Economic Freedom: Toward a Theory of Measurement

Edited by

Walter Block

The Fraser Institute, Vancouver, British Columbia, Canada



Copyright (c) 1991 by The Fraser Institute. All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews.


PREFACE

This is the second in the Fraser Institute's Liberty Project. It is based on the proceedings of a colloquium held in Vancouver, in July 1988. The first was Economic Freedom, Democracy and Welfare, and is similarly based on the proceedings of a conference which took place in Napa Valley, California, in October 1986.

The connection between the books in this series is more intimate than usual. Each tome builds on the groundwork set by its predecessors, and serves as the foundation of its successors. The Fraser Institute has published other multi-volume series: on Housing, Health, and Anti-combines legislation, the Reaction series, and most recently, the Service Sector Project. But in all of these cases, the constituent elements of the larger study, while to be sure connected to their fellows, can each stand entirely on their own.

This, however, is not true in the present case. So strong is the link between the first two products of the Liberty Project that the entire first section of Economic Freedom: Toward a Theory of Measurement is based on a discussion of Economic Freedom, Democracy and Welfare. Dr. Michael Walker, the editor of the latter volume, begins Chapter I of the present book with an overview of that earlier edition. In his discussion, Walker touches upon how the Liberty Project was begun, and explains some of the underlying techniques for, and the importance of, a system of rating economic freedom. In short, the Liberty project is an attempt to do no less for economic freedom what Freedom House does for political freedom: to calculate the amount which exists in the various nations of the world. In addition, Mike Walker, the Director of the Fraser Institute, summarizes government encroachments on all five continents upon the ability of the citizenry to engage in economic activity, and to keep the fruits of their efforts. The remainder of Chapter I consists of a spirited discussion of these concepts on the part of the distinguished panel of conference participants.

Chapter II features a presentation of the philosophical aspects of Alvin Rabushka's monumental study of economic liberty. This Hoover Institution scholar, an expert in taxation and in the economics of the countries in the Asian Pacific, begins his analysis right where it belongs: with the philosophical roots of economic liberty. He surveys the writings of some of the most influential and visionary contributors to this tradition, starting with the work of John Locke, one of the originators of the private property-based free enterprise philosophy. Although somewhat suspicious of Locke's reliance on majoritarian democracy, Rabushka focuses on his important contributions to government limitations and homesteading, as the source of private property rights.

Next comes Milton Friedman, who Rabushka characterizes as a "modern-day John Locke." He focuses particularly on Friedman's book Free to Choose, which makes the case that economic freedom is a necessary but not sufficient condition for political freedom -- the departure point of the Fraser Institute's entire "Freedom Project." As well, in this book Milton and Rose Friedman discuss the proper limited role of government, forcefully maintaining that when the public sector exceeds these bounds, it violates an economic "Bill of Rights."

Rabushka concludes his discussion with the work of Murray N. Rothbard, who has been called the father of libertarianism, in order to present what some consider "the cleanest, purest exposition of the principle of economic freedom." Rabushka presents this natural rights-based free market anarchist position not because he goes along with the position that literally all government activity should be privatized, but in order to establish an end point to the free market continuum.

With this provocation, the ensuing discussion was wide ranging and highly spirited. Some of the topics covered in greater depth were utilitarianism, alternative definitions of economic freedom and property rights, the plight of Hong Kong, the restructuring of socialism, libertarian theory, Rothbardianism, conceptual difficulties in measuring freedom, noise and air pollution, institutional stability, and homesteading airspace.

Chapter III is devoted to Alvin Rabushka's analysis of the Freedom House survey of economic freedom. Although primarily associated with the rating of political liberty, this organization has recently concerned itself with economics. But the experiment has not proven too successful, at least to date, according to Rabushka and the panel participants. The major criticism is that Freedom House conflates economic freedom and democracy. For example, if a polity but votes for rent control, minimum wages and tariffs in an open and free election, then according to Freedom House calculations, these laws, which would otherwise have been considered paradigm cases of the denial of economic freedom, somehow become freedom-enhancing. Particularly unsatisfactory in this regard is the linkage between extent of unionism in a country and economic freedom.

In Chapter IV, a preliminary definition of economic freedom is attempted. Based on Rabushka's analysis, and the consensus of the conference participants, the following considerations emerged: at the core of economic freedom is an appreciation of the institution of private property, whether in human or physical capital, and the right to trade. It applies preeminently to individuals, not to political or other groups or majorities. It is consistent with the necessarily coercive role of the state, but only if its actions, and the taxes imposed in order to accomplish them, are severely and strictly limited. Economic regulation, and public ownership of economic activity, then, are highly dangerous to a regime of economic liberty.

The discussion focussed on seven critical categories: private property, the rule of law, taxation, government spending, regulation of business and labour, monetary policy, and free trade. Among the most disputatious issues were the role of government in the provision of money, anti trust legislation, "voluntary" taxation, the regulation of externalities such as air and water pollution, and food and drug and occupational safety legislation. As well, there was the highly controversial methodological issue of whether economic freedom is "out there," just waiting to be measured, or whether it is a concept that can better help us to explain and understand economic reality.

Chapter IV, written by Zane Spindler and Laurie Still, is our first attempt to quantify the analysis. They create an index of economic freedom which encompasses such criteria as conscription, privatization, public sector involvement, profit repatriation, import restrictions, foreign ownership, infrastructure, licensing, taxes, banking regulations, military conflict, government stability, trade barriers, investment incentives, bureaucracy, labour relations, deregulation, and price and exchange controls. Then, they apply this to 145 countries, where a rating of 1 indicates a high degree of freedom, and 5 a low degree. On this basis, countries such as Cayman Islands (1.25), Costa Rica (1.00), Australia (1.62), Austria (1.60), Belgium (1.71), Denmark (1.87), Fiji (1.50), Great Britain (1.33), Hong Kong (1.14), Lichtenstein (1.25), Singapore (1.37), St. Lucia (1.33), Swaziland (1.30), and the U.S. (1.81) are amongst the freest in the world, while Afghanistan (4.14), Albania (4.20), Bulgaria (4.30), Cuba (4.75), Czechoslovakia (5.00), East Germany (4.50), Iran (4.60), Iraq (4.28), North Korea (5.00), Laos (4.33), Romania (4.00), Vietnam 4.20), and Yugoslavia (4.00) are the least free.

The critical discussion which greeted these findings ranged far and wide. Several of the criteria used in the index were questioned, such as the claim that the freedom to form restrictive associations impeaches other's rights to free access. There was a consensus, however, around Milton Friedman's point that at bottom, civil liberties can be reduced to economic liberties.

The Fraser Institute has had a deep and long abiding interest in the analysis of economic freedom. It is publishing this volume in the hope of encouraging wider discussion of this topic, and moving toward that day when the economic liberties of the nations of the world may be more meaningfully measured. However, the authors and contributors to this volume have conducted their research independently, and the views they express may or may not conform singly or collectively with those of the members of the Fraser Institute.

Walter Block

CHAPTER I: DISCUSSION OF "FREEDOM, DEMOCRACY AND ECONOMIC WELFARE: PROCEEDINGS OF AN INTERNATIONAL SYMPOSIUM"

Michael Walker

This discussion is the second in what shall be a series of five symposia on rating economic freedom. Let me give you a little background on this project. I was asked to participate in the 1984 meetings of the Mont Pelerin Society at Cambridge, England. The paper upon which I was asked to comment, "1984 - A False Alarm," by journalist and historian Paul Johnson, presented a view of George Orwell's predictions about the demise of democracy that proved to be too pessimistic. In commenting on Johnson's paper I raised a number of points which I thought demonstrated the accuracy of Orwell's analysis, even if he had been wrong in the extent to which the totalitarian forces would exert themselves by 1984.

For example, the increase in the aggregate tax rate borne by citizens in Western democracies has gone hand-in-hand with the decline of their ability to individually control their economic destinies. The use of social insurance numbers to trace every financial transaction of which individuals engage has increasingly exposed private affairs to the potential scrutiny of the state. The fact that one of the economic transactions subject to scrutiny are contributions to political parties, led me at the time to note that this intrusiveness of the state might eventually challenge the political freedom which, in Western democracies, we take for granted. Ultimately, it is the wide dispersal and availability of financial resources which enables citizens to challenge the political power of governments. In other words, I opined, there is a connection between the extent of economic freedom and the dispersal of economic purchasing power and the extent of political freedom enjoyed by people.

In support of that comment, I naturally referred to the famous passage in Capitalism and Freedom by Milton Friedman, with Rose Friedman, in which the authors note that,

historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity.

At the meeting in Cambridge, there then ensued a discussion about the relationship between economic and political freedom. It became clear during the course of this discussion that while Milton and Rose Friedman's comment had been extant for more than several decades, there had been no serious attempt to explore the relationship between economic and political freedoms in a scholarly way. I decided at that time that such a discussion should be undertaken and was able to convince Rose and Milton Friedman to co-host a symposium to investigate these relationships. This event, the first in the series, was held in Napa Valley, California, in 1986. The proceedings were published in Freedom, Democracy and Economic Welfare, Vancouver: The Fraser Institute, 1988.

In discussion, it soon became clear that the focus of the symposium should be somewhat broader than economic and political freedoms. As Milton Friedman noted at the time, in some important cases it is civil freedoms and not political freedoms which are of most significant interest and concern. Hong Kong, which has a trivial amount of political freedom, but enjoys civil and economic freedoms, is a case in point.

We were extremely fortunate to attract to that symposium some of the finest minds in the world, representing a broad cross-section of disciplines, including history, philosophy, political science, economics and the law. Of course, the rest of the finest minds in the world are present at this meeting. (Laughter).

I don't think there is any easy way to summarize those discussions other than to give you a sampling, a flavour of what was in each of the papers. I hope that at the end of my summary that those who were at that last session and who think that I have mis-characterized any contribution made by individuals there will correct that.

We had a historical paper by Douglass North which provided fascinating insights about the role which institutional developments and cultural heritage play in the evolution of democratic process. This emerged again in a paper, which I will mention later on, by Ramon Diaz. By comparing and contrasting the evolution of Britain and Spain, North cast into sharper relief the factors that have been important in the evolution of liberal institutions and economic growth in the Western world. This paper was followed by excerpts from the book by Milton Friedman, with Rose Friedman, Capitalism and Freedom, which I have noted, and which were in some sense the catalyst for the gathering. In consideration of the relationship between economic and political freedom contained in the excerpts provides a timeless exploration of the subject and this is evident from the discussion which then ensued led off by Professor Gordon Tullock. It was noted that economic and civil freedoms have in common the fact that they are freedom from coercion by others, whereas political freedom can be viewed as a process whereby people relinquish their rights in a collective majoritarian decision making process. According to some participants, if civil and economic freedoms are guaranteed, then participation in the political process is almost irrelevant in this sense.

