A history of economic freedom

This article is published in collaboration with VoxEU.

Economic freedom can be defined as an absence of interference and coercion in individuals’ economic decisions. Secure privately owned property, enforced contracts, stable prices, small barriers to trade, and resources mainly allocated through the market are the main features of an economically free country.

Views on the evolution of economic freedom differ widely and assessments tend to be highly qualitative and occasionally tinted by ideology.

In recent times, empirical evidence has been gathered and synthesised as economic freedom indices (Miller and Kim 2015, Gwartney et al. 2015). However, even if their spatial coverage is wide, these indices only refer to the recent past. As a consequence of the limited time coverage, the value of its lessons and policy implications is sharply reduced.

Providing a long-run view of economic freedom and its main dimensions (the legal framework and property rights, the value of money, international trade, and regulation) is the main goal of the new historical database. In its current version, the new Historical Index of Economic Liberty (HIEL) covers 21 of today’s advanced nations (practically those included in the OECD in 1994) over 1850-2007. In next stages, the coverage of index will be extended to the present and to the rest of the world.

In the new website, a dynamic graphic presentation is available for the aggregate historical index of economic liberty (HIEL) and each of its four dimensions across countries. Each country’s economic freedom index and its dimensions, including their contribution to the aggregate index, can also be viewed and accessed separately.

The database can be downloaded from the website, together with a discussion paper that presents the concepts and discusses the sources and procedures employed in the construction of the indices. A detailed list of the sources used in the construction of the dataset is provided.

Some results for the OECD as a whole

Economic liberty in the OECD was higher in 2007, the eve of the Great Recession, than at any time over the last one and a half centuries, but its evolution has been far from linear. Over 1850-2007 its improvement represented nearly three-quarters of its maximum potential.

Phases

From the mid-19^th century to the eve of the World War I, a steady advancement of economic liberty took place across the board in the OECD. On average, over three-quarters of the overall progress in economic liberty in the OECD up to 2007 had been achieved by 1913.

During the first half of the 20^th century, economic freedom suffered a severe setback. After a dramatic decline during the war and its aftermath, the recovery was fast up to 1929. The Great Depression pushed down economic freedom again. By the eve of World War II, economic liberty had shrunk to the early 1850s level.

Economic freedom expanded in the second half of the 20^th century and peaked at the beginning of the 21^st century, with two expansionary phases – the 1950s and, especially, the post-1980 period in which economic freedom expanded until the eve of the Great Recession, reaching the 1913 peak by 1989.

However, economic freedom came to a halt during the 1960s and experienced a contraction in the early 1970s, by the end of the Bretton Woods system and the oil shock.

View interactive version of chart here.

Country rankings

Countries from the western offshoots and the European core stayed at the top over the entire considered period, while southern European countries lagged consistently behind. Nonetheless, convergence episodes coexisted with country ranking stability.

Drivers of economic freedom

Over time improvements in economic liberty have derived from different dimensions. The improvement in property rights made the main contribution between 1850 and 1914.

During the first half of the 20^th century, it was the collapse of freedom to trade internationally and to a lesser extent monetary distortions that accounted for the contraction in economic liberty.

Since 1950, the liberalisation of trade and factor flows was the leading force. In the 1960s and 1970s, increases in regulation and unsound monetary policies represented a deterrent for the advance in economic liberty, offsetting the gains in freedom to trade and improvements in property rights.

Over 1850-2007, improvements in the legal structure and property rights emerge as the main force behind long-term gains in economic liberty.

References

Gwartney, J, R Lawson, and J Hall (2015), The Economic Freedom of the World. 2015 Annual Report, Fraser Institute. www.freetheworld.com

Miller T and A Kim, 2015 Index of Economic Freedom. Promoting Economic Opportunity and Prosperity. Heritage Foundation. http://www.heritage.org/index/pdf/2015/book/index_2015.pdf

Prados de la Escosura, L (2016), “Economic Freedom in the Long Run: Evidence from OECD Countries (1850-2007)”, Economic History Review 69 DOI: 10.1111/ehr.12130

Publication does not imply endorsement of views by the World Economic Forum.

To keep up with the Agenda subscribe to our weekly newsletter.

Author: Leandro Prados-de-la-Escosura, D. Phil. (Oxford) and Ph.D. (Complutense, Madrid), Professor of Economic History at Universidad Carlos III, Madrid. 

Image: A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London. REUTERS/Luke MacGregor.