Published in The Sovereign Society Offshore A-Letter, January 25, 2006
The problem with the "freedom indexes" (the 2006 edition of the one done by the Heritage Foundation and The Wall Street Journal has just been published; another one is due to the Fraser and Cato institutes), is not that they are done by bad analysts (quite the contrary, and we have friends among them) nor that none of the underlying data is not potentially interesting to economists or investors. The problem is that it is not clear what they measure.
If "economic freedom" is defined in the most general sense of the liberty to do anything peaceful one wants to do with one's own property, and to enter into any contractual relation one wants (except to commit violent crimes), then obviously this is not what the indexes measure. The HF/WSJ index ties economic freedom to "the production, distribution, or consumption of goods and services," but this will only do if, by "goods and services," we understand those allowed by the state to enter legal markets. If "economic freedom" is inseparable from the rest of human liberty in a social context (using one's property to express dissenting opinions, travel, have sex, grow marijuana, store one's firearms, raise funds from "public" investors, etc.), the freedom indexes are off the mark.
This explains why some countries ruled by hard tyrannies (as opposed to the soft, Tocquevillian brand we know in the West), where nobody in his right mind would want live except to make a buck as a privileged foreigner or a member the local nomenklatura, make it to the top of the list. Who would want to live in Hong Kong (ranked 1st of 151 countries in the HF/WSJ index), that is, under one of the worst tyrannies on earth, and so much so for its very efficiency? Who would want to be a peasant under other Asian tyrannies like Singapore (ranked 2nd)?
The selective definition of economic freedom also explains why the indexes show growing economic freedom while everybody who lives in the real world must know that the 20th century, rightly described by Mussolini as "the century of the state," is continuing in the 21st with a vengeance. During the 12 years of the HF/WSJ index, economic freedom is supposed to have increased. For example, over that period, both the U.S. (now ranked 9th) and Canada (ranked 12th) have improved their scores by 11%, while in both countries (and others) the Surveillance State was growing uncontrollably, including on financial markets. In the U.S., so many business executives are going to jail that perhaps repression will have to be outsourced to China.
Thus, the "economic freedom" that is being measured is a rather special animal: it is the freedom to do what is narrowly defined as freedom in the statistics underlying the index. In practice, the freedom indexes encompass some general conditions for economic freedom (like a stable currency, or narrowly defined "property rights"), specific government restrictions or controls (on foreign investment, for example), and consequences of state intervention (the informal economy or corruption). And, of course, the weights assigned to the components of the indexes are arbitrary.
I am not saying that such indexes are totally useless. They do regroup variables that are correlated with GDP per capita and its growth, but keep in mind that GDP is a very unreliable construct that reveals basically nothing about the general welfare, and is based on arbitrary value judgments (this is pretty standard welfare economics: see my upcoming article in The Independent Review). The indexes may correlate with the difficulties the businessman will have with local bureaucracies. They may even indicate opportunities for investors to make money in limited contexts, assuming the information has not already been incorporated in prices. The HF/WSJ publication even contains some useful country summaries and international statistics.
But the freedom indexes have little to do with "economic freedom" as we use the term in politics, economics and philosophy.