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NOTE A Statistical Calculation of Economic Freedom

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Welcome to the next session. I forget what section it is. I guess it's the seventh session.

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It's hard to keep track when you're having fun.

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Today, we are going to discuss an Econometric Empirical Study of Economic Freedom in the World.

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What we did in this book, my co-authors and I, Jim Gortney and Robert Lawson,

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is we constructed an index of economic freedom.

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We compared 102 countries on this basis.

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Namely, we took 102 countries and we rated their economic freedom

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and then we try to correlate the level of economic freedom in a country

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with various other statistical measures such as GDP or change in GDP

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or life expectancy or income equality.

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Income equality is a real good one to use with your friends on the left,

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who say that capitalism exacerbates income differentials

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and makes the rich richer and the poor poorer.

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Here you will see empirical evidence for the opposite,

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namely that the more economically free the country is,

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the less the difference between rich and poor.

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to give away the punchline before I even get into it.

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The reason for this is that in an economically free country,

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the tendency is the way you get rich is by enriching other people.

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Think Bill Gates.

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How did he get rich?

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By stealing money from the poor?

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No.

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He got rich by enriching the lives and wealth of everyone else by trade.

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And every time he sold a computer, he enriched someone else,

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at least in the ex-ante sense and usually in the ex-post sense as well or as take somebody like

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some dictator in Africa or South America who's got a big bank account in Swiss bank account how did

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he get rich did he get rich by enriching his fellow citizens no he got rich by pushing them

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down so you get a bigger differential but that's just one of the many things that comes out of the

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Study, let me get back into the study itself. Before explaining exactly what we

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did, let me explain why we did it. What was the motivation? To the best of my

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recollection, I was the one who started this thing at the Fraser

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Institute and the reason I started this is because, all because of Freedom House.

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It usually starts with Freedom House, at least in this regard. What was Freedom

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Freedom House is a left-oriented group that measures civil liberties and voting and is there a fair trial in a country?

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What they do is they compare countries on habeas corpus and juries and is there torture and is there a judiciary?

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Pretty much they do a reasonably good job, or at least I had no problem with what they were doing.

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it's a well-respected group by the New York Times and that's good enough for me

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so I figured you know things were good but then

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I learned much to my dismay that they were now launching out a new initiative

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and their new initiative had nothing to do with civil liberties and civil rights

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and torture and habeas corpus and things like that rather it was

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they were going to do economic freedom now their view of economic freedom was

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slightly different than my view of economic freedom

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Their view of economic freedom is, the higher the taxes, the more economic freedom.

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The higher the progressive rate, the more progressive the income taxes, the more economic freedom.

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The more unionism, the more economic freedom.

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The more welfare there is, the more economic freedom.

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The more non-discriminatory laws there are, the more economic freedom.

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The more environmental protection,

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and by environmental protection,

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they don't mean what we were talking about yesterday

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about upholding property rights.

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What they mean is compelling recycling

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or something like that.

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So I said, whoa, this is awful.

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If these people get away with this

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and they're the only ones doing it,

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then economic freedom will take a cut.

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It will be very bad for economic freedom.

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So I figured we should do it too.

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I was working at the Fraser Institute then and happily we launched a whole bunch of conferences with the support of the Liberty Fund and the whole bunch of conferences emanated in the or resulted in this book but when we started we weren't as clear as we were when we ended there were four or five different annual conferences that eventuated in this book so one of the big motivations was to head off the

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The Freedom House Index at the pass.

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Another is, you know, it's like Mount Everest.

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Why do you climb Mount Everest? Because it is there.

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And it seemed to be a challenge to...

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You see, we talk about economic freedom in a philosophical sense.

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And that's all well and good, and I'm in favor of it, and I try to contribute to that discourse.

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But it was a challenge to try to put numbers on this.

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And it's even more of a challenge because people say that Austrians, you know, the only numbers they have are on the page of the publications and, you know, I wanted to show that that wasn't true.

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Another motivation is that in the economics profession, the overwhelming mainstream received opinion was that the way to have economic development for underdeveloped countries is central planning.

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For example, here's a quote from Gunnar Myrdal, your favorite Nobel Prize winner.

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He won it alongside Hayek in 74.

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And here's a quote from him.

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Quote, the special advisors to underdeveloped countries who have taken the time and trouble

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to acquaint themselves with the problem of underdeveloped economics

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all recommend central planning as the first condition of progress.

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So, if this is, you know, central planning is the first condition of progress, that means that economic freedom, which is the absence of central planning, will not correlate with growth.

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And we wanted to make the case that this was not so. Peter Bauer is my guru in the economic development of underdeveloped countries.

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in all countries and he is absolutely brilliant and I recommend his writings.

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He has this thing called the three M's, as in Mary.

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The three M's of foreign aid were monuments first.

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It doesn't have to be a statue of the dictator, although it could be, but it could be a steel

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mill that costs five times as much to make the steel as you could have imported it.

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Or a domestic airline which costs ten times as much to carry people around within the country as you could have had with another outside airline coming in, but we don't want outsiders coming in and taking jobs away or whatever.

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The second one is Mercedes's. That's where the rulers drive around on the basis of the foreign aid that they are given.

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And the third is machine guns. And we know what the machine guns are doing.

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I see the point is that foreign aid is a very small percentage of the Western countries. Lauren, come give me the stuff. You'll be on TV. I'll make you famous here. Thank you.

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The foreign aid is a very small part of the donor country's GDP, but it's a gigantic percentage of the recipient's GDP.

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So without it, it doesn't matter that much which tribe in the African country is the government,

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because the government can't do too much.

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But when the government is showered with money for the three M's, then it's an imperative matter as to who the government is, and then you have tribal warfare.

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And also the best and brightest of the young people, instead of taking jobs like engineer or doctor or nurse or businessman, something that could help with economic development,

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instead they become lawyers. No insult to lawyers here, but lawyers isn't the first thing you think of when you think of economic development of a poor country.

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Lawyers, the better to get some of this boodle. So foreign aid is a disaster and the foreign aid is usually to support central planning and it's given to the people who screw up their economies.

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So foreign aid is just a disaster and this was one more motivation for trying to get an index of economic freedom that was more consonant with our views rather than the Freedom House's views.

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Then two, there's nothing that the mainstream economist loves more than to correlate things with other things.

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M1, M2, M3, M16, no that's not right. Unemployment, trade deficit, interest rates, budget deficits, you know,

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correlate this with that and see what happens because they're sort of lacking in economic theory,

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so they have to, you know, just sort of throw numbers out and see if anything comes out

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comes out and that's how they develop their economic theory in some ways so as

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a matter of outreach from an Austrian to the mainstream I figured I'd offer them

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another thing to correlate and something that might make more sense to correlate

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because economic freedom is important so we get the relationship between economic

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Freedom and GDP or whatever and another reason, another motivation was suppose

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you wake up tomorrow and you're the dictator of some small country. Now I

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know it's not likely but you know I've been watching a little too much TV and

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you know it could happen and suppose you wanted to stay on as benevolent dictator

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only you didn't know how to create economic development in your country.

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Well, the answer would be promote economic freedom and look at our index and see what the index is composed of and then do what the index implies.

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Yet another motivation for this is that for some people a statistic lends reality to a concept.

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And if it's just airy-fairy philosophy, you know, it doesn't mean as much, but if there's a number, then it means something.

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And there are lots of people like that in the economics profession and we figured we might as well do it.

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Yet another motivation is that the big correlation with economic development for the mainstream profession is a percentage of investment.

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You know, that's why the foreign aid is popular because you can now have more investment.

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For them, the key crucial element is the ratio of investment to GDP.

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and what we wanted to see and perhaps to find out or to prove or to suggest is

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that there's something more important than investment that even determines

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investment and that's economic freedom. Yet another motivation for this was to

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just promote economic liberty and one way to promote economic liberty is to put

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some numbers on it and it'll convince some people who would not otherwise be

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Okay, so much for motives. So that's what we did and that's why we did it.

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Well now, what is economic freedom? Well, philosophically, we know what economic freedom is.

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It's the ability to do whatever you damn well please, provided you keep your myths to yourself and you don't steal other people's property.

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Economic freedom is the right to buy and sell and invest and interact with your fellow creatures in a voluntary way.

