WEBVTT NOTE Examining the Hayek-Friedman Hypothesis on Economic and Political Freedom 1 00:00:00.000 --> 00:00:06.280 So I'm going to talk about a paper on what I'm calling the Hayek-Freedman Hypothesis. 2 00:00:06.280 --> 00:00:09.720 The first version of this paper was called the Freedman Hypothesis. 3 00:00:09.720 --> 00:00:15.160 And then Ben Powell read an early draft and wrote me an email and said, 4 00:00:15.160 --> 00:00:16.920 well, you need to show Hayek some love. 5 00:00:16.920 --> 00:00:20.640 After all, Hayek really said the same thing about 18 years earlier in the Road to Serfdom. 6 00:00:20.640 --> 00:00:24.560 So I said, OK, we'll call it the Hayek-Freedman Hypothesis. 7 00:00:24.560 --> 00:00:28.200 I'm sure other people have said it, but that's all the names I'm going to put on it for now. 8 00:00:28.200 --> 00:00:33.400 I should recognize my co-author who's in the room, Jeff Clark, from University of Tennessee, Chattanooga. 9 00:00:33.400 --> 00:00:39.700 So if you have any damning criticisms, direct them to him afterwards. 10 00:00:39.700 --> 00:00:44.800 This is the 50-minute PowerPoint, so I'm going to do it in 15, so I might be a little quick, 11 00:00:44.800 --> 00:00:49.500 just give you an idea of what the paper's about. 12 00:00:49.500 --> 00:00:52.800 These are some quotes that basically motivate the paper. 13 00:00:52.800 --> 00:00:55.600 The first one is from Hayek and the Road to Serfdom. 14 00:00:55.600 --> 00:01:09.600 The second is from Capitalism and Freedom, and in both of these works, Hayek and Friedman make an empirical claim about the relationship between economic freedom and political freedom. 15 00:01:09.600 --> 00:01:23.600 In a nutshell, the claim is that economic freedom is a necessary but not sufficient condition for political freedom, that if you're going to have political freedom, you must have economic freedom. 16 00:01:23.600 --> 00:01:37.600 And that's the claim that Friedman made in this quote. If you read, 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. 17 00:01:37.600 --> 00:01:51.600 So a free market is a necessary condition for political freedom. They're both a little bit fuzzy sometimes about what they exactly mean by economic freedom and political freedom, particularly political freedom in Hayek's world, 18 00:01:51.600 --> 00:02:21.600 World, especially writing right after World War II. He seemed to be more interested in the formal trappings of political freedom in the sort of democracy sense, whereas Friedman is clearly a bit broader in terms of political freedom. At this time, he was more including things like civil freedoms and freedom of speech and religion and so forth. But in any case, they're both making claims that the liberal society, the free society, that these two dimensions are linked. 19 00:02:21.600 --> 00:02:40.600 in this peculiar way. Let me use this as, I think, a simplified version. I just saw a presentation the other day where the fellows stood up and said every presentation should have a two-by-two matrix, so I'm going to follow that from now on. 20 00:02:40.600 --> 00:02:50.600 Two-by-two matrices, of course, simplify things, they oversimplify, but this gives you an idea of what I think the hypothesis that Frieden and Hayek had was all about. 21 00:02:50.600 --> 00:03:20.600 So, across the horizontal we have economic freedom, and the left is no economic freedom, and on the right is economic freedom, and in the real world it's a continuum, we'll talk about that in a minute, but on the vertical axis it's the political freedoms dimension, so politically free is up and not politically free is down, and if you think about some of the combinations, for example, the upper right-hand quadrant, the economically free, politically free quadrant, places that combine both political and economic freedom 22 00:03:20.600 --> 00:03:25.760 are pretty easy to find. The United States, at least in a relative sense, don't throw 23 00:03:25.760 --> 00:03:32.840 any bricks at me. In a relative historical sense, the United States is both liberal free 24 00:03:32.840 --> 00:03:37.760 politically and economically, at least relative to anywhere else on earth, just about. There's 25 00:03:37.760 --> 00:03:43.200 no shortage, alas, unfortunately, of examples in the lower left-hand quadrant of countries 26 00:03:43.200 --> 00:03:47.800 that have been repressive in both dimensions. The Soviet Union is a classic example, others 27 00:03:47.800 --> 00:03:56.720 Today, you can find like that. There's also plenty of examples in the lower right-hand quadrant, and it's important to note that the 28 00:03:57.640 --> 00:04:00.000 Freedmen especially was quite clear that 29 00:04:01.300 --> 00:04:06.640 economic freedom can be combined without political freedom. If you have economic freedom, 30 00:04:06.640 --> 00:04:13.040 that doesn't necessarily mean you're going to have political freedom in Singapore and Hong Kong and many of the oil-rich nations or countries today 31 00:04:13.660 --> 00:04:15.520 that 32 00:04:15.520 --> 00:04:17.520 typify a 33 00:04:17.520 --> 00:04:25.520 They're pretty much a market economy, I mean, at least in a relative sense, a free market economy by today's standards, and yet they're politically repressive. 