Reading: Lesson 5 – Economic Freedom and Prosperity

Description:

According to the Economic Freedom of the World Index: “The link between freedom and prosperity is undeniable. The most economically free countries offer the highest quality of life and personal freedoms while the lowest ranked countries, are usually burdened by oppressive regimes that limit the freedom and opportunity of their citizens.”

In this lesson, students will watch and discuss a video by Professor Antony Davies, “What’s so Great about Economic Freedom?” Next, students will read an article by James Gwartney, Robert A. Lawson, and Joshua C. Hall, “The Decline in Economic Freedom.”  Finally, students will watch a brief video followed by an activity about the incredible power of economic freedom and the prosperity it brings to the world.

 

Time Required:

45 min

 

Required Materials:

Internet connection, writing instrument 

 

Prerequisites:

Module 4 – How Does Trade Create Wealth?

4.5.A – Watch the following video and use the discussion questions to guide your discussion [10 min].

Video:(Learn Liberty, 4:25 min)

“Economic freedom is about the freedom to buy and sell things, says Professor Antony Davies, but it’s also about the freedom to interact with people, to converse with others, to travel, and to say what we want to say…”

Discussion Questions: What’s So Great about Economic Freedom?

1.  What are a few of the benefits of economic freedom as described in the video? Do you think economic freedom is important?

1. With more economic freedom comes higher economic growth, lower unemployment rates, and more equitable income distribution.
2. Economic freedom also promotes greater gender equality, lower child labor rates, and reduced exploitation of the environment.
3. The more economic freedom we have, the more able we are to make the world a better place.

 

2.  What are some of the comparisons that can be made between states and countries that are freer compared to those that are less free?

1. States with greater economic freedom have higher economic growth rates, lower unemployment rates, less debt per GDP than states that are less free.
2. Countries and states that are more economically free also tend to have more equitable income distributions.

 

3.  America’s economic freedom ranking dropped from 2^nd in the world in 2000 to 18^th in 2012. What do you think America could do to become more economically free again?

1. In the Economic Freedom of the World index, from the period between 1980 to 2000 the United States ranked as one of the world’s freest economies (along with Hong Kong and Singapore) as measured by a few key areas, including: Size of Government Expenditures and Taxes; Legal Structure and Security of Property Rights; Access to Sound Money; Freedom to Trade Internationally; Regulation of Credit, Labor, and Business.  The US has seen a notable decline in each of these areas.
2. If we think economic freedom is important, we should work to increase economic freedom in these key areas.

 

4.5.B – Read the following article using the questions below to guide your discussion [10 min].

Article: The Decline in Economic Freedom by James Gwartney, Robert A. Lawson, and Joshua C. Hall (FEE.org)

“We now know more about the sources of growth and prosperity than ever before. Economic growth is primarily the result of gains from trade, capital investment, and the discovery of improved products, lower-cost production methods, and better ways of doing things. Numerous studies have shown that countries with more economic freedom grow more rapidly and achieve higher levels of per capita income than those that are less free. Similarly, there is a positive relationship between changes in economic freedom and the growth of per capita income. Moreover, as per capita income has grown, the world’s poverty rate has declined, and most of this progress has occurred in countries that have made substantial moves toward higher levels of economic freedom.”

Discussion Questions: The Decline In Economic Freedom

1.  What does the Economic Freedom of the World Index measure, and how does a country earn a high score?

1. The Economic Freedom of the World index “measures the consistency of a nation’s institutions and policies with economic freedom. Put simply, institutions and policies are consistent with economic freedom when they permit individuals to choose for themselves, enter into voluntary agreements with others, and protect individuals and their property from aggressors.”—James Gwartney, et al.
2. In order to earn a high score, countries “…must provide secure protection of privately owned property, evenhanded enforcement of contracts, and a stable monetary environment. It also must keep taxes low, refrain from creating barriers to both domestic and international trade, and rely more fully on markets than the political process to allocate goods and resources.”—James Gwartney, et al.

 

2.  How are incentives to serve people different for entrepreneurs in the market and public servants in the government? How does each know whether or not they are serving people well?

1. In the market, profit and loss tell businesses the most productive allocations of resources, as well as how to best create value for consumers.
2. The incentives in the market push entrepreneurs to offer the best service at the lowest cost. There is nothing like the system of profit and loss in government; instead, the dominant incentives focus on how political actors can gain more influence and power directing resources.
3. The result is that in politics, resources are channeled not toward their most productive uses, but toward those who are powerful and well-connected, and value is created primarily for very narrow, specific groups of people.

 

3.  What is the difference between a “market entrepreneur” and a “crony capitalist?”

1. A “market entrepreneur” finds success by “providing customers with better products, more reliable service, and lower prices.”
2. “Crony capitalists,” however, are successful because they are politically connected and are able to get special treatment from government.
3. Whereas market entrepreneurs actually create value for consumers, crony capitalists take taxpayer money for their own benefit and work to limit consumers’ choices.