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in a voluntary way. It's very simple. All commerce is allowed, it's uncontrolled, it's unregulated, except for fraud.

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Violence, invasions of person or property would be incompatible with economic freedom.

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What is the relationship of government and economic freedom? Well, this was not an anarchist exercise.

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This was a limited government exercise, so if we correlate economic freedom with percentage of government out of the GDP for the anarchist,

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The relationship would be some sort of asymptotic thing like that,

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where you get infinite amount of economic freedom if there's no government,

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or indefinitely large, and by here we define government,

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not just as official government, but any governmental act, such as theft.

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In other words, if a private criminal comes over and mugs you,

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that's a governmental kind of a thing.

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So that would be the strict way of looking at it.

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But the way we looked at it was, and one of the criteria was, what's the percentage of government expenditure in GDP?

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The way we looked at it, it was like this, and this is about 10%, namely, for the limited government person, the minarchist.

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If the government is zero, well then so is economic freedom because you have the Hobbesian jungle of all against all or something like that.

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And then as government increases up to the 10%, you get more and more economic freedom, and then you reach the apex at around 10%.

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Milton Friedman, who was the intellectual eminence gri behind this, somehow picked 10% as, you know, I think tithing or something like that.

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He had some reason why 10% was great.

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Well, what the heck, you know, if you have to pick a number, 10% seems reasonable. At least it's not 50%.

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So, what we do is we, one of the criteria is to rate the percentage of government in GDP and compare countries on that basis.

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Okay, all well and good, probably there's widespread agreement, at least in this group, if you want to adopt a minarchist view.

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But how do you operationalize this? How do you get actual numbers?

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What are the numbers? Well, we picked 17 sub-components based on four categories.

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Now, I've given out stuff to everyone. You've all got those handouts? Okay.

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Let me see if I can get myself in gear here.

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The first way to look at this is here are the overall components.

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There are four categories and the four categories are, let me get my notes here, here they are.

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The first is money and inflation.

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Can you see that?

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I guess you've all got a hard copy of it, but I'm worried about the studio audience or the people out there.

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Chad, is that okay?

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Okay, so the first one is money and inflation.

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The second is government operation.

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Here's that percentage of GDP business.

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The third one is takings. The government takes from this guy and gives to that guy. That's a no-no.

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And the fourth is international free trade.

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And then among those four categories, there are subcategories.

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So that's sort of the overall thing of what we're doing.

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Let me give you the results before going into the details.

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And here is one way to look at the results, what we do is we have a hundred countries, if I did it this way, no that wouldn't work, I couldn't turn this machine around, could I? No, okay, so I'm going to have to make it a lot smaller, so you can get all hundred countries in there.

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What we do is we rate all the countries and you can see that this was 95 before Hong Kong was taken over by China.

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So the freest countries in the world were Hong Kong, Singapore, New Zealand, the US, Switzerland, Malaysia, United Kingdom, Thailand, Canada, Japan.

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The least free, we're at the other end of the spectrum, we have Oh, Burundi, Ivory Coast, Romania, Haiti, Syria, Iran, Algeria, Zaire, Somalia,

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you know, the rogue's gallery of countries in terms of economic freedom.

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Okay, we did this, remember I said there were 17 different criteria in four categories?

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Well, we have to talk a little bit about the weighting system,

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W-E-I-G-H-T-I-N-G, the weights of each of the criteria.

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There were three ways to calculate the weights.

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One was to calculate the weights so that each of the 17 criteria

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had a equal contribution to the overall index.

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And the way you do that is you make the weights in inverse proportion to the variance of each category.

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So if a category stretched from here to here, you have to reduce it.

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If a category was very close like that, you had to expand it a little bit so you'd have an equal contribution of all 17.

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That's one way to do it.

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Another way to do it would be to just take a survey.

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And we took a survey, we took two different surveys. One I think was, if I remember correctly, was all the participants at these conferences.

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And there were, oh, 20 people at each conference. And the third way we did is we picked the Mont Pelerin Society as a large group that would roughly be freedom oriented.

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And we gave them a survey and we said all the weights have to add up to 100. What do you think are the most important of these components?

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And I'm going to present two different versions of this business.

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Here's one version of the business and this is a summary index of all three.

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And this heavily weights income transfers.

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So you can see that France and Denmark are tied for 32.

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for 32, whereas when I do it in a slightly different way, here, France and Denmark, which specialize in redistribution, move up to 16 and 20 respectively, or 20 and 16.

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So there are slight differences in the weighting systems, but as it turns out, the weighting systems don't matter too much.

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So I'm just going to ignore it.

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Here is a sort of a look at how the weighting systems came about.

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Over here, we have the 17 different criteria.

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And the weightings come out differently

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based on whether we purposely try to make each component

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be responsible for the inverse of the variance,

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namely an equal contribution,

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or we take one or the other of the surveys or we take all three and most of what I'll be reporting would be all three of the systems averaged out.

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It's a little complicated but and as a reward for listening to all this stuff about statistics,

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I'm now going to give you my favorite cartoon, my favorite cartoon in political philosophy.

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I don't know if you can see that clearly.

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Helping the poor, the big government, in both cases you have people at the bottom of the pit

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and other people at the top of the pit who are helping them.

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And in the one case it's the big government answer and they're handing down buckets of food

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and the guy is crying out more food.

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And in the second panel, the free market answer, again you have people at the bottom of the pit

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and now what they're handing down is rungs of freedom

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and the guy is yelling out, more rungs.

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And it sort of indicates to our friends on the left

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who think that we're against the poor,

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that we're not against the poor,

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it's just that we have a different way

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of trying to help the poor.

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And our way of trying to help the poor

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is not to give them food,

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it's to give them economic freedom.

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Okay, let us now go over each of the 17 criteria.

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17 criteria, and the first one, the first one I'll illustrate this with is with the United States, and I'm now focusing just on this component here, so I'll make it a lot bigger, I can't make it any bigger than that, there we go.

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So just look at this part, the top four. Money is an important part of economic freedom and a sound money is part of economic freedom just as the blood is an important part of the body so is money an important part of the economy because money is sort of the bloodstream of the economy if I can make that analogy.

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Money touches almost every interaction in the market except for border, so money is very important.

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Okay, well what's the first one? The first one is annual money growth.

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Well that's a problem. Why are we picking annual money growth?

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Because you see, what we want to do is we want to pick things that have to do with economic freedom.

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We don't want to pick things that have to do with GDP because if we do then we'll be accused of fudging.

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You know, of course there's a correlation because you defined your index on the basis of it.

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So what we should have done ideally, well, what would be a free market money?

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Obviously, a free market money would be gold.

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Why would a free market money be gold? Because whenever the market was free to pick a money,

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it always picked gold and sometimes silver.

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Initially, it would pick things like, I don't know, herring or bananas,

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those weren't good moneys for various reasons and then they got the fishing hooks and salt

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and those weren't as good as gold because gold was, you know, easily divisible without loss of value

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like a diamond, you break a diamond and make change and you lose most of the value of the diamond

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whereas you break up a gold piece and, you know, it has its value

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cement wasn't a great money because, you know, it's hard to carry around cement

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You don't get much value per weight or per cubic in cement, whereas in gold was a good money.

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Okay, so what we could have done is said, okay, look, how many countries are on the gold standard?

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Zero. So, let's give every country a zero.

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We could have done that, and that would have been philosophically satisfying.

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But the whole point of making an index is to distinguish between countries, and if we gave them all a zero,

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If all was zero, it would have been as if we wouldn't have included that as a criterion, so we couldn't do that.

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So our reasoning was, well look, what's one of the benefits of the gold standard is you're not going to get inflation,

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because the government can't, you know, create gold, whereas they can create zeros and paper.

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And if they were on a gold standard, the inflation rate would be zero, or something, or be very low.

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Well, what we then did is we went around to all the countries and looked at what their inflation rate is,

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or their increase in the money supply rate was, and that's how we rated them.

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So, you have to realize that when you get into empirical work, you can't be pure, you have to make compromises.

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There was even a compromise, why did we pick 17 criterion? And only 102 countries, 101 countries, I forget how many countries there were.

