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Terry Miller and Anthony b. Kim 2012_defining Economic Freedom [Chapter1]

Terry Miller and Anthony b. Kim 2012_defining Economic Freedom [Chapter1]

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Chapter 1
Defining Economic Freedom
Ambassador Terry Miller and Anthony B. Kim
conomic reedom is a condition or stateo being in which individuals can act withautonomy while in the pursuit o liveli-hood. Any discussion o economic reedom hasat its heart consideration o the relationshipbetween individuals and governments or otherorganized groups.Economic reedom is an essential aspect o human liberty, without which a person’s rightsto lie, liberty, and the pursuit o happiness may be undamentally compromised. As FriedrichHayek once observed, “To be controlled in oureconomic pursuits means to be controlled ineverything.”
Hayek’s keen and timeless obser- vations on economic reedom are based on thetruth that each person is, as a matter o naturalright, a ree and responsible being with inalien-able dignity and undamental liberties that righ-teous and eective political systems will regardas unassailable.
gUiding principlesof economic freedom
In an economically ree society, each personcontrols the ruits o his or her own labor and
To build a better world, we must have the courage to make a new start. We must clear away theobstacles with which human folly has recently encumbered our path and release the creativeenergy of individuals. We must create conditions favourable to progress rather than “planning progress.”… The guiding principle in any attempt to create a world of free men must be this: a policy of freedom for the individual is the only truly progressive policy.
—Friedrich A. Hayek 
1. Friedrich A. Hayek,
The Road to Serfdom
 (Chicago, Ill.: University o Chicago Press, 1944).2
2012 Index of Economic Freedom
initiative. Individuals are empowered—indeed,entitled—to pursue their dreams by means o their own ree choice.In an economically ree society, individualssucceed or ail based on their individual eortand ability. The institutions o a ree and opensociety do not discriminate either against or inavor o individuals based on their race, ethnicbackground, gender, class, amily connections,or any other actor unrelated to individual merit.Government decision-making is characterizedby openness and transparency, and the brightlight o equal opportunity replaces the shadows where discrimination can be most insidious.In an economically ree society, the power o economic decision-making is widely dispersed,and the allocation o resources or productionand consumption is on the basis o ree and opencompetition so that every individual or irm hasa air chance to succeed.These three undamental principles o economic reedom—empowerment o theindividual, non-discrimination, and open com-petition—underpin every measurement andpolicy idea presented in the
 Index of Economic Freedom.
economic freedom:aUtonomy, not anarcHy
In general, state action or government con-trol that intereres with individual autonomy limits economic reedom. The
 Index of Econom-ic Freedom
is not, however, a call or anarchy.The goal o economic reedom is not simply anabsence o government coercion or constraint,but the creation and maintenance o a mutualsense o liberty or all. As individuals enjoy theblessings o economic reedom, they in turnhave a responsibility to respect the economicrights and reedoms o others. Governments areinstituted to ensure basic protections againstthe ravages o nature or the predations o onecitizen over another so that positive economicrights such as property and contracts are givensocietal as well as individual deense against thedestructive tendencies o others. A comprehensive deinition o economic ree-dom should
encompass all liberties and rights of  production, distribution, or consumption of goodsand services. The highest form of economic free-dom should provide an absolute right of propertyownership; fully realized freedoms of movement  for labor, capital, and goods; and an absoluteabsence of coercion or constraint of economicliberty beyond the extent necessary for citizensto protect and maintain liberty itself.
In other words, individuals in an economically ree soci-ety would be ree and entitled to work, produce,consume, and invest in any way they chooseunder a rule o law, with their reedom at onceboth protected and respected by the state.Some government action is necessary orthe citizens o a nation to deend themselves,promote the peaceul evolution o civil society,and enjoy the ruits o their labor. For example,citizens are taxed to provide revenue or the pro-tection o person and property as well as or thecommon deense. Most political theorists alsoaccept that certain goods—what economists call“public goods”—can be supplied more eiciently by government than through private means.Some public goods, such as the maintenance o a police orce to protect property rights, a mon-etary authority to maintain a sound currency,and an impartial judiciary to enorce contractsamong parties, are themselves vital ingredientso an economically ree society. When govern-ment action rises beyond the minimal necessary level, however, it can become corrosive to ree-dom—and the irst reedom aected is oten eco-nomic reedom.
