Abstract
This paper contributes to a theoretical underpinning of the economic freedom–political freedom relationship. We use the theory of social orders (North et al. in Violence and social orders: a conceptual framework for understanding recorded human history, Cambridge University Press, Cambridge, 2009) to look at the Hayek–Friedman Hypothesis (HFH), which leads us to propose a novel interpretation. The core insight of our weak interpretation of the hypothesis is that economic freedom is a necessary condition for maintaining political freedom in open access order countries (countries with high levels of both freedoms), i.e., once achieved, political freedom needs economic freedom to be stable; but the HFH is not relevant for limited access orders (rent-seeking-dominated orders). We find empirical support for the weak interpretation with canonical correlations and conditional logit regressions, using a panel database for 122 countries for the period 1980–2011.
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Notes
In some instances, Friedman and Hayek consider economic freedom a precondition for political freedom: “[h]istory suggests only that capitalism is a necessary condition for political freedom” (Friedman 1962: 10), or “[i]t is far more important to realize that only within this system (capitalism—added by the authors) is democracy possible” (Hayek 1944 [1971]: 70); in other instances, Friedman refers to the relationship between the two freedoms as being mutually reinforcing or “by no means unilateral” (Friedman 1962: 10); or again, elsewhere the causality seems to run in the reverse direction, that is, from political freedom to economic freedom: “[e]conomic freedom was the outcome of a free growth of economic activities which had been the undesigned and unforeseen by-product of political freedom” (Hayek 1944 [1971]: 12).
Later, we will differentiate between three possible interpretations of the HFH. This separation is not made here, because it is not made in the literature we are about to review.
Democracy is used in the sense of political freedom.
It is beyond the scope of our paper to present this literature in more detail.
Bjørnskov (2017: 5) also emphasizes that “the HFH is undertheorized” basically because of a lack of consensus on the definition of political freedom.
By social order they mean the complex of military, political, economic, and religious institutions of social organization.
The primitive order, since it is a characteristic of hunter-gatherer societies, is not analyzed in their book.
This is why North et al. (2009) call the limited access orders natural states.
Van Bavel et al. (2017) provide a detailed further description of the limited access order based on their formal model.
“Perhaps 25 countries and 15% of the world’s population live in open access societies today; the other 175 countries and 85% live in natural states.” (North et al. 2009: xii).
These are as follows: (1) rule of law for elites, (2) perpetually lived organizations in the public and private spheres, and (3) consolidated control of the military.
The significance of impersonal rights is discussed at greater length in Wallis (2011).
We owe this insight to one of our reviewers.
Fukuyama (1992) also emphasizes that capitalism (economic freedom) is compatible with many forms of authoritarian government.
For instance, the argument proposed by Weingast (2015) in favor of the HFH which says that economic freedom—i.e., the wide reliance on, and acceptance of, free-market principles—limits the policy choices of elected officials in such a way that they cannot opt for non-democratic transformation is in fact not a proper argument because of the above implication of the HFH we just mentioned.
This method transforms the aggregation problem into optimization. For more details, see Gründler and Krieger (2016).
We have divided our time span into two periods as explained above.
Fragile limited access orders will not be treated as a separate group, but together with basic limited access orders. The reason for this is that the political freedom–economic freedom relationship is basically no different in these two orders. See North et al. (2009).
There are good reasons to proxy open access orders with the Paldam’s two groups of countries. First, Old West countries are those that emerged in a historical developmental process in a way described by North et al. (2009). Second, although North et al. (2009) does not list the countries, they implicitly refer to the West (in general), and they mention that today there are circa 25 (ibid.: xiii) or two dozen open access order countries (North et al. 2006: 5) which is more or less the number of countries based on Paldam’s categorization, too. In the same line, Weingast (2015: 258) also argues that ‘the number of countries that have sustained democracy since 1950 is around two dozen,’ and clearly, by stable democracies he means open access order countries.
Note that open access orders have higher Euclidean distances. The EFW Index is normalized so as to be comparable with the SVMDI, and both run between 0 and 1.
One example of its application in a field related to ours is the paper by Foldvari (2017) who uses this method to find the highest correlation between the components of two different indexes of political institutions.
As one of our reviewers has rightly pointed out.
Vector (ap, ae) relates to the first period, vector (bp, be) to the second; p and e in the lower index refer to political and economic freedom, respectively.
Changes in the EFW Index, which runs between 0 and 10, are divided by 10 in order to make the changes in it comparable with the changes in SVMDI that runs between 0 and 1.
We use GDP per capita (rgdpe divided by population) from the Penn World Table 9.0 (Feenstra et al. 2015).
The best examples for the latter process might be South Korea and Chile, which went through a significant liberalization and democratization process, leading them from a mature limited access order to an open access order.
Two of our reviewers have suggested using the Freedom House indexes in robustness checks, for which we are grateful.
Note that this, in itself, seems to support our case: in the open access orders political freedom is stable.
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Kapás, J., Czeglédi, P. Social orders, and a weak form of the Hayek–Friedman Hypothesis. Int Rev Econ 65, 291–328 (2018). https://doi.org/10.1007/s12232-018-0298-7
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DOI: https://doi.org/10.1007/s12232-018-0298-7