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Well, this seemed reasonable to us. Our competitors, the people at the Heritage Institute,

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picked nine criterion, nine criteria, and that way they got about a hundred and

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eighty countries. So in other words the more criteria you pick the fewer the

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countries you'll get. You could have picked a thousand criterion got no

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countries or you could have picked you know one criteria and got every country

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but neither one would tell you as much as the compromise. Now I don't think that

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our decision was better or worse than the heritage's it's just a different way

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One of the problems I got into, at the time that this book came out, I was going for tenure at Holy Cross and one of my colleagues who was deciding on my tenure was an expert in China and we didn't include China and he was livid.

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How could you not include China? China is a big country, yack, yack, yack.

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And the point is, if we would have included China, we would have had to lose six or eight other criteria.

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And we decided, you know, to go that way.

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Okay, so the first one is money and inflation and annual money growth in the last five years.

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And the higher the rate of growth in the money stock, the lower the rate you get, and you're rated 1 to 10.

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So, in parentheses, you see like for 1975, the last five years previous, the money increase was 3.5 and you got an 8, for 1985, the number was a little higher, 5.8, so you got a lower number, in 1990 it was, you got a 9, which was a higher rating because you had a lower rate of money inflation, you get the point?

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In other words, the higher the annual money growth, the lower the mark you get, and that's how you get the numbers.

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The second criteria is inflation variability, because it was seen that if a country inflated at a solid 5% all the time,

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That was somehow more economically free than if one year they would do zero and another year 10 and then zero and then 10, another minus 10, another plus 20, and you know, they would add in a certain amount of, gold wasn't like that.

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Gold was much more steady, so in effect, this is yet another way of capturing what economic freedom would mean in money.

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Now, I'm not going to go over all 17 of these criteria in the fine detail that I'm doing on the first one or the first two,

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but I will go over them and I'll illustrate different countries.

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But let me look at over here at the top.

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See, these are the three ways of doing the summary for the five, five-year periods.

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And here is the summary rating for the average of all three

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And you can see that the economic freedom in the US is slightly increasing

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From a pretty good, this is out of 10, and 6 is decent but not really anything to write home about

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And 7.7 is a little better

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You know, one of the things that comes out of this is when people like George Bush say

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We're the freest country in the world economically

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We can say, oh no, no, no, we're only the fifth freest or something like that.

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But one of the objections I've found whenever I show this to people is everyone,

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especially from foreign countries, says, you know, this is pretty good, but my country, you rated too high.

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Because everyone knows their own country and they hate their own country and they know their own country pretty well.

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I say, we couldn't be that good.

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The point is that other countries are pretty crappy too, so...

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Okay, so we did the first two, 1A and 1B.

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1C is can you own foreign currency?

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And if you can, you get a 10, and if you can't, you get a zero.

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And you can see by some of the other countries that I gave out in the little thingy, for example,

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In Israel, as we'll later see, you cannot maintain a bank account abroad, which is the fourth criteria.

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In the U.S. you can, so you get tens all the way across.

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Okay, so that's the first category.

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And the data we came from the IMF and the World Bank and a World Currency Yearbook from the IMF.

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In other words, the data we're getting is, for the most part, not made up by us.

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It's rather reporting from what is seen by most people as legitimate sources,

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because we're going to be trying to convince the enemies of economic freedom that this has some merit.

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Therefore, it was incumbent upon us to pick sources of the data that they would at least grudgingly respect.

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Okay, the next thing I want to do is to illustrate the second category of government operation and now I'm picking Sweden to illustrate this.

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And before I get to that second category, let's just talk about Sweden a little bit.

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You can see Sweden is also increasing their economic freedom, but they're starting from a lower base and ending at a lower place, although there is improvement.

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But the interesting thing about Sweden is if you look at the four summary numbers, on money and inflation they get a 6.9 which is pretty good,

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on government operation they get a 6.7 which is pretty good, on international trade, this isn't as clear as in the past,

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Is there some sort of focus that I could do to make it sharper or is this it?

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That's it, okay.

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Maybe if I make it smaller.

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See, I'm not worried about you here because you've got it on paper and you can see it clearly,

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but I'm hoping to, you know, get everyone else to see it.

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Well, I'll say what the numbers are.

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And on international sector, they get an 8.7, which is very, very good.

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So, in a sense, Sweden is a free market country.

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country. You know, this is a way of dealing with the people who say, ah well,

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you know, Sweden is great and yet they're all socialists there. There's only one

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area on which Sweden falls down and that's takings and there they get an 0.5

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which is horrible because Sweden is a redistributionist country par excellence.

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So what Sweden is, according to our numbers, is a reasonably free enterprise

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There's a country that keeps switching money from here to there.

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Well, it's not good to do that.

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But still it's, you know, in these other three categories,

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which comprise 14 out of the 17 categories, or rather criteria, they're pretty good.

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Okay, now let me use Sweden.

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I'll focus down a little bit so we can just look at area two,

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which is our main focus in this.

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In other words, what I'm doing is I'll take four different countries to illustrate the four different categories.

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So we're now on Sweden and we're now on Roman numeral two, government operation.

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So what's going on here? The first one is government consumption percentage of GDP.

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In parentheses, it's the percentage of government out of the GDP ignoring transfers,

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because transfers we consider in category three.

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Everyone with me on this? Is it understandable? Okay.

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So the first one is what percentage of GDP is government accounted for

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and Sweden is getting zeros all along here because their criteria is too high.

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The second one is government enterprises, you know, do they have a steel mill?

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Do they have a radio station? Things like that.

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The more of those sort of things they have, the lower the mark they get.

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The third one is price controls, and we don't have data for every year, but at least we have data for the last two, five years, and they're pretty good.

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They get a six and an eight, which means that they don't have too many price controls.

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Entry into business. How easy is it to get into business?

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There's this guy, what's his name, from Peru? Sorry, help me out. Who's the...

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De Soto, Hernando De Soto. And what he does is he goes around to various countries and he sets up a business.

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No bribes, just doing it legally. And he, you know, some business like selling watches or repairing shoes or something like that.

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and he calculates, well, how many days does it take from the first day that he goes down there and asks for permission to set up a business

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and how much money does he have to pay legally and, you know, three years, five years, you know, never or, you know,

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and in some countries you can do it in one day or in some days, in some countries you don't even have to ask permission.

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So, here, that's the criterion. The quicker you can set up a legitimate business in a country, you get a 10, and if you can't, you get a 0, and we rate the countries for how long it takes.

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The information on the first one was from the World Bank and the IMF. Government enterprise came from the OECD and the World Bank and the IMF.

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The price control business came from the World Competitiveness Report. Entry into business came from Freedom House.

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Notice we're taking their their numbers on on limited things. The legal system

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came from Freedom House namely if you sue a national will the court just throw

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you out because you're a foreigner and they're a domestic person and the last

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one is a measure of credit market freedom. So you can see that Sweden got an

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and 048-1010-10 for what do you call it, a weighted average of 6.7, which is pretty good.

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Okay, so I've now used a second country to illustrate the second category.

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We're going to take a third country, Israel, to illustrate the third category of takings.

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And in the Israeli case, you can see that they start at a very low number.

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They're increasing, but they're pretty pathetic in terms of economic freedom.

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Now Israel is a very interesting country.

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They're interesting on two bases.

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One, the Jews in this country have the highest income of any category.

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And there's mostly Jews there, so you'd expect, you know, that they'd be doing pretty well in terms of GDP and economic freedom.

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You'll see that the Israeli GDP is not very good. It's consonant with their economic freedom.

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And this is a puzzle. It used to be that the Chinese were like that too, that they were very, very poor in China.

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It's changing now because there's more economic freedom in China.

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But 10, 20, 30 years ago, China was an economic basket case. The Chinese were practically starving.

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But the Chinese who lived in Malaysia or who lived in India, or I don't know if there are any in India, but in the US, are doing very well.

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So you get a very sharp, dramatic contrast showing that you sort of have a ceteris paribus on the people.

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Not perfect, you know, the Chinese who live here and there might be different, the Jews who live here and in Israel might be different.

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But by and large, you know, you sort of say when you're doing rough historical or empirical work and you're not in the area of high theory,

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you sort of say, okay, the people are about the same, the talents are the same, the IQ is the same, give or take.