While the direction of causation was not established, evidence introduced in the course of conversation led to the definite impression that there is a correlation between the level of affluence and the likelihood that a nation will be politically tolerant and respectful of democratic institutions. Professor Alvin Rabushka, referring to earlier work, noted that he had correlated the levels of incomes with the political freedom indices produced by Raymond Gastil and also reproduced in our volume. These are the famous Freedom House measurements. The unmistakable conclusion from Rabushka's work is that countries which have a high rate of growth and a high level of income are also likely to have political freedoms.

A high rate of growth, it was noted, is difficult to achieve without civil and economic freedoms, suggesting that political freedom and stability may derive from civil and economic liberalism.

Fortunately, an examination of the global record seems to strongly suggest that the existence of political freedom is not a prerequisite to the existence of civil and economic freedoms. Singled out for particular consideration by the participants was the fact that most people tend to associate political freedom with the existence of some sort of majority rule. That is to say, legislation is determined by a simple majority of the populace and all have the opportunity to participate in the electoral process. It was determined by the consideration of a number of examples, that majority rule of itself has no particular virtues, especially if the majority decides to abuse the rights of minorities.

In fact, considerable sympathy was expressed during the last deliberations for the unanimity principle; for the reduction of political choices to those that were amenable to resolution by the unanimity principle. There was a lot of support for the notion that if we are going to talk of political freedoms, then we can only speak of that meaningfully in terms of the unanimity principle.

The discussion then went on from the more general consideration of the prospects to consideration of particular case studies. In the book there is a collection of case studies in which countries from different parts of the world and existing in different cultural and environmental contexts are analyzed to discern how economic, political and civil freedoms co-exist in those environments. The first paper by Alvin Rabushka dealt with the two city-states of Hong Kong and Singapore. Those papers, and the subsequent discussion, confirmed the impression that both these countries have done remarkably well in protecting economic and civil freedoms without utilizing political freedoms in the ordinary sense.

Not only did we conclude that countries have been able to prosper in spite of having no political institutions; the judgement out of the discussions was that they have prospered because there have been no political institutions! Much of the discussion centred on the unfortunate proclivity of the political system to be used for what Gordon Tullock described and Anne Kruger has dubbed "rent-seeking behaviour."

While enjoying substantial amounts of economic freedom, neither Hong Kong nor Singapore are completely free of government intervention. This is particularly true of Singapore, which has a long tradition of governmental activism with regard to such famous institutions as the Central Provident Fund and other social engineering policies. On the other hand, it was also noted that while Hong Kong is subject to economic regulation, by comparison with any other developing country it is undoubtedly the most economically free country in the world.

While the lack of political institutions has been an important ingredient in Hong Kong's past economic success, as the end of colonial status approaches and the beginning of the People's Republic of China hegemony becomes important after 1997, the conclusion is that political institutions maybe the only thing that can act as a buffer between the PRC and Hong Kong's economic and civil freedoms.

As we attempt during these deliberations to become more precise at looking at different countries, there was a lot of discussion about how laws which were operated in one kind of context and by one sort of attitude can be completely changed when activated by a different set of attitudes. For example, in Hong Kong there were laws regarding the freedom of the press which can, in fact, be used by the colonial administrators to simply remove the freedom of the press. But because the administrators of Hong Kong are subject to the second-guessing of the parliamentary traditions of Whitehall, there was no proclivity to use that particular law. When the mandarins of the PRC come to operate that same law it may produce an entirely different prospect and negatively impact on civil freedoms. This is something to remember when characterizing countries on the basis of examining their laws and forgetting the attitudes which may have formed them.

Lord Peter Bauer examined the interaction of economic growth, political sovereignty and freedom in black Africa. He noted that the colonial managers of black African states left an administrative residue which has subsequently become the "ready-made framework of economic totalitarianism." As if to underline the point I have just made about Hong Kong in the PRC era. One very interesting nugget that emerged from the discussion about the black African situation was a comment to the effect that as Isaiah Berlin noted in 1958, the notion of liberty is a concept of such porosity that there is practically no interpretation it is capable of resisting. The confused identification of the sovereignty of African governments will the freedom of Africans is an example of this kind of difficulty.

During the course of discussion, while there were no firm conclusions, there was a kind of consensus that Africa does provide a large number of examples of the misuse of government power by incumbent governments and the crucial role which protection of civil rights and economic rights has for economic development and political stability. The resounding message from Africa is that those who are seriously interested in the freedoms enjoyed by people must not be misled to believe that political freedom, in the sense of freedom to cast votes in an election can in any sense guarantee freedom that is meaningful for citizenry, and in particular, civil rights and freedom from capricious violence administered by the state. The economic success stories of Africa occur in those jurisdictions where civil rights are preserved and where a measure of economic freedom has been ensured.

The paper by Ramon Diaz on South America was very insightful. He dealt with the puzzle of economic, political and civil freedoms in South America and tried to explain why this continent, which had such promise in its early years, could have lapsed into the economic and political difficulties which are now endemic to the region. Diaz hypothesizes, and the subsequent discussion confirmed that, in part, the difference between South and North America is that the former was inspired by a Rousseaunian concept of the appropriate role of government whereas in the latter the Lockean notion of limited government was more prevalent. Cultural differences, a number of which were raised by Doug North in his paper as being a very important part of institutional evolution, were also mentioned by Diaz as having proved important, and indeed, decisive. This is particularly true of the pervasive impact of the mythological thought and romanticism in Latin society.

The paper by Ingemar Stahl notes that many of the discussions about the relationship between rights and freedoms is often marred by a lack of precision in the terminology used. I can say that if there was one conclusion which emerged from that three-day session it was that terminological inexactitude is the main plague of these kinds of discussions. To try to remedy that, Stahl proposed an approach to the discussion about freedoms and civil rights which relates the contractual relationships between individuals and between individuals and the State. Freedoms in this sense are bundles of rights which will be more or less extensive in different states depending on the regime pursued.

This was found to be a quite useful classification system and it sharpened the nature of the discussion. The discussion itself focused more on the extent to which the relations between the State and the individual really are voluntary in the modern welfare state and, in particular, focused on the issue of Sweden's economic performance in light of the fact that it is a highly redistributive state.

Another point which rose in the discussion was the very important question of the extent to which the modern welfare state apparatus really is coercive. If citizens believe that other citizens are bearing the cost of the programs which they themselves particularly subscribe to, then they are, in effect, voluntarily concurring with arrangements which, while not in their interest, seem to be in their interest because of a lack of transparency of the costs associated with the actions. Discussion of the Swedish case, in particular, revealed that there are many lapses and many imperfections in the conceptual framework which economists and political scientists bring to the analysis of the relationship between economic, political and civil freedoms.

The final paper by Svetozar Pejovich deals with innovation in economic systems. While at first blush it seems to be unconnected to the rest of the papers in the volume, in fact, it initiated a discussion which neatly enveloped much of the discussion which had proceeded. Innovation - the introduction of something new - occurs in economic, political and scientific as well as other aspects of human existence. The amount of innovation, in its broad sense, that can occur in a society depends to a considerable degree on the relationships between individuals and on the relationship between the individual and the state.

As emerged in the conversation, as long as people are free to make contracts with one other about how they will treat each other, even if those contracts involve restrictions, they nevertheless enhance the amount of freedom in the sense of the amount of choice that people have. It was noted for example, that contracts between inventors and those given the rights to use their inventions, while often quite demanding, in effect are intended to provide the user with sufficient latitude to use the innovation in a creative and potentially novel way while protecting the rights of the inventor. The only way the inventor will be inclined to encourage this to happen is if there is some equitable sharing, from the inventor's point of view, of the fruits of that arrangement.

One of the kinds of innovations that can occur in a society where people are free to contract and re-contract and make choices is new institutions. Elections are a process whereby people change governments and the freedom to do that is the freedom to innovate in the political area. Freedom of speech is the freedom to bring new ideas or new perspectives on old ideas to a society, while the range of civil rights which are often the concern of civil libertarians and libertarians are the rights to be innovative in personal behaviours as long as those behaviours don't violate the rights of others. From the point of view of society's economic growth and development, the most important right is the right to innovate; to bring new products, new methods of production and new pricing information to individual interactions.

That's a review of what I believe to be the salient points from our book Freedom, Democracy and Economic Welfare. But most importantly, a resolve emerged from the discussion (which ultimately became that book) that this was only a beginning of the process, not a culmination. At the suggestion of my colleague Walter Block we decided to enlarge our involvement into a series of five conferences, in cooperation with the Liberty Fund, of which the present gathering is the second.

It is our hope that out of this series will emerge a methodology for rating economic liberty. Then, with the basics under our belt, we will be in a position to publish an annual rating of economic freedom around the world - in much the same manner as Freedom House now rates political liberty.

Two final points - by way of perhaps motivating our attempt to become more precise in our measurement of economic freedom. First, if there was one dominant characteristic of the discussions during the last session it was that the dialogue was continually frustrated by the lack of precision about what exactly was being discussed. As Al Harberger put it at one point, the discussion often floated away on a cloud of terminological inexactitude. Hopefully, we can avoid that fate, if we can agree on some taxonomy which we will find useful.

Secondly, as a public policy institute, the intent and the interests of The Fraser Institute are pragmatic. My hope is that from the process in which we are engaged we will produce a measurement technique which can eventually become as much a part of common political parlance as the unemployment rate and the consumer price index. We have had some experience at The Fraser Institute in trying to raise important political and policy issues in the form of measurements which subsequently become commonly accepted. For example, our Consumer Tax Index. See Isabella Horry, Sally Pipes, and Michael Walker, Tax Facts Seven, Vancouver: The Fraser Institute, 1990.Note This is a measurement which now generates considerable amount of interest and activity in Canada every year when we release it. In fact, it generates about 4,000 column inches, of newspaper coverage which in comparable American terms would be about 40,000 column inches, to give you an idea of some of the impact it has.

I would like to see regular reference made to reports that freedom took a nasty turn last week owing to a cloud of interventionism emanating from Ottawa. I would like to see people eventually talk about freedom indices in comparing different provinces, and different jurisdictions. While that maybe an impractical hope, getting back to my original point, I think that if there is a chance to do it, it will come out of this series of discussions. I look forward very much to the discussion today and to the ones which will ensue in the coming years.


Discussion

David Friedman When I was reading one of the papers it occurred to me that a person may want to distinguish between the amount of freedom and the value of freedom. There ware ways in which one may be free, and yet that particular freedom is of no use to you. We think of freedom in terms of how many choices are available, but there are lots of choices I don't want to make. I am freer for being able to make them, yet that particular freedom is not of much value to me compared with the freedom to make choices I want to make.

I am not arguing for identifying freedom with utility or wealth, with how rich or how powerful you are. What I am suggesting is that an index of the cost to me of restrictions on my freedom would be the ratio of the utility I actually have to the utility I would have in an entirely free society.

This definition does not require that perfectly free societies be possible. That is, I am thinking of an absolute in a sense in which every penny of taxation is a restriction on my freedom. It might be that in a society that had zero taxation, my freedom would be violated by countries across the border coming in and enslaving me. Fine, all that tells me is that there may be no stable society whose amount of freedom in this sense is 100 percent.

