Free Markets Require Good Governments, for the Sake of Liberalism

The Fraser Institute measures economic freedom in nations with five items and reports summary scores in the Economic Freedom of the World Index (EFW, the Index). Ryan Murphy (2022b) argues on behalf of the Institute that Economic Freedom is defined in a stipulative way as a formative concept and is insensitive to validity issues. This is correct, but it is informative to see what happens if we define economic freedom as a theoretical or reflective concept instead. If we do, we see that the Institute is measuring two different phenomena that can be denoted—arguably—as two types of freedom. The first freedom can be interpreted—arguably—as ‘freedom by smaller government’ reflecting low levels of government activities as measured by size of government. Nations get higher summary scores if such levels are low. The second freedom, as measured by the other items, can be interpreted—arguably—as ‘freedom as the opportunity to choose.’ Nations get higher scores as a result of specific government activities creating more options for economic transactions. These two types of freedom are contradictory, because higher levels of such specific activities contribute simultaneously to lower and higher summary scores. If the one goes up the other goes down, and vice versa. It is an option to report about size of government and the other items separately as additional information. This will enhance the usefulness and the importance of the Index. This argument is independent of the data. If we look at the data we see that higher levels of government activities go together with higher scores in the other items. We must be critical about governments, but should acknowledge this positive correlation. We should also pay attention to the quality of government as a crucial condition for freedom, defined in whatever way.