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and yet the economic system is so crucial and this is a dramatic way of

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pointing it out. The second way that Israel is of interest is that there is

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this, I told you about one competitor for our index, the Heritage, there's another

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competitor with our index and that is the IQ index and what they do is they

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take the IQ of every country and they correlate it with GDP just like we do

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and they get better results so we have to be very modest about economic freedom

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here the point is that it's not a praxeological issue treating with GDP and

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GDP is as we know has got a lot of problems not least among which is leisure

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I mean suppose that there's economic freedom but we in the country of

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Auburnia we have total economic freedom but we're lazy so-and-so's and you know

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Well, we're very rich, but what we decide to do with our wealth is work three hours a week and go play golf the rest of the time.

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So our GDP is going to look pretty crummy, even though we've got a lot of economic freedom.

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So you don't have this proxeological element going on. That's why you need some sort of empirical measure.

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The other reason that Israel is interesting is that in the IQ studies, Israel has a low IQ,

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Which was really puzzling to me because the Jews have the highest IQ, especially the Ashkenazic Jews.

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And maybe the highest proportion of Ashkenazic Jews in the world is in Israel.

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So I guess what I'm saying is a lot of term papers and PhD dissertations in this stuff.

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And indeed, one of the benefits of our index is that a lot of PhD dissertations in mainstream places

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in some extreme places where they want to correlate, correlate, correlate, they use this stuff to correlate all sorts of other stuff in international comparisons and those of you who are on your way toward doing a PhD dissertation might consider, you know, taking our data and correlating with something else and maybe that'll get you a good dissertation.

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Okay, so let's get back and now we're talking about takings, so I want to blow up the third part of it and the first one is transfers and subsidies

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and the more you transfer, the lower the market you get and the less you transfer, the higher the market you get.

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The second one is marginal tax rates, and what we did there with marginal tax rates is that the sooner a thing kicks in, the lower the mark you get.

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So if it kicks in at a low rate, let's look at a 56 to 60 percent marginal tax rate.

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If it kicks in at less than $25,000, you get a real low mark, but as it kicks in higher and higher, you get a higher mark.

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You get it?

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And also, going up and down, the lower the marginal tax rate, the higher the...

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Boy, every time I touch it, it goes crazy.

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The higher the marginal tax rate, the lower the mark you get.

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So that's how we calculated 3b.

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And then conscription was a dummy variable.

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If you had conscription, as Israel did, you got a zero,

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and if you didn't, you got a 10.

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Conscription doesn't really belong in with takings,

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although it could because you're really taking labor.

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Ideally, what I would have loved to have

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is another section on labor, labor market freedom,

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and where we could have got unions, percentage of unions,

400
00:41:52.300 --> 00:41:58.300
and the higher percentage of unions, the less economic freedom and the lower, the higher.

401
00:41:58.300 --> 00:42:06.300
And in subsequent iterations of this, I dropped off, my co-authors kept going and now they have unions

402
00:42:06.300 --> 00:42:11.300
and they've rearranged the criteria. I think we're up to maybe 23 criteria instead of 17.

403
00:42:11.300 --> 00:42:15.300
So it's an ongoing thing.

404
00:42:15.300 --> 00:42:20.300
Okay, so that's it for the third category and the third country.

405
00:42:20.300 --> 00:42:30.300
Now, the fourth country is Hong Kong. I don't seem to be able to run from my notes.

406
00:42:30.300 --> 00:42:39.300
Here's Hong Kong, and you'll notice that Hong Kong is way up there.

407
00:42:39.300 --> 00:42:43.300
They're the best country in the world, or they were when they were a free country.

408
00:42:43.300 --> 00:42:48.300
You know that movie The Mouse That Roared with Peter Sellers?

409
00:42:48.300 --> 00:42:51.700
You must watch that. It's a great movie if you've not seen it.

410
00:42:51.700 --> 00:42:56.700
What happens is that Peter Sellers is in a little country in Europe and they're very poor.

411
00:42:56.700 --> 00:42:58.700
Think Liechtenstein or something like that.

412
00:42:58.700 --> 00:43:01.700
How many people have seen that movie? None of you?

413
00:43:01.700 --> 00:43:06.700
That's a disgrace. Oh, one person, okay. You're saved from disgrace.

414
00:43:06.700 --> 00:43:09.900
So you check... You're an older person, okay.

415
00:43:09.900 --> 00:43:13.300
This was a movie in the 50s, I guess, a black and white movie.

416
00:43:13.300 --> 00:43:15.300
I think it's about 68.

417
00:43:15.300 --> 00:43:20.300
68? Okay. I'm not a historian, so I don't know.

418
00:43:20.300 --> 00:43:25.300
Well, Dr. Strangelove was a good movie too, but this is a different kind of movie.

419
00:43:25.300 --> 00:43:31.300
And what it was was Peter Sellers' country was a very small duchy and they were very poor.

420
00:43:31.300 --> 00:43:34.300
So they figured the best way to get rich is to get foreign aid.

421
00:43:34.300 --> 00:43:37.300
But the only way to get foreign aid is to lose a war to the United States.

422
00:43:37.300 --> 00:43:39.300
But the United States was ignoring them.

423
00:43:39.300 --> 00:43:54.300
So what they did is they went over to the United States, Peter Sellers and about 20 soldiers, and they attacked the U.S., and they figured that way the U.S. would sort of put them in jail, and then they'd give them welfare or foreign aid.

424
00:43:54.300 --> 00:44:06.300
Instead, somehow, don't ask, Peter Sellers and his little band of 20 soldiers, no guns but pikes and bows and arrows and stuff, it was very funny, they somehow managed to win the war.

425
00:44:06.300 --> 00:44:36.300
Now, Peter Sellers plays about six or eight of the category of the characters, you know, he's the queen, he's the king, he's the duke, he's the general, and the funniest part of the movie was when you saw two half split screen, you know, where Peter Sellers, the general, is reporting back to Peter Sellers, the prime minister, saying, we won the war, and the prime minister was saying, you fool! What do you mean you won the war? You're supposed to lose the war.

426
00:44:36.300 --> 00:44:39.580
There's a point to this, you know, it's not just total silliness.

427
00:44:39.580 --> 00:44:46.100
The point is that, in a sense, Hong Kong could be looked upon as the mouse that roared.

428
00:44:46.100 --> 00:44:52.020
You'd think, you know, Hong Kong versus China, 10 million people versus a billion people.

429
00:44:52.020 --> 00:44:57.460
Who's going to win the war? Obviously, the big elephant will win the war, not the little mouse.

430
00:44:57.460 --> 00:45:04.900
But in the audiological war, it seems almost that the Hong Kong mouse beat the giant of China,

431
00:45:04.900 --> 00:45:09.420
Because now China is taking the Hong Kong road, at least economically.

432
00:45:09.420 --> 00:45:16.060
Okay, there's a Tiananmen Square here and there, but heck, there's also a Waco,

433
00:45:16.060 --> 00:45:21.740
which is roughly the equivalent, and no one would say that we're not economically free because of a Waco.

434
00:45:21.740 --> 00:45:25.020
But you have to distinguish between economic freedom and other kind of freedom.

435
00:45:25.020 --> 00:45:29.660
Waco is not a free thing, but it wouldn't get on our index.

436
00:45:29.660 --> 00:45:31.740
We've got no Wacos here.

437
00:45:31.740 --> 00:45:34.440
We're limiting our vision to economic freedom.

438
00:45:36.700 --> 00:45:39.980
Okay, so we're now illustrating the last of the,

439
00:45:41.400 --> 00:45:42.700
well, I've got my notes there.

440
00:45:42.700 --> 00:45:45.960
Maybe I'll use a different one for the four.

441
00:45:57.460 --> 00:46:00.140
Okay, so the first of these,

442
00:46:00.140 --> 00:46:05.580
4a is taxes on international trade, which is an obvious no-brainer.

443
00:46:05.580 --> 00:46:10.100
The second one is exchange rate control.

444
00:46:10.100 --> 00:46:17.260
The third one is an econometric attempt to estimate what the level of free trade would be if there were no tariffs.

445
00:46:17.260 --> 00:46:18.540
And I won't get into that.

446
00:46:18.540 --> 00:46:26.100
And the fourth one is, are you able to engage in capital transactions with foreigners?

