Economic freedom, or economic liberty, is the agency of people to make economic decisions. This is a term used in economic and policy debates as well as in the philosophy of economics. One approach to economic freedom comes from the liberal tradition emphasizing free markets, free trade, and private property. Another approach to economic freedom extends the welfare economics study of individual choice, with greater economic freedom coming from a larger set of possible choices. Other conceptions of economic freedom include freedom from want and the freedom to engage in collective bargaining.
The liberal free-market viewpoint defines economic liberty as the freedom to produce, trade and consume any goods and services acquired without the use of force, fraud, theft or government regulation. This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative. There are several indices of economic freedom that attempt to measure free market economic freedom. Based on these rankings, correlative studies have found higher economic growth to be correlated with higher scores on the country rankings. Critics of this approach, such as Fredrik Carlsson and Susanna Lundström, have argued that the economic freedom indices conflate unrelated policies and policy outcomes in order to conceal negative correlations between economic growth and free-market policies, such as counting lower corruption as an indicator of economic freedom.
Socialist viewpoints The socialist view of economic freedom conceives of freedom as a concrete situation as opposed to an abstract or moral concept. This view of freedom is closely related to the socialist view of human creativity and the importance ascribed to creative freedom. Socialists view creativity as an essential aspect of human nature, thus defining freedom as a situation or state of being where individuals are able to express their creativity unhindered by constraints of both material scarcity and coercive social institutions.Bhargava. Political Theory: An Introduction. Pearson Education India, 2008. p. 249. Marxists stress the importance of freeing the individual from what they view as coercive, exploitative and alienating social relationships of production they are compelled to partake in, as well as the importance of economic development as providing the material basis for the existence of a state of society where there are enough resources to allow for each individual to pursue his or her genuine creative interests.Barbara Goodwin. Using Political Ideas. West Sussex, England: John Wiley & Sons, Ltd., 2007. p. 107. Liberal viewpoint
Institutions of economic freedom Private property rights
According to the liberal free-market view, a secure system of private property rights is a necessary part of economic freedom. Such systems include two main rights, namely the right to control and benefit from property and the right to transfer property by voluntary means. David A. Harper argues that a system of private property is required for entrepreneurship, because "entrepreneurs would not be able to formulate or carry out their plans unless they were reasonably sure that the people with whom they trade have exclusive control over the relevant resources."David A. Harper. Foundations of Entrepreneurship and Economic Development. (1999). Routledge. pp. 73–74 Bernard H. Siegan holds that a secure system of property rights also reduces uncertainty and encourages investments, creating favorable conditions for an economy to be successful.Bernard H. Siegan. Property and Freedom: The Constitution, the Courts, and Land-Use Regulation. Transaction Publishers. (1997). pp. 9, 230 According to Hernando de Soto, much of the poverty in Third World countries is caused by a lack of Western systems of laws and well-defined and universally recognized property rights. De Soto argues that because of legal barriers and because it is often unclear who owns what property, poor people in those countries cannot utilize their assets to produce more wealth.Hernando De Soto. The Mystery of Capital. Basic Books. (2003). pp. 210–311 In the 1960s, Alan Greenspan argued that economic freedom requires the gold standard for protection of savings from inflation.
David L. Weimer, surveying a series of empirical studies about economic growth, reports that "a number of economic historians have noted the importance of credible property rights, especially in terms of freedom from arbitrary seizures of property by governments, for understanding relative rates of growth in different time periods and regions," and concludes that countries with strong property rights systems have economic growth rates almost twice as high as those of countries with weak property rights systems.David L. Weimer. The political economy of property rights. Published in The Political Economy of Property Rights. Cambridge University Press. (1997). pp. 8–9 At the same time, he notes that the risk of unexpected seizure, and not state ownership in and of itself, is responsible for this outcome, saying: "the degree of state ownership of property does not have a statistically significant effect on growth rates after controlling for the risk of seizure."David L. Weimer. The political economy of property rights. Published in The Political Economy of Property Rights. Cambridge University Press. (1997). p. 8
Freedom of contract Freedom of contract is the right to choose one's contracting parties and to trade with them on any terms and conditions one sees fit. Contracts permit individuals to create their own enforceable legal rules, adapted to their unique situations.John V. Orth. Contract and the Common Law. Published in The State and Freedom of Contract. (1998). Stanford University Press p. 64 Disputes arising from contracts are typically resolved by the judiciary branch of government, but not all contracts need to be enforced by the state. For example, in the United States there is a large number of third-party arbitration tribunals which resolve disputes under private commercial law.David A. Harper. Foundations of Entrepreneurship and Economic Development. (1999). Routledge. pp. 82–88 Negatively understood, freedom of contract is freedom from government interference and from imposed value judgments of fairness. The notion of "freedom of contract" was given one of its most famous legal expressions in 1875 by Sir George Jessel MR:Hans van Ooseterhout, Jack J. Vromen, Pursey Heugensp. Social Institutions of Capitalism: Evolution and Design of Social Contracts. (2003). Edward Elgar Publishing. p. 44
In the United States, courts have at times stated that the U.S. Constitution protects the freedom of contract. For example, in the case of Lochner v. New York the U.S. Supreme Court struck down legal restrictions on the working hours of bakers because under the facts of the case the court found the hours "not dangerous in any degree to morals or in any real and substantial degree to the health of the employees."Lochner v New York . Instead, the court stated that "other motives" underlay the law, by which it seemed to mean protectionism against small bakeries and their non-unionized employees.
