Sumner on Free Markets and Liberal Values

Scott Sumner is on my wavelength

So after 1980 “brute facts” about the weaknesses of statism pushed most of the world toward free markets.  But there was (as yet) not enough evidence to abandon the egalitarian systems of social insurance.  If I am right, then countries with more liberal values should have responded to this new information by becoming much more free market oriented, but not necessarily by reducing the size of government.  But how do we measure liberal values?

Then I ran across a paper by two French economists, Algan and Cahuc, which showed that countries with a high level of civic trust (such as the Nordic countries), tended to have generous unemployment compensation and fewer restrictions on firing workers, and countries with less generous benefits tended to have more rigid labor laws.  I realized that their measure of values (a survey question asking “would you accept government benefits to which you were not entitled?”) was perfect for my research.

They found Denmark to have the most civic honesty, but when I used a more complete sample of developed countries, Denmark was just edged out by Malta.  But I also had a nagging worry about self-reports on honesty (”You Maltese say you are honest, but . . . )  Thus I decided to average this self-described civic honesty metric with a more objective survey—the corruption index produced by Transparency International (which was topped by Denmark.)    When the two indices were averaged Denmark moved far ahead of the field—if its score was set at 100, the next three countries were tied way back at 86.  Because of this blog’s growing popularity, I won’t mention how far Malta slipped, as I wouldn’t want to embarrass any readers from that tiny island nation.

I decided to measure neoliberalism by using the (2008) Heritage Institute’s Index of Economic Freedom minus the two “size of government” components (taxes and spending.)  If one simply averaged the other eight components, Denmark edged ahead of Hong Kong as the surprising winner of “most free market economy on earth.”  I was pleasantly surprised by this finding (achieved without any data mining) as it beautifully fit my dialectical approach to neoliberalism.

Even better, I found this index of neoliberal (or free market) policies was strongly correlated with my index of “liberal” (or idealistic) values.  Indeed the correlation is even pretty strong for the unadjusted Heritage Index of Economic Freedom (despite the fact that that index is topped by a country, Hong Kong, with considerably less liberal values than Denmark.  You’re probably thinking, OK, but correlation doesn’t prove causation.  Lots of country characteristics are positively correlated.  And what my hypothesis actually requires is that a place like Denmark only became highly free market-oriented after the changing intellectual climate made liberals less enamored with statist policies.

To get data going back to 1980, I had to use the Fraser Institute’s Index of Economic Freedom, a (surprisingly fierce) competitor to the Heritage Index.  Here the results were even more gratifying.  My first regression showed that the more liberal a country’s values, the more rapidly it moved away from statism after 1980.  How about that, Naomi Klein? Between 1980 and 2005 only New Zealand moved toward free markets more rapidly than Denmark.  My interpretation is as follows.  Free market reforms threaten to erode rents earned by various special interest groups.  Thus after 1980 these reforms were more likely to occur in countries where the civic culture is more oriented toward the common good.  (In other words if you hear that culture is “tribal,” or that “family comes first,” it’s economy is likely to have statist economic policies.)

My initial reaction was that Deirdre McCloskey would love this finding.  I had just published a long-winded 27 page book review of her fascinating (but equally long-winded) The Bourgeois Virtues.  In that book she fires her shots in both directions at once.  She concedes the good intentions of those on the left, but scolds them for not being more open to what I called the economistic worldview.  Indeed many don’t even understand that such a worldview exists.  She thinks people on the right such as George Stigler were right about free markets, but wrong about values.  Stigler had argued that it is a waste of time for idealistic economic researchers to try to persuade policymakers, as the later group is motivated by self interest.  And rent seeking special interest groups are more able to satisfy those interests then are idealistic economic professors.  McCloskey countered that one cannot run a sound economic system on just self interest.

My findings suggest that Stigler is wrong, as the more idealistic a country’s values, the more rapidly they moved toward free markets when statism became discredited.  But to people like Paul Krugman, Joe Stiglitz, James Galbraith and Naomi Klein, the findings are equally inconvenient.  Far from being a right wing plot, the strong move toward freer markets and lower marginal tax rates that occurred in almost all developed countries after 1980 was actually driven by idealistic values, indeed I would argue by “liberal” values. 

Do read the whole thing.