What I want to get away from is saying "this country is rich, therefore by definition it is free." I want to say instead "the average utility of people in this country, or the GNP per capita, which we may think of as a very crude measure of average utility, is 50. If you had the same country, the same resources, the same people, but no restrictions at all on freedom, the number would be 93. So the amount of restriction on freedom is 50/93." Of course, actually measuring that would be a horrendous problem, but it is easier to think about the actual solution if you at least have a solution in principle.

Unidentified Voice Suppose it was 40 instead of 93?

David Friedman Oh, that's possible. Clearly this doesn't automatically assume that freer makes you happy. It does define away the possibility that restrictions of freedom might make you happier by providing freedom somewhere else. But it might be that in a perfectly free society there would be a lot of heroin addicts, and in a slightly less free society, where heroin was illegal, those people might not be addicted and might be happier. If so, then the value of that additional freedom would be negative. The definition does not automatically assume that freedom is valuable, although obviously I think it usually is.

Ellen Paul I would like to ask for further clarification about the pragmatic uses to which Mike would put this economic calculation. I think it is too narrow if we just hope to influence democratic societies that are already at the top of whatever scale we come up with. It is fine if we try to influence these societies to be more free market and less interventionist than they are already. But, I think that if that is our sole objective, it is really unnecessarily restrictive. We would thereby ignore possibilities around the world for economic change, possibilities that did not exist a few years ago. What I am thinking of particularly is the situation in Eastern Europe and some of the other Communist countries, where there is tremendous change on the horizon, more change than any of their leaders anticipated. Once these forces are unleashed they have a dynamic of their own that is really hard to check. But, if you look at some of the Eastern European countries, whether it is a six or a seven on a scale of economic freedom is not going to make any difference to the leader, but it may be useful anyway to promote this scale in those countries.

What I have in mind is the unintended effects of the Helsinki Accords. When they were first signed, it just seemed like an act of Western cravenness in validating the Soviet conquests of World War II. But it turned out to be useful, as was the Soviet signature on the human rights component of that accord. So, dissidents could say "aha, you are violating the rights you agreed to in this Accord." In other words, if this measure were promoted in Eastern Europe, dissidents might find it very useful as a tool and a check on their own governments. It is really a question of... are you intending to influence these countries with sixes or sevens - low scores - on any scale that we might devise?

Michael Walker There is certainly that possibility, and I would hope that it would be used for that purpose. But there is also a more pragmatic, and from our point of view, more immediate interest: we have to think in terms of a freedom possibility frontier. We have to think in terms of what is possible in our own context. If we don't think in terms of what is possible, if we don't relate it to the amount of resources, for example, that we have in North America, we can get a horrible misreading about the state of affairs. I think, for example, that because we have such a huge resource endowment in North America we have been able to finance all kinds of intrusions and inefficiencies that result from taking away peoples economic and civil freedoms without feeling adverse consequences. We are, to some extent, marching along with great confidence, because our losses in freedom are not evident but our current standard of living is being financed by the depletion of our endowment. If we do have a shock, we will find ourselves in a much less desirable position than we currently think we are.

Ellen Paul I am not denigrating the importance of such an effort. I am certainly concerned with the encouragement of free enterprise in the market societies. I just think if you look at Eastern Europe there is such tremendous opportunity. I know a couple of scholars, colleagues of mine, who have been holding conferences in Poland. One of them comes back every year and says "it's wonderful going to Poland and delivering a paper in defense of capitalism. There are no Marxists in the crowd. Even with the presence of the secret police sitting there in the audience at the University of Warsaw, I still get a much better reception than I do at Cambridge or Oxford." There is a whole generation of intellectuals who disagree with Marx, who loathe the communist system, and who understand it. These people are just craving contact with the West, and I think this enterprise would be a tremendous opportunity to give them ammunition.

Richard McKenzie I am a bit confused on the objective of this endeavour. It seems to me that Mike is too. I'll raise my concerns in terms of questions. Do we want to come up with a measure of freedom that reveals truth about countries on a comparative basis? Or do we want to measure what has instrumental value? That is, do we want to manipulate the process of research agendas? I think if it is the latter objective that we actually want to manipulate the process. If that is the case, you then begin to ask, what is it that the media want? What do we want to feed them? How can we get them interested? What is it about the political process that makes such a number important? And we work backwards. I would like to think that a true measure, if in fact we can come up with one, would indeed be very useful to manipulate the process.

James Ahiakpor Consider the notion that if we found that tax revenues were enough to pay for social programs, then this would be taken as an indication of the willingness of the community to support social programs. My feeling is that if we calculated the incidence of the cost of social programs and compared it with the benefits, we would find that these are not equal. Social programs may well be an avenue for those who pay very little tax or no taxes at all to exact spending on their behalf from those who pay taxes. It seems to me that if we do not find a way of capturing the incidence of benefits and costs of these programs, we would be giving up some latitude in calculating the amount of freedom that exists.

Milton Friedman I would like to continue along the lines of Dick McKenzie's story and go back to Mike Walker's comment about the purpose of this research. I sympathize with the use of this research for propaganda, but I must say I personally find that very uninteresting. Or at any rate, how to use it for that purpose is an issue that economists, philosophers, and so forth don't have much to say about. We're no good at that. If you want to do that you ought to hire some public relations people. It seems to me our interests are scientific and from a scientific point of view I believe that the implicit assumption in much of this discussion is upside down. People are talking as if something called economic freedom is there in the same sense as a mountain is. We know the mountain is there, it exists, we know exactly what it is and we have some instruments and we are going to go off and measure it. But that's not the way science works. That's not the way a concept like economic freedom gets refined and improved and specified.

The fact is, we don't know what economic freedom consists of. We have very intuitive ideas and we would like to do two things, as I see it. We would like to use the process of exploring various dimensions of economic freedom and of trying to attach numbers to them as a device for approaching a more sophisticated understanding of what we really mean by economic freedom. What is the most useful definition of economic freedom? You cannot define a measure without knowing what the purpose of the measure is. What are you going to use it for? For one purpose you measure length, linearly. For another you measure it by the reciprocal. For another you measure it by the log. There is no one answer as to how you measure length. And that's an easy case because length is in a certain sense more objective, but even that isn't strictly objective.

I remember well a marvelous seminar at the University of Chicago that Hayek conducted on methodology. At one particularly memorable session, Enrico Fermi, the famous physicist, spoke about the meaning of measurement. He gave a very simple definition. He said, "measurement is the making of distinctions, precise measurement is making a sharp distinctions." He said the statement, "this is a dog and this is a cat is a primitive form of measurement." And he said, "the concept of length that we use on Earth would be useless on the surface of the sun where the temperature is so high that there are no rigid objects. You would have to develop wholly different concepts."

The same goes here. One reason I am interested in trying to develop a measurement is, first, that it is a way of gaining a more sophisticated understanding of what I mean by economic freedom. A second reason is as a way of exploring the consequences of one or another dimension of economic freedom.

The approach, for example, taken in Zane's paper that somehow or other GNP is a measure of freedom seems to me to be upside down. That may be a result. We all know it isn't a measure. There is nobody in this room who would say that the fact that Saudi Arabia had the highest average per capita income in the world is a result of its having an economically free system. So what we know is that GNP or any such thing, is a complicated result of a great many sources. That is what David was trying to get at by talking about the maximum potential from the present resources. What we would like to do is to understand what the sources of high GNP are. We believe that one of those components is freedom. I say, "is freedom" as if we knew what it is. We don't. But we have certain intuitive ideas. We are trying to refine them. Unless we can view this effort as having a scientific purpose, we don't have anything to hang onto. Otherwise it is purely arbitrary. You like tomato. I like potato. What do we do? I would like to see us try to concentrate, at least for a time, on turning upside down Mike's specification of the purpose of this research. He already knows what he wants to achieve. And I agree with him. I want to change Canadian and U.S. policy in certain well-specified directions that we both know. I have no doubt that the results of a scientific investigation would sharpen the concepts of economic freedom and would help in persuading people to make such changes. But let's turn it upside down and ask, what are we doing this for? How will it help us, as scientists trying to understand the world, to form our own philosophies, to go through this numerical process?

Henry Manne That's a hard act to follow. All I can try to do at this point is to give some additional reasons why I think Milton has put his finger right on the major problem here, although I have one, perhaps, semantic, disagreement.

The notion of economic freedom is very peculiar. If you don't have an instrumental view of it, that is, if you don't have an idea that in some way it can be measured, by Gross National Product, or rates of production or something of the sort, it gets very shadowy and confused with other kinds of freedom. It begins to look like the political freedoms that you are trying in this exercise to distinguish it from.

I think part of the problem is that there is already some confusion that was bound to occur. There was this nice idea that if our side could get the kind of publicity that Freedom House does for political freedom, that would be a great thing. That would sharpen people's sensitivity and so forth. I think that what happened as a result of thinking of that good public relations idea was that we got carried away. We began to think of that as having some real objective intellectual content, and I don't think that it does. As Milton says, maybe it would be a good idea to get some good publicists, public relations people, to do that sort of thing, but this doesn't seem a proper exercise for us.

The discussion already this morning has shown some of the great difficulties involved. For instance, Ellen's comments raise the difficulties between a country's economic freedom, which is a collective notion, and individual freedom. If you take the idea of greater wealth giving some greater freedom to individuals - I don't think anyone disagrees with that notion - then I might quibble a little bit with Milton's point that GNP is not a measure of freedom. It is the best measurement we can get at the moment. That is, the higher GNP or the higher total wealth, the more freedom in aggregate the individuals who own that wealth, enjoy. It doesn't matter what kind of political system there is. You can have a great deal of individual freedom, and the country's freedom can be very low. For example, Milton's example of Saudi Arabia where some people have a great deal of freedom. They can buy and sell huge parts of the world, and yet we wouldn't call the national economy of Saudi Arabia a particularly free one. So that is one kind of difficulty with this.

Another is related if you go along with the notion that wealth is a measure of the individual's freedom. If you set up an index along that line, then immediately, and I think not incorrectly, the U.S. and one or two other countries, become so dominant because of their total wealth, per capita wealth, that countries that are just coming on line, even though they may have a very free political system and don't regulate or restrain property rights at all, are going to look very bad on that scale. You want to use wealth as a measure of freedom, and yet you don't, for your political purpose, because then your index wouldn't have the desired effect.

That raises the question of, well, how would you, circa 1947, have rated Hong Kong? It was very poor. The average income was certainly very low. And yet we didn't know any rate of discount to use to say that the present value is very high because they have put in a lot of freedoms and they are going to do very well. We cannot do that in politics. Consequently, as long as we have no basis for determining the present value of economic freedoms that are simply in the process of developing, there is no such thing as measureableness. That is, until you have some scientific way of predicting political change. I don't think anyone here would suggest we do; so you really can't do the exercise you have set up.

Robert Poole I think there is a fundamental problem with what Henry is saying in terms of different perceptions of what economic freedom means. The option that wealth gives you to have choices is something that we may value, we do value, but that is not at all what I think we are normally talking about when we are talking about economic freedom as analogous to civil freedom, the absence of coercive constraint on choices that we should make. Those are coercive constraints imposed by others as opposed to by the state of nature or the fact of what we have available to us in terms of....

