Economic Freedom by the Numbers

ANTONY DAVIES: Economists are interested in
how people behave when their unlimited desires collide with their limited abilities. We focus a lot on how people go about making
decisions and what those decisions are. Here, you could imagine, not just amongst
economists but amongst people at large, two schools of thought. One school of thought says that decision-making
should be more centralized, that is, the government should be making decisions and imposing those
decisions on people. The argument that people often make is that,
look, if you leave them to themselves, people will consolidate power, they’ll stifle competition,
they’ll exploit each other, and because of that, when decisions need to be made, they
should be made centrally by a government that makes the decision for everyone. Then there's another group of people who say,
"No. Decisions should be made individually, because
if you leave people alone, they will disseminate power, they’ll promote competition, they’ll
create and disseminate wealth." This school of thought says that decision-making
should be left at the individual level. People should be free to make whatever decisions
they want for themselves, and the role of government should be restricted to preventing
people from harming each other but otherwise leaving them alone. What's interesting is that as we think about
these two schools of thought, should decision-making be more centralized or should decision-making
be left to individuals, we can look at different societies that have employed different types
of decision-making and ask what's happened. Now we'll be using here what's called the
Economic Freedom Index. This comes from the Fraser Institute, and
the Fraser Institute looks at all sorts of things such as how much government spending
is there in a society; how much transfer is going on, that is, the government taking money
from one group of people and giving it to another; how much regulation is there; how
much rule of law is there; are people protected from other people coming and harming them? The more a society falls into the individual
decision-making category, the higher it ranks on the Economic Freedom Index. The more it falls into the centralized decision-making
category, the lower it scores on economic freedom. Basically, economic freedom boils down to
two things, one, individuals making decisions for themselves and two, the government taking
the role of protecting people from others imposing harm on them. Let's look at the United States. We'll take the 50 states and divide them into
two groups. In each year, we'll have the 25 U.S. states
in which decision-making was done in a more centralized manner compared to the other states
and the 25 states in which decision-making was done in a more individual manner compared
to the other states. All the years available, 1984 through 2014,
in every one of these years, each of these states appears in every single year in this
more centralized decision-making category. These states, in every year, 1984 through
2014, appear in the group of states in which decisions are made in a more individual basis. Now that’s about half of the states. The other half of the states are here, and
they go back and forth. California, for example, moves back and forth
eight times between these two groups over these range of years. In each year, we've got 25 states in the more
centralized decision-making category, we have 25 states in more individual decision-making
category, and we understand as the years go by, these states move back and forth. Let's start by looking at outcomes. Let's talk about people's income. We'll look at median household income here,
and what I'm showing you are a bunch of years. We'll start with 1984. This is median household income adjusted for
inflation. The blue bar shows you the median household
income amongst those 25 states in which decision-making is done in a more centralized manner, and
in 1984, those states exhibited a median household income of $56,600. In that same year, 1984, the states in which
decision-making was done in a more individual fashion, those states exhibited a median household
income of slightly more, 56,900. This is 1984. In 1985, median household incomes fell, adjusted
for inflation, but you can see the same pattern. The median household income amongst the 25
states in which decision-making was done more centrally is 54,900. The median household income amongst states
in which decision-making was done in a more individual basis is slightly higher at 55,100. That’s 1984 and 1985. Now in 1986, the pattern reverses. In the states that make decisions in a more
centralized manner exhibit higher median household incomes. The states that make decisions in a more individual
manner exhibit lower household income. In 1987, the pattern reverses again, and now
the states that make decisions in a more individual manner have higher household incomes. We can continue this comparison for all the
years, and when we do, we find the following. Of all of these years, 75% of the time, the
states that allow people to make more decisions for themselves exhibited higher household
income than the states in which the governments made more decisions for people. Now there's a good counterargument to this,
and the counterargument is this. Well, you're looking at median household income,
but that can mask the effects of unemployment. For example, suppose we have two societies. In this society, I've got 10 workers, each
earning $50,000. In this society, I've got nine workers earning
nothing, and one worker earning half a million dollars. In both societies, the average income is $50,000,
and yet, there's a marked difference in unemployment. The unemployment in this first society is
zero. The unemployment in the second society is
90%. Maybe it's the case that this household-income
data that we're looking at is masking something. Let's look at unemployment, same kind of comparison. This is 1981. The data go back a little further here. You can see the states that made more decisions
for people, in a more centralized manner, had almost the same, slightly higher unemployment
than the states that allowed people to make more decisions for themselves. In 1982, states that exhibited more centralized
decision-making had significantly higher unemployment than the states that allowed more individual
decision-making. We can continue this for all of the years,
and what you will find is that in every single year, with the exception of those five, states
that allowed people to make more decisions for themselves exhibited lower unemployment
rates than did the states that made decisions for others. In fact, if you take the difference in these
unemployment rates and convert them into human beings, you find the difference is about 600,000
jobs. Said another way, if over this period, the
more centralized decision-making states exhibited the same unemployment rate as the more individual
decision-making states, we would have seen 600,000 more jobs throughout the country. There's a good counter-argument which says
that unemployment data ignore the chronically jobless. Let me show you how this works. Let's suppose we have a labor force of five
million people, and of these five million people, 4.7 are employed and 300,000 are unemployed. When we calculate the unemployment rate, we