447
00:46:26.100 --> 00:46:43.540
Okay, so we've now illustrated four countries and four categories and 17 subsections of it.

448
00:46:43.540 --> 00:46:45.860
And now we're ready for Exhibit A.

449
00:46:45.860 --> 00:46:54.500
We're ready for the denouement, the final cataclysmic, econometric equation,

450
00:46:54.500 --> 00:47:02.500
And if I can put it in those terms, we're ready now to correlate economic freedom with GDP and change in GDP.

451
00:47:02.500 --> 00:47:06.260
And what we have here is first, let's take GDP.

452
00:47:06.260 --> 00:47:24.260
Now, what we did is we took anything with an eight or eight or above was an A, seven was a B, six was a C, D was a five, F was a four and F minus was a three.

453
00:47:24.500 --> 00:47:31.820
or below okay now you remember that these 17 criteria had nothing to do with

454
00:47:31.820 --> 00:47:37.340
economic growth there was no IQ there there was no capital there was no

455
00:47:37.340 --> 00:47:41.380
resources there was nothing no investment there was nothing that most

456
00:47:41.380 --> 00:47:46.340
people think accounts for GDP instead there was all this stuff about how much

457
00:47:46.340 --> 00:47:51.300
busy-bodiness is the government doing and can you set up a business quickly or

458
00:47:51.300 --> 00:47:56.300
You have to wait three years before you can open up a fish shop or something like that.

459
00:47:56.300 --> 00:48:06.300
So we tried our best not to fudge, not to pick things that could lead to wealth.

460
00:48:06.300 --> 00:48:09.300
We didn't put natural resources or anything like that.

461
00:48:09.300 --> 00:48:14.300
We put things to the best of our ability, given, for example, that there's no gold standard.

462
00:48:14.300 --> 00:48:16.300
We had to use something for money.

463
00:48:16.300 --> 00:48:46.300
To the best of our ability we picked 17 things that had nothing to do with wealth or GDP or anything like that and now we're going to correlate it with it and lo and behold we find that there is not a perfect correlation but certainly a very strong correlation and I'll get to the exact correlation when I give you the econometric equation namely that the richer the country the more economic freedom or obviously the more economic freedom the richer the country

464
00:48:46.300 --> 00:48:55.060
on a per capita basis and this is the the final conclusion of the of the piece

465
00:48:55.060 --> 00:49:04.660
and not only that not only are countries that are economically free relatively

466
00:49:04.660 --> 00:49:14.980
rich they're also have the highest growth rates and you can see that the

467
00:49:14.980 --> 00:49:21.980
The very rich countries are growing faster than the, rather the very free countries are growing faster than the intermediately free countries

468
00:49:21.980 --> 00:49:26.980
and that the most unfree countries are not growing at all but retrogressing.

469
00:49:26.980 --> 00:49:33.980
You know, sometimes they call it developing countries, these economic basket cases.

470
00:49:33.980 --> 00:49:37.980
We can now see that they're not developing countries, they're retrogressing countries.

471
00:49:37.980 --> 00:49:43.300
and you know our friends on the left are always calling things names by you know

472
00:49:43.300 --> 00:49:48.220
good learners or something for people who fail exams you know there's no more

473
00:49:48.220 --> 00:49:51.700
failure you can't fail an exam it's somebody who didn't pass this time or

474
00:49:51.700 --> 00:49:55.460
something like that and and every kid has to get an award and you know all

475
00:49:55.460 --> 00:50:00.020
countries are developing countries but they're not some of them are

476
00:50:00.020 --> 00:50:07.140
retrogressing countries okay now let me put up the econometric equation that

477
00:50:07.140 --> 00:50:34.140
that underlies this whole business, let me blow that up a little bit, what's going on here, what we're comparing is the dependent variable is the growth rate from 75 to 94 and we're comparing the level of economic freedom

478
00:50:34.140 --> 00:50:57.140
With the change in economic freedom, LEF is level, CEF is change in economic freedom, with the criteria, with the thing that most development economists think is important, namely the percentage of investment compared to GDP.

479
00:50:57.140 --> 00:51:09.140
Now our t-values in percentage, in brackets are all statistically significant at the 5% level, which shows that the t-values are above 2.

480
00:51:09.140 --> 00:51:33.140
The important thing to look at is the coordinates there and you can see that for every 1% increase in growth rate there's a 20% contribution by investment

481
00:51:33.140 --> 00:51:38.640
But note that the change in economic freedom is five times more important

482
00:51:38.640 --> 00:51:42.640
because one is five times higher than 0.19

483
00:51:42.640 --> 00:51:48.140
and the level of economic freedom is roughly twice as important as investment

484
00:51:48.140 --> 00:51:53.140
So if you one day wake up and become a dictator and want to be a benevolent dictator

485
00:51:53.140 --> 00:51:57.140
and want to bring your undeveloped country into economic development

486
00:51:57.140 --> 00:52:00.140
Yes, the more investment the better

487
00:52:00.140 --> 00:52:03.140
But investment costs money, where do you get it from?

488
00:52:03.140 --> 00:52:06.640
Whereas with a stroke of a pen, you could just sort of write stuff and say,

489
00:52:06.640 --> 00:52:09.940
okay, we're getting rid of this law, we're getting rid of that regulation,

490
00:52:09.940 --> 00:52:15.140
and the power of it will be either twice or five times as much

491
00:52:15.140 --> 00:52:19.640
in terms of either level or change in economic freedom.

492
00:52:19.640 --> 00:52:22.740
Okay, this is sort of the high point.

493
00:52:22.740 --> 00:52:28.740
The rest of the stuff is just implications of that.

494
00:52:28.740 --> 00:52:54.340
So let me go over a few of the implications, for example, first we take countries, I'm going to have to make that a little smaller.

495
00:52:54.340 --> 00:52:59.440
Income levels and growth rates are persistently high and persistently low rated countries.

496
00:52:59.440 --> 00:53:13.040
So you can see Hong Kong, Switzerland, Singapore, US, there's their economic freedom and there's their per capita wealth.

497
00:53:13.040 --> 00:53:18.740
And then you take countries like Somalia and Zambia and Hungary and they're doing very badly.

498
00:53:18.740 --> 00:53:24.900
And that's in terms of levels, and here we have it in terms of growth.

499
00:53:24.900 --> 00:53:30.400
Now this is an interesting point, you can see my handwriting notes, there's more to growth than economic freedom.

500
00:53:30.400 --> 00:53:37.200
There is more to growth than economic freedom. Notice that Hong Kong and Singapore are growing a lot faster than the other four or five places

501
00:53:37.200 --> 00:53:44.240
that are about as economically free, which indicates that there are other things that determine growth beside economic freedom.

502
00:53:44.240 --> 00:53:46.640
No one is claiming a monopoly for economic freedom.

503
00:53:46.640 --> 00:53:52.200
I mean, resources and the human capital also are important.

504
00:53:52.200 --> 00:53:58.480
And also, the higher the level you start from, the harder it is to grow percentage-wise.

505
00:53:58.480 --> 00:54:04.080
I mean, if you started practically zero, like Hong Kong and Singapore did in the 70s,

506
00:54:04.080 --> 00:54:11.920
you can grow a lot faster in percentage terms than if you start, say, with Switzerland, which was a wealthy country.

507
00:54:11.920 --> 00:54:16.920
Okay, so that's one way to look at this.

508
00:54:17.800 --> 00:54:19.680
Another way to look at this is

509
00:54:23.960 --> 00:54:27.360
the economic freedom ratings from 75 to 95

510
00:54:27.360 --> 00:54:31.600
and the growth rate for high rated non-industrial countries.

511
00:54:31.600 --> 00:54:34.000
So these are all non-industrial countries

512
00:54:34.000 --> 00:54:36.040
that are high rated and they're all doing pretty well.

513
00:54:36.040 --> 00:54:41.040
We've got Hong Kong, Singapore, Malaysia and Thailand

514
00:54:41.040 --> 00:54:52.440
And then what we do in the next bit is low rated non-industrial countries

515
00:54:52.440 --> 00:55:00.340
and you can see that they're doing pretty badly, Brazil, Syria, Algeria and Nigeria.

516
00:55:00.340 --> 00:55:02.040
These are low rated countries.

