• Toby Irwin

Free Markets and Prosperity

All over the world, national governments are becoming increasingly involved in the management of their domestic economies. China controls a vast system of State-Owned Enterprises (SOEs), and in Russia many companies are controlled by former USSR government oligarchs. Sovereign Wealth Funds (SWFs) - effectively nationalised investment holdings – are also as rampant and powerful as ever. Perhaps most shocking, though, is the extent to which Western governments also interfere with their economies. Currently, Norway holds the largest SWF in the world, with over $1058 billion in assets. This represents how a government has seized the wealth of its nation and means to control it for its own purposes. The example given is how the Norwegian government redirected investments away from British defence company BAE because it deemed it unethical. This article will demonstrate that, inter alia, the free market must be protected.

There has been a great link between market liberalisation and global economic prosperity. The fact that we all enjoy such remarkable standard of living today is owed in large part to the universalisation of neoliberal economic policies in the wake of the end of the Cold War. Figure 1, shown below, demonstrates the link between levels of economic freedom and prosperity. Economic freedom can be defined in several ways. According to the Heritage foundation, there are twelve criteria within four categories.

1. Rule of Law:

a. Property Rights, b. Government Integrity & c. Judicial Effectiveness

2. Government Size:

a. Government Size, b. Tax Burden & c. Fiscal Health

3. Regulatory Efficiency:

a. Business Freedom, b. Labour Freedom & c. Monetary Freedom

4. Open Markets:

a. Trade Freedom, b. Investment Freedom & c. Financial Freedom

As such, the top five most free countries can be listed. These are Hong Kong, Singapore, New Zealand, Switzerland, Australia and Ireland. Equally, the five least free countries can be named as Cuba, Togo, Venezuela, Turkmenistan, North Korea and Mozambique. (Data for Iraq, Somalia, Libya, Yemen, Lichtenstein and Syria is unavailable.)

For a country to be economically free, it is thus necessary for a government to be restrained and limited. If it is competition that drives prosperity and innovation, then the role of government is consequently to simply provide the means by which every individual may be given an equal opportunity to compete. This notion of competition is not just the most effective way to naturally coordinate the desires, efforts and transactions between humans, it is also the only method in which it is free from coercion. As Friedrich Hayek argued:

“[economic liberalism] is opposed to competition being supplanted by inferior methods of coordinating individual efforts. And it regards competition not only because it is in most circumstances the most efficient method known, but even more because it is the only method by which our activities can be adjusted to each other without coercive or arbitrary intervention of authority”.

American economist Milton Friedman similarly expressed such a view, wherein a government is essentially responsible solely with maintaining the conditions in which the citizens can exercise themselves pure economic freedom. This would require the creation of a ‘level playing field’. Things like privatisation, a negative income tax for poorer citizens and a reduction in regulations are therefore needed. Among other things, the scaling back of a government allows poorer individuals and families to “be given the resources they need to compete effectively in the marketplace”. The choice to efficiently seize upon this opportunity of competition can be taken or not, and eventually will determine their own prosperity.

One of the most dangerous counters to this policy is the misconception that it is unethical. According to some deductions, this system of competition will unjustly leave some individuals in a more disadvantaged outcome. Here enters the principle of equality. How far can we go to dissolve inequality? The distinction is most fundamentally felt between that of equality of opportunity and equality of outcome. Simply, if the outcome is unequal but the opportunity was the same, then inequality is just. However, if inequality persists in a system where opportunity is not universal, or rather the playing field is not level, then that inequality is unjust.

Such proponents of the desire for equality of outcome propose the solution to be collectivism. Principally, this is socialism. This approach suggests that central planning by a government, as we see increasingly throughout the world today, is the key towards a universal objective. This objective, however, is not necessarily the advancement of national prosperity but rather the dissolution of economic inequalities. I do not believe that this is ethically sustainable. A glance at history is all that is needed. The two dominant ideologies that sought to supplant Western Liberal Democracy in the 20th Century both drew their support from socialists. Fascism and Communism both recognised that a general discontent with inequality leads to a desire for central planning, for it acts as an alternative to individualist competition. Adam Smith noted himself the dangers of any form of central planning, that in order to subvert the presumed natural freedoms of its citizens a government recognises that “to support themselves they are obliged to be oppressive and tyrannical”.

The paradox of trying to increase national happiness/equality through government intervention was dispelled in a paper by the Institute of Economic Affairs. In it, Phillip Booth argues persuasively that General Well Being (GWB) is not something that should be pursued at the expense of GDP maximisation. Rather, GWB is enhanced indirectly through governmental reduction and free markets that thus contribute naturally to the relative improvements in universal prosperity.

This article concludes with a remark from Smith:

"The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."

- Booth, Phillip. "... and the pursuit of happiness (IEA Readings 64). 2012.

- Hayek, F.A. "The Road to Serfdom". Routledge. 2001.

- Butler, E. "Milton Friedman. A Guide to his Economic Thought". Gower Publishing. 1985. - Smith, A. "An Inquiry into the Nature and Causes of the Wealth of Nations". 1776.

- https://www.washingtonpost.com/outlook/state-run-economies-increasingly-adore-the-free-market/2018/01/26/e1ae08b4-0212-11e8-bb03-722769454f82_story.html?noredirect=on&utm_term=.b614341ffa8d - https://www.swfinstitute.org/sovereign-wealth-fund-rankings/

At the time of writing, Toby Irwin is a second year student at the University of St Andrews. He is studying Modern History and International Relations. Areas that interest him the most are UK defence strategy and foreign policy.