation, protectionism, intrusive political correctness, protectionism and anti-competitive market distortions (ACMD). ACMDs relate to the protection of property rights, the rule of law, and the presence or absence of corruption. There are 6 types of ACMDs: (1) Government laws, regulations or practices which eliminate competition entirely. (2) Laws that lessen competition. (3) Laws that are applied differently with exemptions for certain firms. (4) Distortions caused by state owned companies. (5) Action or inaction by competition agencies. (6) Anti-competitive state aid or support. The problem with all these various aspects of intervention is that only the first one, tax & spend can be quantified. The rest fall under the radar even though they could be grossly distorting and damaging to the economy.

The positive relationship between economic freedom (in terms of a smaller state as measured by indices such as the Heritage/Wall Street Journal Index of Economic Freedom and the Fraser Institute’s Economic Freedom of the World Index) and material prosperity is overwhelming in the literature.

And the measured  impact could become even greater in the future due to: (1) Methodological improvements overcoming econometric modelling difficulties, and improved measures of intervention elsewhere. (2) The potential for workers to become more sensitive to tax disincentives in the 21st century than in the 20th century, due, for example, to increases in the proportion of self employed. (3) The nature of the agile, flexible, mobile digital economy which will demand more not less economic freedom for success in the 21st century.

Historically, the happiness literature has tended towards an interventionist stance and has been used for that purpose. Even though economic freedom and material prosperity are seen to go hand in hand, the non-material aspects of prosperity, and the consequences of the exercise of free choice, have been largely overlooked.

But in recent years the research has shown a powerful positive effect of economic freedom on subjective wellbeing. The direct implication of the wellbeing research is that we’re hard wired for freedom. What’s more, it may come as a surprise to some readers, but more equal societies are not happier societies. Greater government intervention isn’t associated with greater happiness.

Research shows that autonomy to choose is a particularly important direct channel on subjective wellbeing, because it establishes this element of freedom as an end in itself. In other words the positive impact of economic freedom on wellbeing is not confined to the material wealth it confers – the indirect channel. This has powerful implications for the provision of choice in public services such as health and education.

Economic freedom is a fundamental pre-requisite for both forms of prosperity – material and immaterial. But perhaps most importantly, economic freedom has to be seen as an end in itself. What the American philosopher, John Tomasi, has described as “a much thicker concept of economic liberty … on a par with natural rights.” The battle for freedom is a battle of worldviews, which must be fought by every generation.

The Athenian philosopher, Thucydides, is quoted as saying: “The secret of happiness is freedom. The secret of freedom is courage.” Politicians need to rediscover the courage to fight for freedom orientated economic policies.