Henry Manne Why do you prefer that?

Robert Poole Well, I think... there are....

Henry Manne Is that a given we have to assume?

Robert Poole Well, I think we need to decide what the whole point of the conference is, in terms of what kind of freedom we are talking about. The point I was going to raise originally was to mention, picking up on Ellen's point about Eastern Europe, that exactly this kind of terminological confusion is imbedded in existing measures such as the U.N.'s Universal Declaration of Human Rights. That document's conception of rights is, in large part, couched in terms of positive rights and entitlement rights. I think we risk getting into the same kind of terminological confusion by talking about freedom as the economic power, to have lots of options, to make choices - as opposed to the negative - liberty conception of what economic freedom is all about. I think we have to really get clear on that before we spend two days on this.

Henry Manne If you have confidence that a full private property system without restraints will give you maximum wealth, maximum production, as individuals will view it subjectively, then there really isn't any difference in these two things and to invent some amorphous notion sitting off there called economic freedom is just a way of confusing it.

Milton Friedman Where do you get that ....?

Henry Manne I want to know where you get the confidence that a notion of absence of constraint is in and of itself a good. Is that simply a given? You see, I find that in absence of constraint that people will act as classical economics tells us they will. They will act in their own self-interest to maximize their own wealth as they evaluate it. And there isn't anything else.

Milton Friedman All I am saying is that it seems to me we can't take it for granted that we know what you think we know. We are trying to understand these things and we are very much aware that power in the sense of availability of goods and services is not the same thing as freedom as in the case of Saudi Arabia. Consider a dozen isolated islands with one person on each. Some are rich islands, some are poor. Are you going to say the rich islands are freer? Well if they are, that is one dimension of freedom. It is a different dimension of freedom than the freedom from coercion by individuals and the question is, does it make any sense to distinguish between these different concepts.

Henry Manne You are assuming my measurement of the Saudi Arabian economy. If one person has all the wealth, there may very well be diminishing marginal returns to wealth for individuals, in which case....

Milton Friedman How do I know what all that means?

Henry Manne I know, we don't. And that's why I say if the GNP in one island is greater, yes, it is freer.

David Friedman It seems to me Henry is missing the point of the Saudi Arabian example. Saudi Arabia could be very equal in the distribution of wealth. Their high real income would still be the result of a number of different things. One is having lots of petroleum under the ground. Another is how free their institutions are in our sense. If you believe that freedom in Bob Poole's sense - absence from coercion by other people - is one of the things that makes people wealthy then freedom is not the same thing as wealth and you had better distinguish it from wealth if you want to test your belief that the two are related.

Ellen Paul I would like to comment on Milton's point that economic freedom is a complicated concept. I don't see that it is all that complex a notion. Why is it so difficult to know what it is? It seems a simple notion to me; of course, if you have lots of participants of diverse ideological persuasions it might become more complicated, even become the opposite of what it ought to be. But at least in this gathering, economic freedom has a rather obvious significance; it mean's that people should own, control, dispose of, trade, and exchange their property without government intervention and without threats of force or fraud from others. Government will not engage in regulating the economy. It won't offer subsidies and monopolies. I think what is difficult is devising comparative measurements. How much freedom did you have in 1970? How much do you have in 1988? Is there more economic freedom in the United States than in Canada? That's difficult, but knowing what economic freedom is doesn't seem to be all that problematic.

Milton Friedman There is sense in which I agree with you. The abstract concept of economic freedom is very simple. I wouldn't put it in your terms at all which seems to me much too complicated. I would say that economic freedom is the ability of any two individuals to make any arrangements among themselves, wherever they are, whatever their sex, whatever their colour, providing it doesn't hurt a third person. That's where you have a real problem with your definition. You may need some of these governmental restrictions to prevent what two people do alone from hurting a third party. Almost all of the difficulties in going from this highly abstract concept of economic freedom to the institutional arrangements that are most appropriate arise out of the complexities that are concealed by the simple statement that two people are free to do anything they want provided they don't interfere with a third party.

Ellen Paul Well, let's take an example. A factory produces an environmental pollutant. Let us say that the mandated that the factory be closed. It says: you can't produce in this way. We'll dictate what kind of production mechanism you should use. Or, alternatively, the government provides courts in which private parties injured by the pollutant can come to attain an injunction or sue to recover damages. Which system is more free?

Milton Friedman I don't know whether it is less free or not.... I don't know. That depends on the transaction costs.

Ellen Paul I want the liberty to dispose freely of my property; you are worried about transaction costs?

Milton Friedman They are the same thing.

Ellen Paul Well, I don't buy that.

Milton Friedman If there were no transaction costs, the whole third party problem would disappear, as Ronald Coase showed in his famous paper. Since there are, and we are talking about the real world, not an abstract world, we have a very difficult problem.

Ellen Paul If one is looking at governments and their economic policies, it is relatively easy to say which government policies are promoting economic freedom. Obviously, if you look at the extreme example of Communist countries where governments own everything, and attempt to dictate all economic behaviour, and people are tied to their jobs, it is obvious that these people have no economic freedom; they are slaves of the state. The situation is obviously quite different in the United States, even if that government exercises quite a lot of control over economic relationships.

Milton Friedman You don't make progress in understanding things by looking at easy problems. It is exactly the fringes that illuminate the difficulties.....

Ellen Paul The fringe cases may be fun to play around with, but these "life boat" cases are intellectual ploys, and they often serve to obscure the larger issues.

Milton Friedman We are talking about two different worlds. We are supposed to be intellectuals and thinkers and scientists. We are not here as public relations people. I hope.

Ellen Paul I'm not saying that we are mere public relations flacks. I just don't think the problem is all that difficult. There are genuinely difficult questions of philosophy. This doesn't happen to be one of them.

Milton Friedman As long as you just talk in generalized terms there is no difficulty, I agree. You don't realize how difficult the problem is. You don't realize the complexities that are covered up by the abstract definition. When you try to be more precise about this, as Fermi says, precise measurement is the making of precise distinction.

Ellen Paul I would agree with you if you were coming up with a measure that said, Rumania is a 5.03 and Czechoslovakia is a 5.76. But we're not doing that. The numbers offered by Freedom House are not of this order of specificity, and they are amalgamated into seven general categories.

Milton Friedman I think those are largely fallacious. I think they contribute very little to our problem.

The defects of the Freedom House measures were shown in the discussion last year. It turned out that if you held civil liberties constant, there was a zero correlation between political liberties and income. Political liberties had nothing to do with income. So those measures alone were illuminating in bringing out a relationship I think we didn't have very clear evidence of before.

Zane SpindlerI want to address one issue that Ellen and Milton Friedman raised with respect to the Freedom House measures. These just give gross ratings that are not useful for making fine distinctions about freedom between or within various countries.

Suppose we had finer measures. One could imagine a Presidential news conference where some reporter like Sam Donaldson gets up and say, "Mr. President, you have sworn to uphold the Constitution. What are you going to do about this .1 fall in the freedom rating?" That might make freedom ratings at least as valuable as the unemployment rate.

Another point I would like to focus on is one that Richard McKenzie raised, but not in the way that he raised it. He tried to distinguish between a measure that gives a truth versus one that gives us political value. I don't think we can separate these. I think in order for it to have political value it has to have truth value. It has to be something that is ultimately very difficult for opponents of freedom to challenge, otherwise it is not going to work.

Finally, David Friedman said that there were really two concepts of freedom that we should keep straight, and I agree. We have to differentiate between freedom and the value of freedom. The problem I find in this is that freedom per se has a number of dimensions that are incommensurable and for which there are no obvious tradeoffs. How are we going to get an aggregate measure of economic freedom unless we have some way of establishing tradeoffs? It may be ultimately more valuable if we look at the value of freedom because that measure at least has implicit tradeoffs, established by those people who really value it; that is, by those people in the market.

Antonio MartinoThis discussion reminded me of something that Joan Robinson says in her horrendous little book called Economic Philosophy. She makes the distinction between a point and an elephant. She says you can define a point as something which has position but no magnitude. But you cannot see a point. You cannot define an elephant but, of course, you can see an elephant.

I think the concept of freedom is closer to the elephant than it is to the point. It is a very large concept. From this point of view, I entirely agree with what Professor Friedman said. From the scientific point of view I also agree that the concept of freedom is too large. You cannot have an exact measurement. You can have a measurement which would be narrow and inaccurate and instrumental. We would be doing violence to the concept of measurement.

On the other hand, this is also true for political freedom, and we don't even know what political freedom is. The propaganda value, however, of Freedom House in this instance is very high. As defenders of economic freedom, whatever that means, we must follow the same strategy for economic freedom as we do for political freedom.

William HammettI am caught between Milton and Ellen here. It might be that there is more of an ambiguity about Fraser House as opposed to Freedom House. Take occupation licensure; we all agree this is an intrusion. However, right now in California cosmeticians, with their makeup, are causing blindness. There is some movement now for a new law to restrict them. A lot of individuals would consider that as an infringement on their economic freedom because they enter into what we would see as a voluntary arrangement... to get blinded. There are third party effects, externalities. One definition of economic freedom is not to have harmful substances thrust on them in a market transaction. It seems like that's where some confusion arises. It depends on your level of sophistication and that's what makes it difficult.

James Ahiakpor I think sometimes you can tell a great deal about what you are trying to get at by considering what the opposite is. With regard to freedom, I think my concept of freedom is non-interference with a voluntary exchange. It is not a third party problem. Rather, it is whether or not individuals gave their consent to an act. If they did, then we can say an exchange is consistent with freedom. Thus, we may think of coercion as the opposite of freedom.

Gerard Radnitzky I wish to attend to what Milton Friedman said. But first a sort of apology. I am one of the few in this company who is not an economist. My teachers were theoreticians of physics, philosophers of science, and logicians, and only late in life I discovered that, for me, economics is more fascinating than those other fields. In view of my limitations it may be advisable to limit myself to methodological comments - but I know I will not have the moral strength to be so cautious.

I take Milton's remarks as a warning against essentialism. Essentialism is the view that something can have an essential property by virtue of a definition. The gist of his warning is that we should not attempt to formulate the correct definition of the concept of "Economic Freedom." That would be an impossible task. Rather, we should attempt to improve the intellectual instruments with the help of which we can describe certain aspects of social systems. The concept of "Freedom" is one such instrument. Milton also reminded us that measuring is but a special sort of describing. In order to describe things we need as a conceptual instrument a descriptive system. We can classify such systems as classificatory, comparative, typological, quantitative. "Measurement" is often used metaphorically. At any rate, first of all we must know what objects we wish to measure with respect to what relational or quantitative properties.

With regard to the task at hand, the methodological concept of explication is useful. An explication is basically a proposal, in certain contexts, to replace an intuitive or less refined concept, the explicandum, by another concept, the explicatum. The new concept is supposed to have "sufficient" similarity to the old one and to be a better intellectual instrument for the task at hand, e.g. enabling us to formulate law like hypotheses that cannot be formulated with the old concept. To give a simple example: the intuitive concepts of "hot," "cold," "warmer than," etc. are replaced, first, by the concept of "Temperature" - which must not be identified with the various methods of measuring "temperature." That concept is then replaced by a concept defined in terms of thermodynamics and then by a concept in terms of statistical mechanics, roughly as the average kinetic energy of molecules and atoms. This example shows that an explication, the improvement of a concept, is a spin-off of the improvement of a theory, i.e. the replacement of a theory by a successor that has more explanatory and predictive power.