517
00:55:02.040 --> 00:55:09.540
They are have a low level of economic freedom and their growth rate is very low.

518
00:55:09.540 --> 00:55:15.540
Where as before, they had a high rate of economic freedom and their growth rate was pretty good.

519
00:55:18.900 --> 00:55:29.900
Okay, we're ready to reconvene and as is our usual practice, a few of my stupid jokes.

520
00:55:29.900 --> 00:55:36.540
Okay, we're on to the very important question of why did the chicken cross the road?

521
00:55:36.540 --> 00:55:45.540
And here is Jerry Falwell's analysis of why the chicken crossed the road and it is because the chicken was gay.

522
00:55:45.540 --> 00:55:50.540
Isn't it obvious? Can't you people see the plain truth in front of your face?

523
00:55:50.540 --> 00:55:55.540
The chicken was going to quote the other side.

524
00:55:55.540 --> 00:56:01.540
That's what they call it, the other side. Yes, my friends, that chicken is gay.

525
00:56:01.540 --> 00:56:05.540
And if you eat that chicken, you will become gay too.

526
00:56:05.540 --> 00:56:15.540
I say we boycott all chickens until we sort out this abomination that the liberal media white washes with seemingly harmless phrases like the other side.

527
00:56:15.540 --> 00:56:28.540
Ernest Hemingway, why did the chicken cross the road? To die. In the rain. Alone.

528
00:56:28.540 --> 00:56:34.540
Martin Luther King Jr., why did the chicken cross the road?

529
00:56:34.540 --> 00:56:41.540
I envision a world where all chickens will be free to cross roads without having their motives called into question.

530
00:56:41.540 --> 00:56:46.540
Grandpa, in my day we didn't ask why the chicken crossed the road.

531
00:56:46.540 --> 00:56:51.540
Someone told us that the chicken crossed the road and that was good enough for us.

532
00:56:51.540 --> 00:56:59.540
Okay, enough with chickens.

533
00:56:59.540 --> 00:57:15.540
Okay, the next category of countries that we illustrate in the book is countries that are less developed that became more free.

534
00:57:15.540 --> 00:57:21.540
So just because you're a less developed country doesn't mean that you can't have a good economic growth rate.

535
00:57:21.540 --> 00:57:27.540
And you can see that pretty much these countries are having positive growth rates.

536
00:57:27.540 --> 00:57:32.540
And we've got Chile, Portugal, Pakistan and Mauritius.

537
00:57:32.540 --> 00:57:47.540
The next category is economic freedom ratings and growth rates of less developed countries that became less free.

538
00:57:47.540 --> 00:57:55.540
Now look at Venezuela, they were pretty good at the beginning of the period and they kept declining

539
00:57:55.540 --> 00:58:08.540
and their economic growth rates indicate, are consistent with our view, similarly with Honduras, similarly with Iran and Nicaragua.

540
00:58:08.540 --> 00:58:19.540
And remember this is Iran before it became the devil incarnate, long before the recent issues.

541
00:58:19.540 --> 00:58:33.540
Okay, now here we have growth rates of the 10 countries with the largest increases in economic freedom during 75 to 90.

542
00:58:33.540 --> 00:58:39.540
And you can see what the change in their per capita GDP is.

543
00:58:39.540 --> 00:58:45.540
And on the same page, we have the 10 countries with the largest decline in freedom ratings.

544
00:58:45.540 --> 00:58:51.540
In parentheses here is the decline and you can see what their growth rates look like.

545
00:58:51.540 --> 00:59:03.540
So these are just other ways of teasing out the implications of the first one that I showed you as Exhibit A and I gave you the econometric equation thereof.

546
00:59:03.540 --> 00:59:07.540
Just different implications of that.

547
00:59:07.540 --> 00:59:14.900
the lesson goes on and on every country with some slight exceptions but most

548
00:59:14.900 --> 00:59:19.460
countries that have had a high level of economic freedom or an increasing level

549
00:59:19.460 --> 00:59:25.380
of economic freedom did better on growth rates than countries that were either low

550
00:59:25.380 --> 00:59:55.380
The next exhibit to buttress this point is growth per capita GDP during 80 to 90 for countries that had a one-unit increase in their economic freedom rating between 75 and 85, namely five years before compared to the growth rate with countries that had a one-unit increase in their economic freedom rating between 75 and 85, namely five years before

551
00:59:55.380 --> 01:00:10.380
So you can see the countries that had a one unit, actually Mauritius shouldn't be there because it's a 2.1, that's a typo.

552
01:00:10.380 --> 01:00:20.380
And also here are the countries with a one unit loss and actually Iran and Nicaragua shouldn't be there because that's a typo.

553
01:00:20.380 --> 01:00:25.380
loss, and actually Iran and Nicaragua shouldn't be there because that's a typo

554
01:00:25.380 --> 01:00:29.500
also that I just discovered this morning because they have more than a one unit

555
01:00:29.500 --> 01:00:34.060
loss but all the other countries had a one unit loss and you can see what their

556
01:00:34.060 --> 01:00:35.060
growth rates are like.

557
01:00:35.060 --> 01:00:50.180
Okay, so much for all the countries now what we're going to do is compare the

558
01:00:50.180 --> 01:00:54.740
with different rates of economic freedom change of the whole world.

559
01:00:54.740 --> 01:01:02.740
We're taking all countries together and we're showing it with different weightings.

560
01:01:02.740 --> 01:01:06.340
And the purpose of this is to show that the weightings don't really matter that much,

561
01:01:06.340 --> 01:01:08.980
no matter how you weight the various components.

562
01:01:08.980 --> 01:01:13.760
It comes out to be the same thing, namely that economic freedom is growing slightly

563
01:01:13.760 --> 01:01:16.220
from 75 to 95.

564
01:01:16.220 --> 01:01:29.420
Here it grows from 4.1 to 5.2, here from 3.9 to 5.2, and in the overall summary index, the one that we've been mainly using, it's 4.2 to 5.2, so it doesn't matter much.

565
01:01:29.420 --> 01:01:45.420
The next batch of analyses shows each of the 17 different criteria, like here's the money expansion, here's the inflation variability,

566
01:01:45.420 --> 01:01:50.420
The first three here is foreign currency accounts and here is deposits abroad.

567
01:01:50.420 --> 01:01:55.420
Let me just take the top six here. This will be a little bit out of order.

568
01:01:55.420 --> 01:02:00.420
Take the first three here, money expansion. We started at 3.6.

569
01:02:00.420 --> 01:02:07.420
We got freer to 5.1 in 1985 and then 10 years later we got to some intermediate point.

570
01:02:07.420 --> 01:02:14.420
In terms of inflation variability, and this is for all the countries in the world,

571
01:02:14.420 --> 01:02:26.420
They're slightly better in terms of foreign currency accounts, much better from a 2.5 to a 2.8 to a 5.0, sorry from a 3.2 to a 3.8 to a 6.0

572
01:02:26.420 --> 01:02:35.420
and deposits abroad are 2.5, 2.8 and 5.0. Here is government consumption, a slight loss.

573
01:02:35.420 --> 01:02:57.420
Here is government enterprises, no real change, credit market, significant improvement from 75 to 85, but then pretty flat from 85 to 95, transfers and subsidies, the world economy or all the countries on average are doing slightly worse, marginal tax rates much better.

574
01:02:57.420 --> 01:03:06.420
In the US, the marginal tax rate was in the 93-94% level 20 years ago.

575
01:03:06.420 --> 01:03:12.420
Sweden had a marginal tax rate of 110%, something like that.

576
01:03:12.420 --> 01:03:20.420
And it was interesting because Björn Borg, a Swede tennis player who was making big bucks, let's say he was making 10 million.

577
01:03:20.420 --> 01:03:30.420
And if he made another million from 10 to 11, they would tax him 1.1 million, because it was 110% marginal tax rate.

578
01:03:30.420 --> 01:03:35.420
Can you imagine that? So if you're making 10 million and you're thinking of going to another tournament to make another million,

579
01:03:35.420 --> 01:03:40.420
and if you succeed, they'll take a million and a hundred thousand away from you.

580
01:03:40.420 --> 01:03:46.420
So what he did is he left Sweden and he went to Monaco.