34 00:04:25.520 --> 00:04:31.520 They're not democracies, and certain basic civil liberties tend not to be widely respected. 35 00:04:31.520 --> 00:04:38.520 So that combination in the lower right-hand quadrant is not a problem in the Hayek-Freedman worldview. 36 00:04:38.520 --> 00:04:44.520 I don't think that... Friedman almost celebrated, like Hong Kong, and he kept saying over and over again, 37 00:04:44.520 --> 00:04:55.520 Hong Kong is so economically free, and by the way, they don't have a democracy and so forth, so that lower right-hand quadrant was not an offensive combination in their way of thinking. 38 00:04:55.520 --> 00:05:12.520 It's the upper left-hand quadrant that is the problem, and the upper left-hand quadrant represents country experiences where you're trying to have a controlled economic environment, repressive economic environment, but have a politically liberal, politically free environment at the same time. 39 00:05:12.520 --> 00:05:17.520 And the combination of what Hayek and Friedman both suggested was problematic. 40 00:05:17.520 --> 00:05:22.520 And again, Friedman's language was, I know of no example of a place that had... 41 00:05:22.520 --> 00:05:25.520 Basically, I know of no example of the upper left-hand quadrant. 42 00:05:25.520 --> 00:05:30.520 When I first started to think about this, I said, well, geez, when he wrote that in 1962, 43 00:05:30.520 --> 00:05:34.520 I mean, India would have come right to my mind. 44 00:05:34.520 --> 00:05:40.520 I mean, India, the world's largest democracy, reasonably free politically, freedom of speech, and so forth. 45 00:05:40.520 --> 00:05:46.560 And yet, in the 1950s and 60s, India was borderline Soviet in its economic regime, so 46 00:05:46.560 --> 00:05:54.200 just on the face, it was kind of, you know, you can think maybe there are examples of countries that have tried to have political 47 00:05:54.200 --> 00:05:57.040 freedom, but not economic freedom, okay? 48 00:05:57.040 --> 00:06:00.120 So that's the sort of framework. 49 00:06:00.120 --> 00:06:05.120 This paper is actually an empirical paper, though. I wanted to empirically look at this hypothesis. 50 00:06:05.120 --> 00:06:06.520 So I collected data. 51 00:06:06.520 --> 00:06:18.520 You won't be surprised to learn if you know about my background. I use the Economic Freedom of the World Index, published by the Fraser Institute and written by a brilliant young scholar at Auburn University. 52 00:06:18.520 --> 00:06:31.520 And the Economic Freedom Index is horizontally there. I've standardized it and centered it on zero, so basically it's zero mean and one standard deviation. 53 00:06:31.520 --> 00:06:36.360 One is standard deviation and the Political Rights and Civil Liberties Index from Freedom House, 54 00:06:36.360 --> 00:06:45.360 pretty common if you know about these indices, it's a long-running survey that's done out of New York on political and civil liberties and I use the average of those two. 55 00:06:45.360 --> 00:06:50.360 And again, I standardized that and centered it on zero so that these two scales are comparable. 56 00:06:50.360 --> 00:06:59.360 And so, and I've sort of drawn this, so the quadrants are still the same quadrants from the previous two by two matrix are sort of represented here, 57 00:06:59.360 --> 00:07:22.760 There are countries up in the upper left-hand quadrant right off the face. 58 00:07:22.760 --> 00:07:32.760 About the data itself, there's 815 dots there because I have data for 1970, 75, 80, 85, 90, 95, 2000 and 2005. 59 00:07:32.760 --> 00:07:40.760 As you get closer to the present, there are more countries represented, so I think I've got 50 or 60 countries in 70. 60 00:07:40.760 --> 00:07:46.760 By the time you get to 2005, there are 120 or so countries represented in the data. 61 00:07:46.760 --> 00:07:58.760 So there's about 815 cases where I've got data on the economic and political freedom environment in the place over time. 62 00:07:58.760 --> 00:08:04.760 That's the regression plot. This is the only paper I've ever written where there's no regression in the paper. 