Alvin Rabushka's paper is a fine example of an explication. In Part I he makes an inventory of what the literature has to offer with respect to concepts of "Freedom." In Part II he focuses on a recent proposal of an explicatum of "Freedom," i.e., that given by Freedom House, and he criticizes that explicatum. In Part III he proposes an explicatum of his own: a descriptive system based on the seven dimensions that he mentions. Such a descriptive system - which explicates the idea of "Economic Freedom" - can then guide the construction of indicators of the absence or presence of certain aspects of "Economic Freedom," now taken in the sense of the explicatum. The explicatum in turn guides methods of comparing countries with respect to the degree in which a particular aspect of "economic freedom" is exemplified in each of two or more countries that are being compared. Eventually, it might, perhaps, guide a quantitative description in the full sense of "measurement".

It is imperative that we distinguish between concept and definition on the one hand and methods of ascertaining the presence or absence of the property signified by the concept on the other. Otherwise, conceptual confusion is unavoidable. Take for instance the concept of truth, defined, roughly, as correspondence with facts - an absolute concept of truth. It must be clearly distinguished from the procedures or methods of ascertaining the truth value of a particular descriptive statement, which methods are in principle fallible. Confusing concepts and procedures for ascertaining the presence or absence of the property designated by the concept leads to what in methodology is called the 'operationalist fallacy,' the view that a concept can be identified by stating methods of measuring the property designated by the concept. This fallacy leads the pseudo-problem of the "sameness" of concepts that guide different methods of measurement, e.g. temperature as measured by various thermometric methods like thermal expansion, thermocouple, resistance, and radiation types, etc. Alvin does not commit that fallacy.

Rose Friedman This whole discussion of measurement reminds me of Frank Knight's comment when he looked at the quotation carried on the social science building, which read "Nothing is scientific unless you can measure it." Knight said, "and if you can't measure it, measure it anyway."

That is essentially what we are talking about. Why not forget the idea of a numerical measurement and instead discuss what economic freedom really consists of. If you ever get to the point where you really can define the elements of economic freedom, the measurement will be very unimportant in a sense and will be very simple. So I suggest that we just forget about the sum total and go to the ingredients.

Milton Friedman The quote Rose refers to is from Lord Kelvin and it says, "Nothing is scientific unless you can measure it." I believe that Knight's comment is wrong. I disagree with Rose on this one.

Michael Walker I see the main purpose, the scholarly purpose, of having these kinds of discussions is so that we can strive for a more precise way of approaching the problem of measuring freedom.

Having gotten this more clear and more precise understanding, we can use those measures for public relations purposes. The notion that using research for public relations purposes renders it not scientifically accurate, is, I think, a myth. Our experience is that if you take the trouble to do your scholarly work first then you use the instrument for public policy, you have a great deal more effect. If you don't take the trouble to do your scholarly work first, not only will it have no effect, it will likely be harmful. We have actually had this experience in our case in Canada with the tax rate. Our statistical agency, Statistics Canada, criticized the Fraser Institute for 12 years for using a certain methodology for calculation, even though we are using the most scholarly and accurate way of doing it. Then, in the thirteenth year, they approached us and asked how exactly did we do this, because they want to create a measure of this kind.

Now for a few particular points that were raised. Jim Gwartney mentioned the idea that we could define economic freedom as freedom from having to seek collective approval for individual contracts. Ingemar Stahl last time around reminded us that there may be collective contracts in which people may voluntarily contract away some of their freedoms. Jim Buchanan noted that at the constitutional formulation stage individuals may, in fact, contract away some of their freedoms out of the belief, maybe illusory, that this will reduce the riskiness of their existence in the post-constitutional phase. That is, behind the veil of ignorance they may contract away some of their freedoms because they believe it would reduce the riskiness of their life given that they don't know which lot they will draw in the lottery of life.

Two last points on measurement. I think the kinds of measurement that will come out of our deliberations will always be relative ones. David Friedman mentioned the notion of the freedom possibility frontier, a kind of total choice set that we might have available to us. This touches upon an illustration which may be useful to make my point. Conceive of a country in which 15 percent of total income is needed to maintain a subsistence level of consumption. Then a 50 percent tax rate, an elimination of 50 percent of the choice set that is available to the people in that country, may not be oppressive.

Now consider another situation in which 95 percent of the available income is needed for subsistence. Then a 10 percent tax rate in that environment would be totally oppressive in the sense that it would reduces peoples' level of consumption below subsistence level.

The final point, and in some ways contradictory to the one I've just made, is that I think that in our discussion this morning, there has been a confusion between the freedom to choose and the consequences of having the freedom to choose and particularly the notion that there are values to freedoms. I think we have implicitly said that because people are free to choose they will therefore have a greater income set, and that situation is preferred to the one where they have less choice and a lower income set. But suppose a increase in the freedom set leads to a reduction in economic outcomes. Then, how would we evaluate it? It seems to me that we should not in our deliberations identify the value of freedom to choose and freedom to choose itself. We have to isolate the freedoms, and then, in a subsequent phase try to relate those freedoms to the values that may emerge from having the freedom to choose.


CHAPTER II: PHILOSOPHICAL ASPECTS OF ECONOMIC FREEDOM

by Alvin Rabushka

"The Tide is Turning" in favour of economic freedom as Milton and Rose Friedman wrote in 1980 in Free to Choose. Perhaps even they dared not envisage the dramatic gains which have taken place during the 1980s: a worldwide trend to lower tax rates, the spread of capitalism in the third world, privatizing state-owned enterprises in both advanced and developing countries, and deregulation of industry. Economic freedom has fueled a rising trend of prosperity around the globe. Market forces have even invaded the socialist redoubts of Eastern Europe and Southeast Asia as central planners look to jump start moribund economies.

Most of us have an intuitive or common-sense notion of the meaning of economic freedom. A smattering of definitions or attributes includes free markets, private enterprise, voluntary exchange, capitalism, limited government, laissez faire, free trade, low taxes, free movement of capital, and other dimensions of economic life. To say that one country enjoys more economic freedom than another means that it has more and higher doses of the above dimensions of economic life. For example, it is relatively easy to agree with the claim that Hong Kong enjoys a greater measure of economic freedom than mainland China, or South Korea than North Korea, or the Federal Republic of Germany than the German Democratic Republic. It is equally easy to see if any given country has more economic freedom than it did last year or a decade ago as, for example, in mainland China, which has undergone a decade-long spate of liberal economic reforms under the tutelage of twice-rehabilitated Deng Xiaoping.

These comparisons lack quantitative precision. Assume, for the moment, a scale of economic freedom ranging from 0 (no economic freedom) to 100 (complete economic freedom). On that scale, where would we rank Hong Kong in comparison with mainland China? How would we score mainland China in 1988 compared with the China of the Cultural Revolution during 1966-1976? To-date, all scholarly efforts to rate economic freedom have taken the form of qualitative measures or relied on casual empiricism. No formal, rigorous rating method yet exists.

This paper is the first stage in a long-run effort to elaborate the conceptual underpinnings of economic freedom for the ultimate objective of developing precise measures of the degree of economic freedom that exists in every country in the world. At a minimum, it is hoped that a basis for rating economic freedom will come of this effort that rivals the Freedom House treatment of political freedom, which has gained universal currency in the scholarly community. Ideally, it would be better still to develop a rating system that permits quantitative comparisons across nations and over time. A side benefit of a formal rating scheme that achieved acceptance and frequent usage is that it would sensitize scholars to the idea of economic freedom, thus elevating it in stature to the much more frequently analyzed topic of political freedom. That, in itself, would constitute an enormous payoff to this effort. Of course, there is no guarantee that scholarly acceptance of a scheme to rate economic freedom would insure agreement with the values of economic freedom or the goals of its proponents. Nonetheless, it would be nice if scholars around the globe, regardless of political persuasion, accepted the outcomes of a rating system as factually accurate.

The organization of this paper is as follows. Part One sets forth several historical and modern attempts to develop a philosophy or definition of economic freedom to identify their common (as well as divergent) elements. This review is not exhaustive due to limitations of space. The main points, however, are fairly well covered in this brief selection of philosophers.Note Part Two critically assesses the most thorough attempt to measure economic freedom that now exists, which has been performed since 1982 by Freedom House in New York City as part of its Comparative Survey of Freedom. Finally, Part Three represents a preliminary attempt to provide and elaborate on a checklist of the different dimensions of economic freedom that require consideration in the development of a comprehensive system to rate economic freedom.

If there were any need to justify the importance of focussing on the concept of economic freedom, a glance at the household dictionary would show how little emphasis it has received compared with its political cousin. The American Heritage Dictionary offers eleven different aspects of freedom, most of which concern political rights or civil liberties. 1) The condition of being free of restraints. 2) Liberty of the person from slavery, oppression, or incarceration. 3a) Political independence. 3b) Possession of civil rights; immunity from the arbitrary exercise of authority. 4) Exemption from unpleasant or onerous conditions. 5) The capacity to exercise choice; free will. 6) Facility, as of motion. 7) Originality of style or conception. 8) Frankness. 9a) Boldness; impertinence. 9b) An instance of improper boldness; a liberty. 10) Unrestricted use of access. 11) The right of enjoying all of the privileges of membership or citizenship.

Roget's Thesaurus is more generous to economic freedom than the dictionary. Synonyms of The 1981 Chinese-English edition of the dictionary issued by the People's Republic of China treats freedom in a wholly different vein. To the communists in mainland China, "freedom" signifies the undesirable nature of "the petty beourgeoise's individualistic aversion to discipline." Other illustrations of the use of the word freedom include "bourgeois ideas must not be allowed to spread unchecked" and "liberalism is extremely harmful in a revolutionary collective." All of these aspects of individual freedom are anathema to China's communist leaders. It should be noted that the word for freedom did not exist in the Chinese language until it was imported from the West in the nineteenth century and a suitable Chinese translation provided. Unfortunately, the characters that were chosen to translate freedom into Chinese remain mired in China's cultural context, in which individual economic activity was regarded as selfish and greedy. These meanings are reinforced by Communist ideology.

In recent years, China has been experimenting with market reforms. The National People's Congress approved two constitutional amendments in April 1988 that authorize private enterprise and the transfer of land rights by private groups and individuals. Some American Marxist scholars are worried that Deng Xiaoping's liberal reforms may divert China from socialism down the capitalist road and warn of the dangers that would result if private property is reconstituted. For this novel view see Cliff DuRand, "The Reconstitution of Private Property in the People's Republic of China: John Locke Revisited," Social Theory and Practice, Vol. 12, No. 3 (Fall 1986), pp. 337-350. freedom, include liberty, license, self-determination, free will, noninterference, laissez-faire, civil liberty and civil rights, freeman, unrestrained, uncoerced, unimpeded, and freeborn, among others. Thus in common parlance, economic freedom generally receives much less attention than political freedom.