581
01:03:46.420 --> 01:03:53.420
There's a movement afoot nowadays to reconcile tax rates across countries because it's really unfair.

582
01:03:53.420 --> 01:03:57.420
Those countries that have low tax rates, the Bjorn Borgs leave and go there.

583
01:03:57.420 --> 01:04:03.420
And in the EEC, or in the European Economic Community, they're trying to, you know,

584
01:04:03.420 --> 01:04:11.420
France and Germany and the bad guys are trying to make those countries that have lower tax rates level up to their level.

585
01:04:11.420 --> 01:04:24.420
And similarly with the countries in the Caribbean that have low tax rates, you know, because it's unfair to whatever to have such low tax rates, because then you get the Bjorn Borgs.

586
01:04:24.420 --> 01:04:34.420
Well, marginal tax rates are, you know, part of the story and we are doing better overall in marginal tax rates.

587
01:04:34.420 --> 01:04:40.420
The US is a big part of this because we're a big country, relatively big.

588
01:04:40.420 --> 01:04:43.420
China is not in there, India is, but China is not.

589
01:04:43.420 --> 01:04:47.420
So in marginal tax rates we're doing a little bit better.

590
01:04:47.420 --> 01:04:52.420
Conscription, worse.

591
01:04:52.420 --> 01:04:56.420
And here is the international sector.

592
01:04:56.420 --> 01:04:58.420
Trade taxes, better.

593
01:04:58.420 --> 01:05:01.420
Exchange rate controls, better.

594
01:05:01.420 --> 01:05:22.120
A little slippage from 75 to 85, but then a recovery to 95, the non-tariff barriers, about the same, and capital mobility constraints, restraints, better, but we started off from a very bad 2.1 level out of 10.

595
01:05:22.120 --> 01:05:37.120
Okay, now we get to stuff that in my view is the most powerful argument that you can use with your friends from the left.

596
01:05:37.120 --> 01:05:50.720
And that is economic freedom and inequality.

597
01:05:50.720 --> 01:05:55.920
I can't get the whole thing on the page, so let me make the page a little smaller.

598
01:05:55.920 --> 01:05:58.320
There we go.

599
01:05:58.320 --> 01:06:01.620
Now, you can see that it's not a perfect correlation.

600
01:06:01.620 --> 01:06:08.120
What we do is on the vertical axis, we have the ratio of the top 10% income to the bottom 10% income.

601
01:06:08.120 --> 01:06:12.920
There are a lot of ways to measure income inequality, but that's a reasonable one.

602
01:06:12.920 --> 01:06:16.320
What's the ratio of the people at the top 10% to the bottom 10%?

603
01:06:16.320 --> 01:06:24.160
There are other ways, but that'll do just fine as a rough measure of what the inequality is within a country.

604
01:06:24.160 --> 01:06:31.040
And on the right, or rather on the horizontal axis, we have levels of economic freedom.

605
01:06:31.040 --> 01:06:41.160
And you can see that in the countries with the greatest inequality, they are the country with the least economic freedom.

606
01:06:41.160 --> 01:06:46.040
And the country, well, I can't say the country with the top rating has the most inequality,

607
01:06:46.040 --> 01:06:50.840
because that's the middle country so you don't get a if you connect all the tops

608
01:06:50.840 --> 01:06:57.040
of these things you don't get a clear and unambiguous downward trend but if you

609
01:06:57.040 --> 01:07:03.320
take the least squares line between those points you can see the trend is

610
01:07:03.320 --> 01:07:11.280
downward this is a very very powerful argument against people on the left

611
01:07:11.280 --> 01:07:22.280
Because whenever I give this talk, this summary of the book, to a mixed audience, the big, big question is, well, what about income and equality?

612
01:07:22.280 --> 01:07:31.280
For them, that's more important than whether you're starving. I mean, if everyone is starving equally, that's sort of okay, because, you know, equal...

613
01:07:31.280 --> 01:07:40.280
You know, I used to think when I was younger and more naive that when push came to shove, human life was more important

614
01:07:40.280 --> 01:07:44.680
and then their crappy ideology and I learned that it's not so.

615
01:07:44.680 --> 01:07:53.480
For example, the Red Cross took blood from homosexuals even though they knew that they had a higher incidence of AIDS

616
01:07:53.480 --> 01:07:58.680
and gave it to hemophiliacs who needed blood transfusions who got AIDS.

617
01:07:58.680 --> 01:08:02.680
This was the triumph of ideology over human life.

618
01:08:02.680 --> 01:08:08.680
The ideology was to not insult homosexuals and so if people died, they died.

619
01:08:08.680 --> 01:08:12.180
Well, this ideology is very powerful stuff.

620
01:08:12.180 --> 01:08:16.780
It's even more important in life for a lot of people.

621
01:08:16.780 --> 01:08:21.580
So what we're doing is something very important, dealing with ideology.

622
01:08:21.580 --> 01:08:25.080
We're ideologues, namely people who study ideas.

623
01:08:25.080 --> 01:08:27.680
I don't see why that's bad, or you're an ideologue, you're evil.

624
01:08:27.680 --> 01:08:29.680
I mean, you're studying ideas.

625
01:08:29.680 --> 01:08:34.280
Okay, so this is maybe the second most important chart in the whole thing.

626
01:08:34.280 --> 01:08:40.080
The first most important chart was showing that the freer you are, the wealthier you are,

627
01:08:40.080 --> 01:08:43.180
and the freer you are, the faster you're growing.

628
01:08:43.180 --> 01:08:48.780
But maybe this is even more important, at least for converting people on the left.

629
01:08:48.780 --> 01:08:54.780
And I think that's a great idea to try to convince them that on their own principles of egalitarianism,

630
01:08:54.780 --> 01:08:58.580
the free enterprise system is better than its opposite.

631
01:08:58.580 --> 01:09:09.580
And again, the reason is that when you have economic freedom, most of what goes on is based on trade, and trade is mutually beneficial.

632
01:09:09.580 --> 01:09:18.580
Yes, the rich get richer, and they pull up everyone else with them. So the relative distance between them is not so great,

633
01:09:18.580 --> 01:09:23.580
whereas in countries that don't rely mainly on trade and markets and private sector,

634
01:09:23.580 --> 01:09:28.580
The rich get rich at the expense of the poor and the gap widens.

635
01:09:28.580 --> 01:09:37.580
Very, very powerful debating point or insight with regard to our friends on the left.

636
01:09:37.580 --> 01:09:45.580
Now, there are some other charts. These came not from the book that I co-authored, but one of the subsequent volumes.

637
01:09:45.580 --> 01:09:51.580
This, too, is important. Economic freedom in cereal yields. Why cereal?

638
01:09:51.580 --> 01:09:55.580
Well, cereal is the difference between starvation and not.

639
01:09:55.580 --> 01:10:02.580
And there you can see that there's a positive correlation without any dips.

640
01:10:02.580 --> 01:10:12.580
And now you have economic freedom in life expectancy, which is also clearly the more economic freedom, the more life expectancy.

641
01:10:12.580 --> 01:10:23.580
and life expectancy. So if you want your country as the benevolent dictator to have more economic, more life expectancy, then you have to go that way.

642
01:10:23.580 --> 01:10:35.580
Okay, this is the end of my formal presentation on this subject. So, questions? Discussion? Noah?

643
01:10:35.580 --> 01:10:42.300
I'm wondering on this inequality chart, how do you answer someone who would look at this and say,

644
01:10:42.300 --> 01:10:53.500
well, I don't see a completely downward trend and among those in the top rating, we don't have complete economic freedom.

645
01:10:53.500 --> 01:10:59.740
Who's to say that if the top rating became a perfect ten, completely economically free,

646
01:10:59.740 --> 01:11:05.500
you wouldn't have something as high as the bottom, bottom rating. It's not like a U shape maybe.

647
01:11:05.500 --> 01:11:10.500
We just don't have those, we don't have anybody economically free enough to show that.

648
01:11:10.500 --> 01:11:15.500
There's nothing in my study that would counteract that.

649
01:11:15.500 --> 01:11:27.500
It's possible that if we went from the highest rating of say an 8.5 or whatever it is and everyone was like Hong Kong at 9.9.

650
01:11:27.500 --> 01:11:30.500
Well one way is to look at the Hong Kong one.