63 00:08:04.760 --> 00:08:14.760 This is not in the paper. And the reason is because the Friedman-Hayek hypothesis is not saying that there is a positive relationship between economic freedom and political freedom. 64 00:08:14.760 --> 00:08:21.760 and Political Freedom. There is. It's been well demonstrated by numerous scholars in political science and comparative economics. 65 00:08:21.760 --> 00:08:29.760 There's, you know, countries that are liberal in one dimension tend to be liberal in the other and vice versa. 66 00:08:29.760 --> 00:08:33.760 So there's nothing particularly interesting about this relationship in my mind. 67 00:08:33.760 --> 00:08:39.760 And again, it's not what Hayek and Friedman really were saying. They had this necessary but not sufficient kind of thesis. 68 00:08:39.760 --> 00:08:46.760 A straight line regression doesn't really get at that necessary but not sufficient kind of hypothesis. 69 00:08:46.760 --> 00:08:54.760 So anyway, what I wanted to do is I wanted to try to operationalize the hypothesis. 70 00:08:54.760 --> 00:08:57.760 And Friedman's quote is a bit more specific. 71 00:08:57.760 --> 00:09:00.760 If you recall, Friedman basically said, 72 00:09:00.760 --> 00:09:07.280 It's impossible for countries with a large measure of political freedom to exist without 73 00:09:07.280 --> 00:09:10.360 something comparable to a free market. 74 00:09:10.360 --> 00:09:14.560 So what I wanted to try to do is operationalize what does it mean to have a large measure 75 00:09:14.560 --> 00:09:18.720 of political freedom and what does it mean to have to be without something comparable 76 00:09:18.720 --> 00:09:19.840 to a free market. 77 00:09:19.840 --> 00:09:25.480 So those are words, but I needed to turn those words into numbers, I need to operationalize 78 00:09:25.480 --> 00:09:26.480 that numerically. 79 00:09:26.480 --> 00:09:31.280 So, somewhat off the top of my head, I decided that large measure of political freedom meant 80 00:09:31.280 --> 00:09:34.960 that your political freedom score was one standard deviation above average. 81 00:09:34.960 --> 00:09:36.760 PF is greater than 1, okay? 82 00:09:36.760 --> 00:09:40.280 I don't know, standard deviation, that's big. 83 00:09:40.280 --> 00:09:43.920 So a large measure, if you're more than a standard deviation above average, you've got 84 00:09:43.920 --> 00:09:44.960 a lot of political freedom. 85 00:09:44.960 --> 00:09:50.440 So I just stipulate that, pulled it out of, you know where, I'll tell you that. 86 00:09:50.440 --> 00:09:52.680 Now what does it mean to be comparable to a free market? 87 00:09:52.680 --> 00:09:53.680 Comparable is weaker. 88 00:09:53.680 --> 00:09:55.800 It's not large measure, comparable. 89 00:09:55.800 --> 00:09:59.480 So I said, well, comparable to a free market would be, I don't know, maybe a half a standard 90 00:09:59.480 --> 00:10:02.440 deviation above average, right? 91 00:10:02.440 --> 00:10:05.680 I don't know. 92 00:10:05.680 --> 00:10:07.720 And then, of course, it's without something comparable to a free market. 93 00:10:07.720 --> 00:10:11.360 So I wanted everybody less than a half a standard deviation above average without something 94 00:10:11.360 --> 00:10:12.540 comparable to a free market. 95 00:10:12.540 --> 00:10:18.640 So it turns out, in the 815 cases that I have, there are 248 cases where I've got large measures 96 00:10:18.640 --> 00:10:24.440 of political freedom on one hand, and there are 550 cases where I've got not something 97 00:10:24.440 --> 00:10:29.600 and Comparable to a Free Market and the intersection of those two is 76 country cases and I think 98 00:10:29.600 --> 00:10:34.800 it represents 30 or so distinct countries but 76 examples. 99 00:10:34.800 --> 00:10:42.880 So using sort of my first pass quick just guess about the Hayek quote there, the Friedman 100 00:10:42.880 --> 00:10:48.500 quote, I came up with 76 countries examples and Friedman said there should be zero because 101 00:10:48.500 --> 00:10:54.040 memory says I know of no example in time or place so I found 76 examples in time and place 102 00:10:54.040 --> 00:11:02.040 that violate the Friedman hypothesis, at least using the thresholds that I just used, which I thought were reasonable in my first pass. 103 00:11:02.040 --> 00:11:09.040 As I kept circulating the paper, my co-author kept saying, well, why'd you pick those numbers? Why don't you go with other numbers? 104 00:11:09.040 --> 00:11:14.040 And a few other people said, I think this number would be the right threshold and so forth. And it's kind of subjective. 