Political philosophers and social thinkers have explored the notion of freedom almost from the beginning of recorded history. For example, the first use of the word liberty is traceable to ancient Sumeria. The cuneiform symbol for "liberty" is found inside the binding on Liberty Fund, Inc. publications. Note Its use describes the good king, Urukagina, who freed his people from previous wartime taxes. The evidence consists of cuneiform writing on clay cones excavated at Lagash, in Sumeria, which contained the freedom laws of Urukagina that were promulgated to rid the land of tax collectors. One cone contained a proverb about taxes: "You can have a Lord, you can have a King, but the man to fear is the tax collector."

Ancient and medieval philosophers were primarily concerned with political freedom rather than economic freedom. To the Greeks, freedom described a fully independent polis that was not subject to the control of any outside power. In the Politics, Aristotle injected one phrase suggesting that individuals should be free to pursue their own self-interest, but this one brief homage to the rights of the individual was swamped by the general notion that the purpose of political society was to foster the "good." Note Pericles typified the free man who, as an active citizen in the exercise of his political freedom, helped shape the laws and policies of the polis. Carl J. Friedrich, An Introduction to Political Theory (New York: Harper and Row, 1967), Chapter 1. Note The primary emphasis of the ancient conception of freedom was an entitlement to a voice in collective decision making. Political freedom meant self rule, or the absence of external control. It was not an idea which emphasized the rights of the individual to non-interference from the state or protection under the rule of law. Sun Yat-sen, the founder of modern China and author of the San Min Chu I (Three Principles of the People), fell victim to the same error in interpreting Western principles of nationalism and democracy for China. Freedom, as he understood it, meant the freedom of the Chinese nation from foreign influence, not the freedom of individuals protected under the rule of law. Moreover, the practice of democracy was limited to the selection of leaders, who, once installed in office, were relatively free from further constraints on their behavior.Note The citizens of the ancient world had duties and obligations, not rights and privileges.

The liberal tradition in politics and economics dates largely from the seventeenth century. For a historical and philosophical treatment of classical liberalism, see John Gray, Liberalism (Milton Keynes, England: Open University Press, 1986). Note The modern notion of liberty or freedom signifies non-interference in the private affairs of individuals in a society governed under the rule of law. Freedom became synonymous with the protection of property, which derived from the feudal heritage of the middle ages. The Christian emphasis on the salvation of the individual also helped to break down classical collectivist notions of society. The freedom to own a certain amount of property was seen as a necessary condition for being able to maintain personal independence. The development of property rights went hand-in-hand with long standing provisions of human rights that were proclaimed in the Magna Carta in 1215, thousands of medieval charters in England and continental Europe, statements and restatements on civil rights, and the procedural safeguards of person and property that developed in the common law. Blackstone's Commentaries on the Laws of England illustrates these safeguards with an entire book devoted to the rights of persons and another to the rights of property.Note

Although the Spanish Jesuits of the School of Salamanca at the end of the medieval period anticipated some of the themes of classical liberalism, especially the notion that the market price was the just [correct] price of any commodity, economic freedom seriously developed into a coherent, powerful intellectual tradition with the publication of John Locke's Second Treatise on Civil Government, which emphasizes freedom of association, private property, and the sacrosanct nature of individual liberty, secured under the rule of law. David Hume reinforces Locke's emphasis on the right to property as the foundation of society and government, insisting that the stability of possession of property is essential to the establishment of human society and that fixing and observing this rule fosters harmony and concord. In so doing, each individual may peacefully enjoy what he has acquired by fortune and industry. David Hume's Political Essays. Edited, with an introduction by Charles W. Hendel (Indianapolis and New York: Bobbs-Merrill, 1953), pp. 25, 32-34. See the political essays entitled Of the First Principles of Government and Of the Origin of Justice and Property.Note

Locke was followed nearly a century later by Adam Smith. In his Inquiry into the Nature and Causes of the Wealth of Nations in 1776, Smith theorizes a system of natural liberty in which each person possesses the greatest liberty compatible with liberty for every other person - a system of methodological individualism. A system of commercial liberty would also find its natural counterpart in a constitutional order that guaranteed civil and political liberties.

Finally, brief mention may be made of John Stuart Mill. In his famous essay On Liberty, Mill insists that the principle of liberty permits individuals to frame their life as they see fit without external interference so long as fellow creatures are not harmed, and that from the liberty of the individual follows the right to combine for collective action so long as the rights of others are not infringed.

Nineteenth century England was governed by the principles of Locke and Smith. Free trade, laissez faire, low taxes, low state expenditure, and a minimally interventionist government were its hallmarks. See Alvin Rabushka, From Adam Smith to the Wealth of America (New Brunswick: Transaction Books, 1985), Chapters 1-7. Historian A.J.P. Taylor vividly summarized the extent of economic freedom in nineteenth-century Britain as follows: "Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman. He could live where he liked and as he liked. He had no official number or identity card. He could travel abroad or leave his country for ever without a passport or any sort of official permission. He could exchange his money for any other currency without restriction or limit. He could buy goods from any country in the world on the same terms as he bought goods at home... broadly speaking, the state acted only to help those who could not help themselves. It left the adult citizen alone. See English History 1914-1945 (New York and Oxford: Oxford University Press, 1965), p. 1. Note The state had little more than night watchman functions throughout most of the century.

Twentieth century Britain brought forth a managed mixed economy resting upon socialist philosophy. Those who supported an activist state believed it would insure full employment and fought for the extension of the welfare state. Classical liberalism revived in 1944 with Friedrich A. Hayek's The Road to Serfdom, followed later by Sir Isaiah Berlin's Two Concepts of Liberty, which distinguished the negative idea of liberty as non-interference from the positive idea of liberty, which involved an entitlement to participate in collective decision making and the use of the state to extend rights through redistributing income and creating opportunities to enable individuals to achieve self-realization. Other major contributors to the modern revival include Ludwig von Mises, Milton Friedman, and James Buchanan. Beyond any doubt, John Locke's powerful statement on the primacy of private property earned for him first place in the economic freedom hall of fame.

JOHN LOCKE

To begin with, virtually every proponent of economic freedom stipulates the need for a system of well-defined property rights, secured and enforced under the rule of law. On this point, each owes a large intellectual debt to John Locke. Locke provided the first coherent justification for private property as the foundation of a liberal social order. Private property was essential to preserve and expand the individual freedom that man enjoyed in the state of nature. Let's review Locke's contribution to the subject of economic freedom in some detail.

In his Second Treatise on Civil Government The full title is An Essay Concerning the True, Original, Extent and End of Civil Government. Throughout I will be citing Social Contract: Essays by Locke, Hume, and Rousseau. With an Introduction by Sir Ernest Barker. (New York: Oxford University Press, 1962), pp. 3-143.Note, Locke argues (1) the merits and legitimacy of private property and (2) that the primary end of civil government is the defense of property. One can't help but wonder how the history of China and other great civilizations might have differed had John Locke written for or been imported into those countries. China, in particular, failed to develop the institutions of private property and the rule of law, and thus remained mired in its Confucian heritage, which opposed the development of private mercantile and business activity. It is no surprise that the emergence of Chinese business and commercial interests took place largely in Southeast Asia primarily in British, but also in French and Dutch, colonies, wherein the institutions of private property and the rule of law permitted enterprising Chinese to accumulate wealth without the fear of arbitrary confiscation by a hostile state. Note Locke's deep sense of property also took root in America. Locke drafted a constitution for Carolina. Note He provides the intellectual foundation that underpinned the zenith of economic freedom and prosperity that developed in nineteenth century Britain. See Alvin Rabushka, From Adam Smith to the Wealth of America Chs. 1-7. Note

John Locke belonged to a class of "social contract" philosophers. He broke ranks with statist classical and medieval philosophers by reposing rights in the individual, not in the state. He begins with a conception of a state of nature, in which men are living as equal and separate units. "In the state of nature, all men are in a state of perfect freedom to order their actions, and dispose of their possessions and persons, as they think fit, within the bounds of the law of nature, without asking leave, or depending upon the will of any other man. An Essay, Para. 4, p. 4. Note" The state of nature is not a Hobbesian state of license: it implies a law of nature, namely, that no one ought to harm another in his life, liberty, or possessions. Each person recognizes limitations on his own will, especially the limitation that every other person posses a right to property In arguing that the natural and inherent right of property existed before the community, and was not created by the recognition and guarantee of the community, Locke's assertion served the interests of the propertied classes among the Whigs. (Hobbes, in contrast, held that property was created by, and therefore subject to the control of, government.) Note and the right to punish transgressors of natural law to preserve the innocent and restrain The law of nature would be in vain without a corresponding right to punish transgressors of the law of nature. But with each man as his own judge and jury, the right of punishment is imperfect due to partial judgments, inadequate force for the execution of judgments, and variety in the judgments passed by men in similar cases. To remedy these imperfections, Locke proposes a judiciary to administer the law impartially, an executive to enforce the decisions of the judiciary, and a legislature to secure uniform rules of judgment. Imperfections in the right of punishment are thus resolved by the consent to make a community or government to which men transfer these rights of punishment.

Locke goes on to describe the state of war, in which one man employs the use of force, or coercion, to set himself against another man's life. To avoid the state of war is one reason why men quit the state of nature and form a common society, to create the authority which curtails and grants relief from the state of war.offenders.

The state of nature is a state of individual liberty, and can be surrendered to a collective power or the community only through consent. No man can be subject to the arbitrary will of another man, since freedom of nature is bound only by the law of nature. On this view, a man cannot by consent enslave himself to any one, since slavery is a violation of the liberty of man found in the state of nature.Note

The bulk of the Second Treatise is devoted to the principle theme Of Property. Locke's primary claim is that "every man has a property in his own person. An Essay, Para. 27, p. 17.Note" Every man is duly entitled to the labour of his body and the work of his hands as captured in his famous phrase that "Whatsoever he removes out of the state that nature hath provided and left it in, he hath mixed his labour with it, and joined to it something that is his own, and therefore makes it his property. Ibid. Note" The application of labour gives the individual the right to remove the newly-created property from the common state found in nature, thereby separating and excluding it from the previously-held common rights of other men. This contention forms the foundation of Murray Rothbard's libertarian society. See The Ethics of Liberty (Atlantic Highlands, N.J.: Humanities Press, 1982), pp. 21-24. Rothbard will be examined in more detail later.Note The application of labour thus converts resources found in the state of nature, where it belonged equally to all, into private property. Of critical importance is that the act does not require the consent of any other person. An Essay, Para. 29, pp. 18-19. Note The authority to create private property out of the common rights derives from God. Although God gave the world to men in common, it takes industrious and rational men to make it useful through the application of personal labour. The application of labour secures distinct titles for men from a world given to men in common. In 1690, Locke insisted that the world had land enough to provide for double its population. Thus the application of labor by one man need not deprive others of similar rights to private appropriation.Note Indeed, the creation of value derives almost entirely from the effects of labour. A fallow field in nature has far less value than a sown and nurtured plot of grain. Productive persons are clearly more valuable to society than the shiftless and idle.Note

What are the limits to the private acquisition A more accurate word might be usurpation or seizure. Note of the natural fruits of the earth that previously belonged to all? One can fix as much property in one's labour as possible so long as it does not spoil (spoilage betrays the law of nature since it takes from others the right to resources found in the state of nature without adding to one's own useful property "Nothing was made by God for man to spoil or destroy." Para. 31, p. 19. Note). The invention of money, that lasting item that men might keep and accumulate without spoiling, permits men to accumulate wealth beyond the holding of products up to the point of spoilage. This provision, in effect, allows and justifies the accumulation of fortunes and large landed estates. Note By mutual consent Mutual consent in Locke corresponds to the features of voluntariness and unanimity found in market exchange described by modern writers. Note men could take money (gold and silver) in exchange for perishable products.