Critics of the classical view of freedom of contract argue that this freedom is illusory when the bargaining power of the parties is highly unequal, most notably in the case of contracts between employers and workers. The argument is that workers as a group may benefit from legal protections that prevent individuals agreeing to contracts that require long working hours. In its West Coast Hotel Co. v. Parrish decision in 1937, the Supreme Court retrenched on some of its previous caselaw protecting the freedom of contract.
Since then, the U.S. Supreme Court has been extremely hesitant to protect economic freedom under the due process clauses of the U.S. Constitution, as it did in Lochner. It has, however, sometimes protected economic freedom in other ways, including through the dormant Commerce Clause doctrine and the First Amendment through protection of commercial speech. And lower courts, including state courts, have protected economic freedom at times through due process clauses and similar constitutional provisions. For example, in 2023 the Georgia Supreme Court found that a law requiring lactation consultants to have a state-mandated license violated the state constitution.
Economic and political freedom Some free market advocates argue that political and civil liberties have simultaneously expanded with market-based economies, and present empirical evidence to support the claim that economic and political freedoms are linked.Freedom in the World. (1999). Transaction Publishers. p. 12Lewis F. Abbott. British Democracy: Its Restoration & Extension, ISR/Google Books, 2006, 2010. Chapter Five: "The Legal Protection Of Democracy & Freedom: The Case For A New Written Constitution & Bill Of Rights".
In Capitalism and Freedom (1962), Friedman further developed Friedrich Hayek's argument that economic freedom, while itself an extremely important component of total freedom, is also a necessary condition for political freedom. He commented that centralized control of economic activities was always accompanied with political repression. In his view, voluntary character of all transactions in a free market economy and wide diversity that it permits are fundamental threats to repressive political leaders and greatly diminish power to coerce. Through elimination of centralized control of economic activities, economic power is separated from political power, and the one can serve as counterbalance to the other. Friedman feels that competitive capitalism is especially important to minority groups, since impersonal market forces protect people from discrimination in their economic activities for reasons unrelated to their productivity.Milton Friedman. Capitalism and freedom. (2002). The University of Chicago. pp. 8–21
Austrian School economist Ludwig von Mises argued that economic and political freedom were mutually dependent: "The idea that political freedom can be preserved in the absence of economic freedom, and vice versa, is an illusion. Political freedom is the corollary of economic freedom. It is no accident that the age of capitalism became also the age of government by the people."Ludwig Von Mises. Planning for Freedom. Libertarian Press. 1962. p. 38
In The Road to Serfdom, Hayek argued that "Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends."Friedrich Hayek, The Road to Serfdom, University of Chicago Press; 50th Anniversary edition (1944), p. 95 Hayek criticized socialist policies as the slippery slope that can lead to totalitarianism.
Gordon Tullock has argued that "the Hayek-Friedman argument" predicted totalitarian governments in much of Western Europe in the late 20th century – which did not occur. He uses the example of Sweden, in which the government at that time controlled 63 percent of GNP, as an example to support his argument that the basic problem with The Road to Serfdom is "that it offered predictions which turned out to be false. The steady advance of government in places such as Sweden has not led to any loss of non-economic freedoms." While criticizing Hayek, Tullock still praises the classical liberal notion of economic freedom, saying, "Arguments for political freedom are strong, as are the arguments for economic freedom. We needn't make one set of arguments depend on the other."
Indices of economic freedom