Throughout history, governments haveimposed a wide array o constraints on econom-ic activity. Though oten imposed in the name o equality or some other noble societal purpose,such constraints are most oten imposed or thebeneit o societal elites or special interests, andthey come with a high cost to society as a whole.Constraining economic choice distorts anddiminishes the production, distribution, and
3 “The property which every man has in his ownlabor, as it is the original oundation o all otherproperty, so it is the most sacred and inviolable.” Adam Smith,
 An Inquiry into the Nature and Causesof the Wealth of Nations
(New York: The ModernLibrary, 1937), pp. 121–122; frst published in 1776.
consumption o goods and services (including,o course, labor services).Government provision o goods and servicesbeyond those clearly considered public goodsimposes a separate constraint on economic ree-dom, crowding out private-sector activity andusurping resources that might otherwise havebeen available or private investment or con-sumption. By substituting political judgmentsor those o the marketplace, government divertsentrepreneurial resources and energy rom pro-ductive activities to rent-seeking, the quest oreconomically unearned beneits. The result islower productivity, economic stagnation, anddeclining prosperity.
measUring economic freedom
 Assessing economic reedom in countries asdierent as Hong Kong and North Korea, Zim-babwe and Singapore, or Australia and Cuba isnot an easy task. As the number and variety o countries included in the
have increased,it has become ever more diicult to ind con-sistent and reliable data covering them all. Ourresearch is indebted to various governmentaland non-governmental international organiza-tions that have undertaken the arduous task o data collection in their various areas o ocus andhave shared their data with us.The
 Index of Economic Freedom
takes a broadand comprehensive view, measuring country per-ormance in 10 separate areas o economic ree-dom. Some o the measured aspects o economicreedom are concerned with a country’s interac-tions with the rest o the world—or example, theextent o an economy’s openness to global invest-ment or trade. Most, however, ocus on policies within a country, assessing the liberty o individ-uals to use their labor or inances without unduerestraint and government intererence.Each o the economic reedoms plays a vitalrole in developing and sustaining personal andnational prosperity. They are not mutually exclusive, however, and progress in one area isoten likely to reinorce or even inspire progressin another. Similarly, repressed economic ree-dom in one area—respect or property rights,or example—may make it much more dii-cult to achieve high levels o reedom in othercategories.This year, in an eort to improve analyticalunderstanding and presentational clarity, the 10economic reedoms have been grouped into ourbroad categories or pillars o economic reedom:1.
Rule of law
(property rights, reedom romcorruption);2.
Limited government
(iscal reedom, gov-ernment spending);3.
Regulatory efficiency 
(business reedom,labor reedom, monetary reedom); and4.
Open markets
(trade reedom, investmentreedom, inancial reedom).Each o the reedoms within these our broadcategories is individually scored on a scale o 0to 100. A country’s overall economic reedomscore is a simple average o its scores on the 10individual reedoms. Detailed inormation aboutthe methodology used to score each componentis contained in the appendix.
rUle of law
Property Rights
The ability to accumulate private property and wealth is understood to be a central motivat-ing orce or workers and investors in a marketeconomy. The recognition o private property rights, with suicient rule o law to protect them,is a vital eature o a ully unctioning marketeconomy. Secure property rights give citizensthe conidence to undertake entrepreneurialactivity, save their income, and make long-termplans because they know that their income, sav-ings, and property (both real and intellectual)are sae rom unair expropriation or thet.The protection o private property requiresan eective and honest judicial system that isavailable to all, equally and without discrimi-nation. The independence, transparency, andeectiveness o the judicial system have provedto be key determinants o a country’s prospectsor long-term economic growth. Such a system isalso vital to the maintenance o peace and secu-rity and the protection o human rights.
Chapter 1

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