Locke builds his social contract upon the institution of private property. The civil society to which by consent each man transfers the right of punishment he enjoys in the state of nature is created primarily to preserve private property. An Essay, Para. 85, p. 49 and para. 87, p. 50. It should be noted that Locke uses the term "property" to encompass life, liberty, and real estateNote

Locke is more pragmatic about the institutions of civil society than he is about the absolute rights of free men in the state of nature. When men consent with each other to make a civil society under one government, they put themselves under an obligation to their fellow citizens through submission to the determination of the majority. The consent of the majority, in the form of concrete decisions, becomes the consent of every individual in the civil society. Unless the majority can act as one body, the society will be dissolved. Locke permits the formation of a community by "any number greater than the majority. An Essay, Para. 19, p. 58. This phrase is the only application I can find of the principle of supermajority anywhere in the Second Treatise. Locke nowhere discusses the costs and benefits of requiring a decision rule other than a majority. He observes that the formation of political society is the consent of any number of freemen capable of a majority. It should be noted that the scope and size of government in his era, excluding periods of wartime, was so limited that Locke probably could not have fathomed simple majorities taxing and spending anywhere from one-third to one-half the national income or more. Note"

To repeat, "The great and chief end of men's uniting into commonwealths, and putting themselves under government, is the preservation of their property; to which in the state of nature there are many things wanting. An Essay, Para. 124, p. 73. Note" Government supplies a known law, which determines right and wrong and a basis for setting controversies The objective of law, and thus legislative power, is the protection of property. Note; it supplies an impartial judge with authority to determine differences according to established law; and, it supplies the power to enforce sentences.

Locke's contribution to the discussion of civil government is the very important notion of limited government. The government that men fashion by yielding the rights they enjoy in the state of nature cannot act arbitrarily over them nor dispossess them of those rights. The rules that legislators promulgate in civil society must correspond to the law of nature (the will of God). The government is obliged to govern by law, not by arbitrary, capricious dictates. The "true end of civil government" is the protection of private property under the rule of law.

Nor can government take from any man any part of his property without his own consent. An Essay, Para. 138, p. 81. Note The power to tax that enables government to fulfill its tasks of protecting men from harm and punish transgressors rests on the consent of the governed, either directly or through representatives chosen by them. Payment should be based on the proportion of benefit each taxpayer derives from the maintenance of protection the state provides. On this wording it is possible to argue either the merits of proportional or progressive taxation.Note Taxation without consent "invades the fundamental law of property and subverts the end of government. An Essay, Para. 140, p. 83. Taxation without representation in colonial America was taxation without consent and thereby violated the rights of colonial settlers. Note"

Locke's government was limited in practice as well as in principle. Since lawmaking is a relatively expedient activity "there is no need that the legislature should be always in being, not always having business to do. An Essay, Para. 143, p. 85. Note" Moreover, to prevent the government from extending its power, Locke required legislators to be subject to the laws they themselves made. The major political issue of the 1990s in the United States may well be the gradual inclusion of Members of Congress under those laws they have imposed on all residents in the United States except themselves (e.g., affirmative action, health and safety requirements, etc.). Locke's stipulation insures that laws will be made for the public good, not the private benefit of the legislators.Note He also called for the separation of legislative and executive powers.

Locke reserves in the people the right to remove or alter a legislature that acts contrary to its trust. The community remains sovereign; it cannot surrender its right of self-preservation. Through the executive it can convoke or dissolve the legislature. But the people retain the right both to refashion the executive and legislature if either violate their trust. In short, Locke's individuals have an implied right of constitutional amendment.Note

Locke's world was grounded on the primacy of the individual. From his emphasis on the individual as the unit of action, Locke developed his conception of natural law in politics which established the natural rights of each individual. Locke transformed the statist character of traditional natural law theory, which placed good and virtuous action in the state, to a body of thought which subordinated the state to the individual. Locke's individualist tradition influenced later American revolutionaries and lay the foundation for American constitutional government.

MILTON FRIEDMAN

In many ways, Milton Friedman is a modern-day John Locke. He asserts the primacy of the individual as the ultimate entity in society. He recognizes the vital role that private property plays in fostering economic and political freedom, and economic prosperity. He is concerned with a variety of pragmatic political issues, such as decentralization of political power. Though separated by 272 years, they are intellectual kinsmen.

With the assistance of Rose Friedman, Milton Friedman set forth a coherent statement of economic freedom in 1962 in a collection of essays entitled Capitalism and Freedom. (Chicago and London: University of Chicago Press, 1962). Note The object of the book is to explain the role of competitive capitalism as a system of economic freedom and show that economic freedom is a necessary condition for political freedom. It also discusses the legitimate role of government in a free society, identifying those areas where government intervention in the private affairs of individuals is warranted but also where intervention that goes beyond the legitimate limited tasks of government harms both economic freedom and efficiency. In Free to Choose, the Friedmans enumerate a list of specific measures that, if enacted into the United States Constitution, would enhance individual economic freedom. Note

Invoking the language of classical liberalism and defining himself as a liberal, Friedman posits freedom as an ultimate goal and the individual as the ultimate entity in a society. How is freedom best secured? In the miracle of the market place, he says, which coordinates the economic activities of millions of people on the basis of voluntary cooperation. Cooperation between buyer and seller is achieved without coercion provided both parties to every economic transaction benefit from it. Through effective freedom of exchange, the market prevents one person from interfering with another. Consumers have a choice of sellers and sellers have a choice of buyers. Similarly, employers and employees enjoy multiple choices, which protects both from coercion. The market accomplishes this impersonally and without centralized authority. To insure that every transaction is strictly voluntary, economic exchange requires that individuals and enterprises be private (government officials and enterprises would enjoy the coercive powers of the state to enforce their wishes), and that individuals be free to enter or not to enter into any particular exchange. Friedman labels an economic system built on the principles of voluntary and unanimous exchange a free private enterprise exchange economy, or competitive capitalism.

In the spirit of Locke, whose free individuals in the state of nature contract with each other to form civil society for the preservation of private property, maintenance of the market (and the institution of private property on which market exchange takes place) in Friedman's world requires certain collective or political institutional arrangements. "The basic requisite is the maintenance of law and order to prevent physical coercion of one individual by another and to enforce contracts voluntarily entered into, thus giving substance to "private Ibid., p. 14. Note". Other issues arise from monopoly and neighborhood effects (or externalities). "The need for government arises because absolute freedom is impossible." Government is essential as a forum for determining the "rules of the game" and for enforcing the rules decided on. Protection of the individual and the nation from coercion are two activities that prevent exclusive reliance on individual actions through the market. Friedman argues that to the extent that economic activity is removed from the control of political authority, the market eliminates coercive power.

Friedman stipulates the institutional arrangements upon which the market system of voluntary exchange rests. First is the maintenance of law and order to prevent the coercion of one individual by another (Locke gives heavy weight to this objective.) Second is the enforcement of contracts voluntarily entered into (Locke is silent on this point). Third is the definition and meaning of property rights (Locke claims property rights as a precondition of civil society. Friedman does not delve into the origin of property rights.Note) Fourth is the provision of a monetary framework (Locke makes no statement about the private or public provision of a monetary standard.) In addition, government must correct the effective inhibition of exchange brought about by monopoly and engage in activities to overcome neighborhood effects.

Once government exceeds its legitimate duties, intervention is likely to bring more harm than good. Friedman points to the destructive economic effects of railroad regulation at the expense of the consumer, the damage of high marginal rates of income tax, waste of funds in federal agricultural programs, housing policies that contributed to urban blight, the coexistence of rising welfare expenditures and rising welfare rolls, and other examples of counterproductive government economic intervention. In the process, an expanding governmental role threatens the preservation and expansion of individual freedom.

To preserve and expand individual freedom, in Free to Choose the Friedmans propose an economic Bill of Rights to complement the original Bill of Rights set forth in the United States Constitution. The specific rights in question encompass a tax or spending limitation of the fraction of national income the government is authorized to spend (thus limiting the size of government), a prohibition on imports or exports (thus achieving free trade), a ban on wage and price controls (thus insuring internal free trade), a ban on occupational licensure (thus assuring free entry into every line of production), a requirement for proportional taxation (thus preventing discrimination by one class of taxpayers against another), a limit on money supply growth, and an indexation provision to remove the incentive for government to inflate the currency. They propose the list in an exploratory spirit of stimulating thinking on specific measures to foster economic freedom. The list is an invaluable starting point in the design of any measure to rate economic freedom.

MURRAY ROTHBARD

Libertarians, who reject any role for government in the economy, look to Murray Rothbard for the cleanest, purest exposition of the principles of economic freedom. A prolific writer, in the 1960s he wrote at length on the virtues of the free market, the evils of coercive intervention, and the feasibility of a totally stateless (anarchistic) market economy. Unsatisfied with value-free analysis, Rothbard set out to develop a positive ethical system which would make the case for individual liberty in The Ethics of Liberty. (Atlantic Highlands, N.J.: Humanities Press, l982). Note

Rothbard grounds his political philosophy of liberty on a natural law foundation, especially John Locke's treatment of property and ownership. Rothbard's theory of liberty rests on the establishment of the rights of private property, which determines each individual's sphere of free action. The right of any man to do certain things means that it would be immoral for others to stop him by the use or threat of physical force. He defines crime as a violation or aggression against the just property or body of another individual. The theory of liberty thus becomes an analysis of what can be considered property rights and what can be considered crimes. On this foundation, Rothbard examines a number of topics including the rights of children, the proper theory of contracts as transfers of property titles, and the questions of enforcement and punishment, among others. His objective is to develop a libertarian law code as a natural law theory.

Rothbard's free society or his society of pure liberty is based on free and voluntary exchanges. The free society is one where property titles are founded on the basic natural facts of man - each individual's ownership over his own person, his own labour, and the land resources which he finds and transforms (though the ultimate justification in Rothbard's natural law does not depend on God as it does in Locke). The natural alienability of tangible property and man's labour service makes possible the network of free exchanges of ownership titles. The free market economy thus depends upon a free society with a certain pattern of property rights and ownership titles. The libertarian society - the regime of pure liberty - is a society where ownership titles are not involuntarily distributed.