 

4.5.C – Watch the following video and complete the following activity 4.5.D. Share your ideas with the group [25 min].

Video & Activity:

https://www.fraserinstitute.org/economic-freedom/economic-freedom-basics

(EconFree, 1 min) and 2020 Index of Economic Freedom Activity

Teacher Tip: Familiarize yourself with the website before this lesson.

The Heritage Foundation, together with the Wall Street Journal, has for over twenty years published an annual report titled “The Index of Economic Freedom.” This report is very similar to the aforementioned “Economic Freedom of the World” index, largely in that it measures economic freedom using a number of different measurements relating to the country’s economic and legal systems; general trends are the same, though specific rankings may vary. Using the report’s website featuring interactive displays of various measures of economic freedom, students will be able to compare and contrast countries with different levels of economic freedom.

 

Directions:

1.  Introduce the activity using the following brief video: Economic Freedom in 60 seconds (EconFree, 1 min)

“How do you explain the incredible power of economic freedom in 60 seconds? This video does just that, showing how vital economic freedom is to our quality of life”

 

2.  Open the 2015 Index of Economic Freedom—Heritage Foundation webpage and tell the students the following background information:

1. The Index collects data from 186 countries and has been published for over twenty years.
2. It measures ten freedoms, grouped into four general groups: rule of law, limited government, regulatory efficiency, and open markets. The different freedoms are defined/measured as follows:

• Business Freedom: Measures the regulatory burden on the ability to start, operate, and close a business.
• Trade Freedom: Measures the absence of tariffs and non-tariff barriers affecting imports and exports.
• Fiscal Freedom: Measures the tax burden.
• Government Spending: The percentage of GDP comprised of government spending.
• Monetary Freedom: Measures price stability and the nature of any price controls.
• Investment Freedom: Measures constraints on the ability of individuals and companies to invest.
• Financial Freedom: Measures independence of banks from government control.
• Property Rights: The level of legal protection of private property.
• Freedom From Corruption: The level of corruption in government.
• Labor Freedom: Measures various aspects of labor policies, such as minimum wage laws, regulatory burdens on hiring, hours, etc.

3. Ask the students which region they would like to look at. Choose one, then use the following to guide your exploration of different countries’ economic freedom.

1. Country Rankings: This groups the ranked countries by “free,” “mostly free,” “moderately free,” “mostly unfree,” and “repressed.”
2. Graph the Data: This tool allows you to compare up to 3 countries across all ten variables from 1995 to 2015.
3. Interactive Heat Map: This tool gives a visual representation of economic freedom across all variables in the form of a multicolored map.

 

4.  As you look at different countries’ levels of economic freedom, ask students what they think could be done to help improve the level of economic freedom, as measured by the different variables. The following is a guide to potential answers:

1. Business Freedom: Remove regulations making it difficult to start, operate, or close a business.
2. Trade Freedom: Eliminate tariffs and other barriers to international trade.
3. Fiscal Freedom: Reduce the tax burden.
4. Government Spending: Find ways for markets or civil society to provide services instead of government, thus lowering government spending.
5. Monetary Freedom: Eliminate price controls (where the law requires a good or service to be sold below or above a certain rate).
6. Investment Freedom: Make it easier to save and invest.
7. Financial Freedom: Reduce government control of the banking industry.
8. Property Rights: Reduce government violations of property rights and fairly enforce contracts.
9. Freedom From Corruption: Greater transparency and accountability from government. Enforcement of the rule of law.
10. Labor Freedom: Reduce the limitations on individual’s freedom to contract.

 

Lesson Recap

• Economic freedom means the freedom to interact and trade with people. Economic freedom means the freedom to make choices with your property and person provided that you don’t violate anyone else’s freedom and you live with the consequences of those choices.

 

• The benefits of economic freedom include: greater wealth, cleaner environment, less infant mortality, greater happiness, longer life expectancy, less child labor, civil rights, less corruption, great social harmony, and less unemployment.

 

• Free markets result in a “pattern of mutual adjustment and coordination that creates far more wealth and opportunity than could ever be achieved by central direction.” – Dwight Lee

 

Additional Resources

Video:   (Learn Liberty, 8:26 min)

“Prof. Antony Davies empirically examines the question of whether or not markets are exploitative. In his analysis, he finds that trade is positively correlated with wealth creation, jobs, reductions in child labor, and increasing wages. Markets, therefore, empower individuals rather than exploit them.”

 

Podcast: Deaton on Health, Wealth, and Poverty  (EconTalk, 1:23:00 min)

“Angus Deaton of Princeton University and author of the Great Escape talks with EconTalk host Russ Roberts about the book –the vast improvements in health and standard of living in modern times. Deaton surveys the improvements in life expectancy and income both in the developed and undeveloped world. Inequality of both health and wealth are discussed as well. The conversation closes with a discussion of foreign aid and what rich nations can do for the poor.”

Video: 

“Watch as Professor Robert Lawson discusses the connection between economic freedom and income inequality and why what we should really be concerned about is income mobility.”