105 00:11:14.040 --> 00:11:22.040 So I went ahead and I ran the numbers using multiple different thresholds. If you don't like the 1 and the 0.5 that I first chose, 106 00:11:22.040 --> 00:11:52.040 Here's a matrix that gives you sort of the idea, and I shaded in where you get the zeroes, so the zeroes are, that's basically where Friedman was right, and the closest you can get to is one, one for political freedom works, and then negative, once innovation below average for economic freedom. To me, once innovation below average is not comparable to a free market, so to make Friedman right, and let's face it, I kind of wanted Friedman to be right, 107 00:11:52.040 --> 00:12:01.040 and Hayek, you have to really push the data more than I think it makes sense to do if you use a reasonable reading of that quotation. 108 00:12:01.040 --> 00:12:12.040 So I think Friedman was literally incorrect and I think probably what happened is in the Capitalism and Freedom, which is a book written primarily for lay audience and lectures for lay audiences more than professional audiences, 109 00:12:12.040 --> 00:12:21.040 a little bit of a rhetorical flourish on Friedman's part to say, I know of no example, even again, at the time there was India, there were examples, Israel in other cases. 110 00:12:21.040 --> 00:12:25.040 So, I think he oversold his case. 111 00:12:25.040 --> 00:12:30.040 The fallback position, you don't need to see that. 112 00:12:30.040 --> 00:12:37.040 The fallback position is that if you look through time, the number of violations is diminishing. 113 00:12:37.040 --> 00:12:44.040 And so I think the fallback position, to sort of resurrect the Hayek-Freedman hypothesis, as I'm calling it, 114 00:12:44.040 --> 00:12:54.040 The fallback position is that the combination of no economic freedom with political freedom is not sustainable. 115 00:12:54.040 --> 00:12:59.040 Then over time, that combination just doesn't survive very well. 116 00:12:59.040 --> 00:13:06.040 If you think about India as a case, and Israel, both examples of countries that had borderline Soviet economic regimes. 117 00:13:06.040 --> 00:13:15.040 I mean, the central planning in India and Israel in the 50s and 60s and into the 70s was, I mean, it was Soviet-like, right? 118 00:13:15.040 --> 00:13:21.040 But they were liberal democracies with freedom of speech and press and religion and so forth, you know, pretty much. 119 00:13:21.040 --> 00:13:27.040 So that combination, I would suggest, I think Friedman would agree, is just not sustainable. 120 00:13:27.040 --> 00:13:34.040 And if you look at what happened in both countries, they both have liberalized their economies to match that, to match each other. 121 00:13:34.040 --> 00:13:41.540 Essentially, in that matrix, they moved from the upper left-hand quadrant to the upper right-hand quadrant in both cases. 122 00:13:41.540 --> 00:13:53.040 And then the last part of the paper, this is just doing some stuff, you know, is I looked at a few cases just for fun because it's kind of neat to look at the journeys that different countries have taken. 123 00:13:53.040 --> 00:14:02.040 Israel, this is Chile. Chile started in the lower left, went to the lower right and kind of ended up in the upper right. Never ventured into that upper left quadrant. 124 00:14:02.040 --> 00:14:13.040 This is the Israel example. You see Israel dallyed up there in the upper left for a long period of time, tried to have liberal democracy but repressive economics, and it just didn't work for them. 125 00:14:13.040 --> 00:14:18.040 The economy was terrible. You remember the Israeli economy in the 80s. It was just a disaster, and they finally started reforming. 126 00:14:18.040 --> 00:14:28.040 And now, when you think of Israel today, you think of Israel as being a modern market-type economy. It's not Galt's Gulch, but it's a good market economy. 127 00:14:28.040 --> 00:14:35.040 When I, you know, people that are older, my age or older, think of Israel as a basket case. Remember the old, you know, it was horrible. 128 00:14:35.040 --> 00:14:46.040 And then you can see Venezuela. Venezuela is going the other direction though. They started in the upper right, they went to the upper left, and now they're sinking to the south and going, and it's very bad. 129 00:14:46.040 --> 00:14:54.040 Taiwan, Singapore are in there too. So there's a few case studies in the paper that I think are thought provoking. 130 00:14:54.040 --> 00:15:11.040 Stop Provoking, and if nothing else, again, this is the lowest tech paper I've ever written, no regressions, no nothing, but it's probably the most stop-provoking paper I've ever written because it's just kind of interesting to think about how countries try to organize themselves politically and economically.