Leandro Prados de la Escosura is professor in
Economic history at Universidad Carlos III de Madrid.
Given the bounded nature of any index of economic freedom, the use of its percentage change or rate of growth would be misleading as increases achieved at low levels cannot be matched at high levels. It is preferable, then, to look at the absolute shortfall of economic freedom from its upper bound at the initial point and, then, compute its relative decline over a given period. Thus, the improvement is measured as the proportion of the maximum possible (that is, the reduction in its shortfall).
|The Historical index of Economic Liberty, HIEL.|
(click on image to enlarge)
Economic liberty is higher nowadays in the OECD than at any time over the last one and a half centuries and, probably, in history. Over 1850-2007, the shortfall declined by nearly three-fourths. However, its evolution has been far from linear. Different phases can be established. From the mid-nineteenth century to the eve of World War I steady advancement of economic liberty took place across the board, peaking in 1913, although it is up to early 1880s when most of the action happened. Over three-fourths of the overall progress in economic liberty in the OECD up to 2007 had been achieved before World War I.
|Improvements to economic liberty, by dimension and period.|
(click on image to enlarge)
Over time improvements in economic liberty derived from different dimensions. Thus, between 1850 and 1914, the improvement in property rights made the main contribution. Then, during the first half of the twentieth century, it was the collapse of freedom to trade internationally the main responsible for the contraction in economic liberty. Since the mid-20th century, specifically in the 1950s and the post-1980 era, the liberalization of trade and factor flows was the leading force, accounting for more than half of the reduction in the economic freedom shortfall over 1950-2007. During the 1960s and 1970s, increases in regulation and unsound monetary policies offset the gains in freedom to trade and improvements in property rights. Overall, improvements in the legal structure and property rights emerge as the main force behind long-term gains in economic liberty during the last one and a half centuries.
The trends exhibited by the new historical index of economic liberty raise pressing questions. If economic freedom is usually associated to economic growth, how can we reconcile good economic performance in the OECD during the 1960s and early 1970s with stagnant and relatively low levels of economic freedom? Furthermore, are there any trade-offs between economic liberty, as a negative freedom, and other kinds of positive freedom, in particular, human development and democracy? Answering these questions provides an exciting and worth pursuing research agenda.