651
01:11:30.500 --> 01:12:00.500
or to look at Hong Kong, Singapore and the US and New Zealand which are the top four and see if you can see if you if it's u-shaped that would be that would be an interesting dissertation there's nothing I've done that precludes it I don't expect it I'd be puzzled by it but you know once you're in the empirical world anything can happen and what we would say then is that

652
01:12:00.500 --> 01:12:08.500
Given this analysis of trade improves both people, whereas non-trade deviates them,

653
01:12:08.500 --> 01:12:11.500
we would have to say there's something wrong with the data.

654
01:12:11.500 --> 01:12:19.500
Either it's GDP that's screwing up, or it's leisure, or the measurements aren't that good.

655
01:12:19.500 --> 01:12:22.500
But you see, this is the praxeological part.

656
01:12:22.500 --> 01:12:27.500
This part we don't give up. This part we know it's a synthetic a priori

657
01:12:27.500 --> 01:12:33.500
that trade benefits both parties and violence helps one and hurts the other.

658
01:12:33.500 --> 01:12:35.500
We don't give that up.

659
01:12:35.500 --> 01:12:41.500
Now, whether we can illustrate this, if we can't, then we need finer empirical measures

660
01:12:41.500 --> 01:12:46.500
that the next generation of students, such as yourself, will hopefully refine this stuff.

661
01:12:46.500 --> 01:12:50.500
This is a first hack at it. This is the first time this has ever been done.

662
01:12:50.500 --> 01:12:56.500
Conceivably, it isn't as perfect as it can be, as the years go on.

663
01:13:01.000 --> 01:13:02.000
Yeah.

664
01:13:02.000 --> 01:13:07.000
How has the index evolved since this was first published?

665
01:13:07.000 --> 01:13:10.500
Chris Lawson and Gortney have continued.

666
01:13:10.500 --> 01:13:15.500
They've added more countries and more criteria,

667
01:13:15.500 --> 01:13:20.900
because they unearthed more things that they got data for.

668
01:13:20.900 --> 01:13:27.400
But other than that, the same things are continuing.

669
01:13:27.400 --> 01:13:33.900
We're still showing the evidence is that the more economically free you are,

670
01:13:33.900 --> 01:13:40.700
the wealthier you are, the faster you're growing, the more economic equality, what have you.

671
01:13:40.700 --> 01:13:45.500
There's no U-shape, no U-shaped thing.

672
01:13:45.500 --> 01:13:51.000
In 2005, it's the same thing as 75, 85, 95.

673
01:13:51.000 --> 01:13:54.200
These things aren't changing.

674
01:13:54.200 --> 01:13:56.000
Has China been added to the EU?

675
01:13:56.000 --> 01:13:56.800
I can't hear you.

676
01:13:56.800 --> 01:13:58.100
Has China been added to the EU?

677
01:13:58.100 --> 01:13:59.700
Yes, China is now in there.

678
01:13:59.700 --> 01:14:03.900
I've sort of dropped out because I decided that my own comparative advantage and interest

679
01:14:03.900 --> 01:14:07.900
was more in things like, you know, what do you do about abortion or stem cell research

680
01:14:07.900 --> 01:14:13.620
or you know these philosophical issues and once I I was sort of in on the

681
01:14:13.620 --> 01:14:18.860
ground floor with the ideas for this but once it got going my own personality

682
01:14:18.860 --> 01:14:25.700
wasn't really into the numbers I mean advice for new people who are going to

683
01:14:25.700 --> 01:14:31.620
get PhDs in economics especially you have to have some numeracy and if you

684
01:14:31.620 --> 01:14:35.540
hate math well there are ways to get a PhD without it and I've written about

685
01:14:35.540 --> 01:14:43.540
I've learned about this a lot and it's on the web, on the Mises web, so you don't absolutely need the math, but it's a lot easier.

686
01:14:43.540 --> 01:14:48.540
It's just that my personality is such that I'm not into the math.

687
01:14:48.540 --> 01:14:58.540
I remember when I was getting my own Ph.D., when I entered Columbia in 65, you needed two languages to get your Ph.D.

688
01:14:58.540 --> 01:15:08.540
I'm pathetic at language, and I only had Spanish very little bit, but happily after three years or so they allowed you to substitute math as a language for your second language.

689
01:15:08.540 --> 01:15:13.540
So I snuck through on that, otherwise I wouldn't have a PhD had it not been for math.

690
01:15:13.540 --> 01:15:21.540
So I'm reasonably conversant with her, or at least I was 30 years ago, but my own interests are not in the statistical element, but I respect it.

691
01:15:21.540 --> 01:15:31.540
I respect it, it's okay, it's part of life, and I very much resist the notion, when Roderick said it, he was just kidding, he said,

692
01:15:31.540 --> 01:15:40.540
Oh, I thought, you know, we're Austrians, we don't do any math, us that. We do. It's just that we put a different interpretation on it.

693
01:15:40.540 --> 01:15:47.540
We're not going to say, ah, the numbers, you know, look at the third and the second quintile, you know, it shows,

694
01:15:47.540 --> 01:15:50.540
And then we say, oh yeah, maybe economic freedom isn't good.

695
01:15:50.540 --> 01:15:58.540
Even the Chicagoans, like I talked about with Becker and Farnes Welch and these guys,

696
01:15:58.540 --> 01:16:04.540
and the quote from Buchanan, even they, if you scratch a good mainstream economist,

697
01:16:04.540 --> 01:16:07.540
there's a core of Austrianism in there, we just have to bring it out.

698
01:16:07.540 --> 01:16:13.540
And the core is that synthetic a priori is praxeology, a la Mises.

699
01:16:13.540 --> 01:16:43.440
Great question. Let me repeat it in case it wasn't clear. She asked me before, and now I'm hearing it for the second time,

700
01:16:43.440 --> 01:16:59.440
The other day we had the question from an insolent, disrespectful student, not mentioning any names, Carrie, who said, suppose that there's a baby on the porch of your house, what positive obligations do you have?

701
01:16:59.440 --> 01:17:05.440
Do you have to notify anyone or anything like that? And now, Anka?

702
01:17:05.440 --> 01:17:15.440
Oskar is saying, well suppose either garbage or a bicycle or something else is dumped on your porch, what obligations do you have with that?

703
01:17:15.440 --> 01:17:24.440
And the idea is that sometimes when you can't answer a question, you ask a slightly different question and see if you can answer that and then you can go back to it.

704
01:17:24.440 --> 01:17:26.440
And I think that's a very good technique.

705
01:17:26.440 --> 01:17:36.440
And obviously, if you find garbage on your porch or a bicycle on your porch, you have no positive obligations as a libertarian to do anything with it.

706
01:17:36.440 --> 01:17:43.440
By extrapolation, ditto for the baby. Not that we think babies are garbage, or babies are bicycles, which our critics will then say,

707
01:17:43.440 --> 01:17:49.440
Aha, Block thinks babies are garbage, but that's not so. But the same implication follows.

708
01:17:49.440 --> 01:18:02.440
For example, or to take yet another example, suppose I see someone drowning over there, just right there and I could easily just toss over a life raft without any danger to me, I don't have to jump in.

709
01:18:02.440 --> 01:18:09.440
Do I, according to the libertarian theory, have an obligation to do that? And the answer is no.

710
01:18:09.440 --> 01:18:15.440
You know, sometimes after the session is more interesting, people gather around and we really get into it.

711
01:18:15.440 --> 01:18:45.440
The only example that I can think of, which is a counter example to this, is if someone is drowning, and I start swimming out there announcing to all the people on the shore, I'm going to save that person, and I've got a life preserver, and then when I get there, I go, haha, not saving you, there's sort of an implicit contract that I had with the people on the shore saying, don't worry, I'll save that person, and then when I get there, I let them drown right in front of me while I'm holding them down,

712
01:18:45.440 --> 01:19:15.440
As a living life preserver, here we get into the implicit contract business and I think now you can have a case on libertarian grounds without positive obligations which we want to abjure at all costs that I do have an obligation to save the person because I sort of told these people I would and they were ready to go save them but they didn't because they were relying on me.

713
01:19:15.440 --> 01:19:19.440
Statistical Issues. So, I'll see you then. Take care.