The universal status of the ethic of liberty, and of the natural right of person and property that obtains under such an ethic, can be covered by the basic rules: ownership of one's own self; ownership of the previously unused resources which one has occupied and transformed; and ownership of all titles derived from that basic ownership either through voluntary exchange or voluntary gifts. Rothbard deems all current titles to property as valid except where the origin of any current title is criminal and the victim or his heirs can be identified and found or the victim cannot be found but the current title-holder is the criminal in question. Ibid., p. 59. Note

Rothbard parts company with Friedman in the area of contracts. He argues that the right to contract is strictly derivable from the right of private property, and therefore that the only enforceable contracts should be those where the failure of one party to abide by the contract implies the theft of property from the other. This can be true only when title to property has already been transferred, and therefore where the failure to abide by the contract means that the other party's property is retained by the delinquent party without the consent of the former (implicit theft). Thus the contract itself is not an absolute and need not be legally enforceable in a free society. Ibid., p. 133. Note Put another way, promises are not the equivalent of a transfer of property title, and while it may be moral or responsible to keep one's promises, it is not the function of law (i.e. the legal application of coercion or violence) to enforce morality or the keeping of promises.

Rothbard further parts company with most treatments of the free market economy in his analysis of the proper role of government or the state in the economy (e.g., provision of a legal code, supply of police and firefighters, road building and maintenance, delivery of the mail, etc.). The crucial features of the state are its monopoly on the use of violence - the police, the armed services, and the courts - and its decision - making power in disputes over crimes and contracts. The key feature that distinguishes the state from private persons and groups is that the former obtains its revenue by coercion, known as taxation, whereas the latter obtain their income voluntarily by selling goods and services to others or by voluntary gift. To Rothbard, taxation is theft, pure and simple. Ibid., p. 162. The only exception to the theft thesis of taxation is the unanimous voluntary payment of taxes by every person in a society.Note If taxation is compulsory, and therefore indistinguishable from theft, the state is the most formidable criminal organization in history. How can the most formidable criminal organization in history enjoy the legitimate right to perform any task? To repeat, the use of coercive taxation to acquire revenue and the compulsory monopoly of force and ultimate decision-making power over a given territorial area on the part of the state constitute criminal aggression and depredation of the just rights of private property of its subjects. In addition to the state's inherent immorality, Rothbard contends that the services generally thought to require the state - from the coining of money to police protection to the development of law in the defense of property rights (all part of Friedman's legitimate role for government) - can be and have been supplied more efficiently and more morally by private persons. Ibid., p. 187. Rothbard refutes modern alternative theories of liberty in Part IV of his book. These include utilitarian free market economics, on the widely recognized grounds that utilities and costs are subjective and cannot be added or weighted to estimate social utility or cost. He challenges the unanimity principle as groundwork for a free market of voluntary and contractual agreements on the grounds that the principle has nothing to say about the goodness of the existing status quo, only on changes from that situation. If the status quo represses liberty, the unanimity principle is a barrier to it. He faults Isiah Berlin's treatment of negative liberty - the absence of interference with a person's sphere of action - with Berlin's later charge, stung by his critics, that unrestricted laissez-faire violated negative liberty by restricting free expression or association, that personal liberty suffered during the reign of unfettered economic individualism by referring to children in mines and mills, people in poverty and disease, etc. He parts with Hayek on the grounds that Hayek's government and its rule of law creates rights rather than ratifies or defends them. He devotes his lengthiest critique to Robert Nozick, attempting to show that Nozick failed in his demonstration of the need for a minimal state on ten separate counts, including issues of taxation, voting or democratic procedures, the prevention of the slippery slope from minimal to maximal state, and so forth.Note

A Rothbardian rating of economic freedom would be the simplest measure to construct: it would rest solely on the extent to which all resources in any economy are held in the form of valid property titles and are subject to voluntary exchange with no interference by the state. Since every country in the world has some state interference in the economy, a rating scheme based on Rothbard's libertarian vision is more utopian than practical. Every other philosopher of economic freedom, from John Locke to Adam Smith Adam Smith believed in publicly-financed education, public works, and the Navigation Laws among other legitimate activities of the state.Note to Milton Friedman to Robert Nozick, grants specific, if limited, powers to government or the state, including the power to tax, enforce laws, maintain order, and defend the nation. Rating schemes based on these alternative conceptions of economic freedom would permit larger measures of government activity. They would also take into account the real world activities of governments.

Discussion

Alvin Rabushka My origin of interest in this general subject grows out of a quarter century of first hand personal observation of Hong Kong and observing that it contains an enormous amount of economic freedom. There is a larger measure of economic freedom in a place like Hong Kong than in virtually any other country in the world even those that have considerably higher incomes per person than Hong Kong.

The social science enterprise does a number of things. It develops concepts. It tries to employ concepts and theories. It seeks to explain reality. It tries to do that sometimes in a qualitative way, in a comparative way, and in a quantitative way. My interest is to do it in the most rigorous way possible over a period of time. I don't anticipate the resolution of this in two days. I'm not sure I anticipate the resolution of it in five years. But I am certain that there will be many who attempt to dismiss it after two days as an insoluble task and I am quite sure that in the course of the scheme of human history, problems have been solved which have similarly been dismissed out of hand after an initial day or two of conversation. In the scientific spirit of being open minded; in allowing us to examine ideas, I am not prepared to sign by the end of tomorrow a statement saying that this is a fruitless and hopeless prospect. I can't guarantee how far we will get but I think over a period of years we will make some progress. However slow and however little that is, it still may be worthwhile in its own right and on its own merits.

As I thought about how to structure the subject my first point was to get a handle on economic freedom. Before one can rate economic freedom, it is valuable to talk about its conceptual underpinnings. When one looks through the philosophy of economic liberty, it is clear that different people have taken different issues, have given different conceptual treatments of it and have tried to define what they think economic freedom means by pointing to a sort of different set of minimum conditions.

I also believe there is some benefit to be gained by trying to move this concept forward out of the truly intuitive into something much more precise and conceptually more quantitative. The more attention that is focussed on it, the more likely there will continue to be some incremental thinking about it. The more people who can be enlisted in this effort, the more likely contributions can be made to it.

Finally, it is desirable to get people to acknowledge that it is as valuable to talk about economic freedom as efficiency. I tried to put on the table what I felt some of the philosophical treatments were, some key people, what they said. I found a greatly renewed admiration for John Locke. What comes out of John Locke is the critical issue of private property. John Locke takes us through his thinking, going back to the state of nature, the existence of God, the fact that men are equal in separate units in a state of nature and that in the state of nature there isn't perfect freedom but there is the problem of punishing transgression. What do you do? You have to surrender some of your liberty into the collective to protect it. I found it very worthwhile to go through property in John Locke and then Blackstone's commentaries - one of the four volumes he wrote is just on property, a very long account of all the intricacies of the law and how it protects property.

I was troubled with Locke. He goes to simple majoritarian democracy as the vehicle that subsequently makes decisions on how one is going to protect the society one creates because of this problem of individual punishment. But, he is also very, very clear that man does not surrender his freedom because he contracts it in a society; rather, man continues to have his freedom.

From Locke to Friedman, I have jumped several centuries. How do you secure individual freedom through the miracle of the marketplace? In looking through Capitalism and Freedom I found five points: the maintenance of law and order, the enforcement of contracts; the definition of property rights that's a little bit different from Locke; a monetary framework, that is completely different from Locke's concerns about monopolies and externalities.

In to Free to Choose Friedman presents an economic bill of rights. I'd like to make an observation that isn't in my paper because something absolutely unique in modern constitutional history is occurring right now. The Chinese government is drafting a basic law or a mini-constitution for what will become the Hong Kong Special Administrative Region in 1997 when Hong Kong sovereignty reverts from Britain to China. Chapter 5 of this draft basic law is entitled, "Economy." In this there are lists of articles in very simple Chinese that translate into very simple English. These include such statements as, "Hong Kong shall continue to practice a low tax system." By that it means the Government of Hong Kong, by constitutional requirement, shall not have a high tax share of GNP. "Hong Kong shall, taking one fiscal year with another over a series of years, run a balanced budget." Another point is that, "The rate of growth of taxation and the rate of growth of expenditure shall not exceed, taking one year with another, the rate of growth of the economy," which is a tax or expenditure limitation. This is an explicit and concrete article.

There are other explicit and concrete articles which say that Hong Kong shall remain a duty free port, there shall be no customs tariffs, that Hong Kong shall maintain a policy of free trade save for safety and health regulations. There are provisions on commerce which require free entry and free exit. Unregulated prices are implied in all of this. There are also a series of precise and specific measures having to do with monetary policy, that is to say, "the Hong Kong government shall be required to make it a convertible currency." Therefore, there shall be a free market in money. It goes on to say that this convertible currency shall not be under any circumstances a fiat currency but must be 100 percent backed and that backing shall take the form of external convertible reserves such as U.S. dollars, deutsche marks, yen, gold, other potential commodities.

Milton Friedman Who drafted this?

Alvin Rabushka There was a committee set up of sixty-odd persons of which about 60 percent are mainland Chinese and 40 percent are Hong Kong Chinese. By and large they tried to maintain the concept of one country, two systems, and guarantee that Hong Kong's capitalistic system shall remain unchanged for 50 years after 1997, to give confidence to local and foreign investors in Hong Kong that the capitalist system will not be merged into the socialist system. They took the existing sense of economic institutions and policies and wrote them up as constitutional maxim.

What's intriguing is that if you take Chapter 10 of Free to Choose and look at the seven amendments, I believe they are all there. I should go on also to state that earlier on in Chapter 1 of this constitution is a very clear statement about the definition of the maintenance and enforcement of private property rights. The very first statement is that Hong Kong people "shall enjoy the rights of private property, to buy, sell, exchange, and dispose of them as they see fit without government restriction." There is a whole series of statements about the judiciary. They, unfortunately, didn't carve those up and that is because the Chinese have a very peculiar notion of law which historically has been garbled.

I just wanted to indicate here that we are talking about a device being written by one of the most totalitarian communist countries on the face of the earth which no capitalist society has ever written - there is the occasional state in the United States which has to run a balance budget - but nowhere in the history of any national constitution can one find this activity. It is the first one and quite ironic that a communist system has written it here to maintain a capitalist society.

To the extent these principles are honoured and enforced means a greater likelihood of maintaining economic freedom. To the extent constitutions worked, that is, they were honoured, enforced and supported, we might be inclined to say the society would have a greater measure of economic freedom. The Chinese seem to believe that prosperity and good things flow from these provisions.

My last point. I also thought it worth mentioning Murray Rothbard because when one is talking about alternative philosophical conceptions of economic freedom one could say his is the simplest, imposes the least number of minimum conditions, would be the easiest to derive and develop a measurement set for. All that he basically requires is a set of property rights growing out of a Lockean-type state of nature, making sure that somebody didn't steal illegitimately from someone else, and that ownership titles can be freely exchanged. He parts company from Locke, Friedman, and almost everyone else on the role of the state because a penny of taxation taken coercively makes the state a criminal organization in his view and therefore there is no room for the state in the way that there is a requirement for the state amon