take the number of unemployed people, 300,000, and we divide it by the labor force of five
million, so here we have a 6% unemployment rate. Now, suppose that a hundred thousand of these
people had been unemployed for so long they had become what we call discouraged. That is, they would like to have jobs, but
they've gone for such a long period of time of being rejected repeatedly that they just
give up looking. They give up looking not because they don’t
want jobs but because they think there's just no point in looking for a job. When workers become discouraged, they move
out of the unemployment category and they become what we call non-employed. These hundred thousand workers, when they
give up looking for jobs, we no longer count them as unemployed. In fact, we no longer count them as part of
the labor force at all. They're a third category, non-employed workers. Now we can go back and recalculate the unemployment
rate, and the unemployment rate, of course, is the number of unemployed divided by the
labor force, and look at what's happened. Our unemployment rate has dropped to 4.1%. Now go back and compare these two scenarios. Here, 100,000 of my workers have become discouraged
and left the labor force. My unemployment rate because of that drops
from 6% to 4.1%, but look at the two scenarios. In the two scenarios, there are the same number
of people working, 4.7 million, 4.7 million. In other words, as workers become discouraged,
we stop counting them as unemployed, and the unemployment rate appears to fall, even though
it's possible that the same number of people are employed as were employed before. Really, what we want to do here is get our
heads around perhaps poverty instead of unemployment, because what really matters isn't whether
you have a job. It's whether you can eat. Let's look at the poverty numbers and again
compare states in which decision-making is more centralized to states in which decision-making
is done in a more individual basis. What you see for all the years available,
1981 through 2014, in every single year, with the exception of these three, the poverty
rate in the states that allowed people to make more decisions for themselves was lower
than in the states in which government made more decisions for the people. If you convert the difference in poverty rates
to human beings, the difference is three million people. In other words, if over this period the centralized
decision-making states had the same low poverty rate that the individual decision-making states
had, there would have been three million fewer Americans living in poverty. A good counterargument to this is that poverty
rates can mask the effects of inequality. Let's talk about inequality for a moment. Now economists measure this with something
called the Gini coefficient. The Gini coefficient ranges from zero to one,
where zero is perfect equality, everyone is the same, and one is perfect inequality, one
person has all the income and everybody else has nothing. There's less data available for inequality
among the states, but I'll show you everything that’s readily available. As you look at this picture, down means more
equality. Up means more inequality. Down is good. Up is bad. Again, let's compare the centralized decision-making
states to the individual decision-making states. If you do that, you find an interesting pattern. In every single year, inequality amongst the
states that allow people to make more decisions for themselves is actually lower than it is
amongst the states in which the government makes more decisions for them. We've seen income, we've seen unemployment,
we've seen poverty, we've seen inequality. In every instance, the states in which people
are free to make more decisions for themselves show better outcomes. Maybe it's the case that there's something
weird about Americans. Americans enjoy being entrepreneurial. We generally don’t like people telling us
what to do. Maybe there's some other reason particular
to Americans that causes freedom to work better here than it might elsewhere. A good way to address this is to perform the
same comparison we just performed amongst the states amongst the various countries of
the world. Here, we'll look at roughly 130 reporting
countries, and let's start by looking at poverty rates. If we take all the countries of the world
and divide them into two groups, those in which decision-making is done in a more centralized
manner and those in which decision-making is done in a more individual manner, what
we find is that the poverty rate amongst these countries that allow more individual decision-making
is significantly less. The same phenomenon we observed with the states. Now you might argue, yes, but what we're getting
here is what's called the rich-country effect. The rich-country effect says, well, look,
rich countries of course have less poverty. They're rich. Also, if you're a rich country, you have the
leisure to be concerned with things like individual decision-making, economic freedom. You're not worried about where your next meal
is coming from. Maybe what we're seeing here is simply a fact
that rich countries coincidentally tend to enjoy more individual decision-making. The way to answer that is to look at the poorest
countries. I'm going to show you now the poorest 20%
of countries in the world. I'm going to take the poorest 20% of countries
and divide them into two groups, the poor countries in which decision-making is done
in a more centralized manner and the poor countries in which decision-making is done
in a more individual manner. What you observe is, again, the same phenomenon. Now the poverty rates are astronomical. They're above 30% in both cases, and yet,
despite that, the poor countries in which decision-making is done in a more individual
basis enjoy a lower poverty rate than the countries in which decision-making is done
in a more centralized manner. What about inequality? Same thing that we saw amongst the states,
less pronounced perhaps, but the same direction. Countries in which the government makes more
decisions for people tend to exhibit more inequality than do countries in which decision-making
is more individual. It's not just income inequality. It's also gender inequality. This is measured by the United Nations, and
it asks questions like to what extent are women's quality of life, educational opportunities,
health care different than those of men within each country. What we find is amongst countries in which
individuals are allowed to make more decisions for themselves, gender inequality is actually
lower. Child labor rates exhibit the same pattern. In countries in which the government makes
more decisions for the people, these are principally poor countries, but the child labor rates
you see are markedly higher. What's the conclusions? We look at all this. We've looked across countries, across states,
across time and we see repeatedly societies with more economic freedom enjoy less unemployment,
higher incomes, less poverty, less income inequality, less gender inequality, and lower
child labor rates. All of that seems to go with more economic
freedom, more individual decision-making, but people are selfish, and if you leave them
alone, they're going to act in a selfish manner. That’s what individual decision-making is
going to give us, and that’s true. More freedom means a greater ability to exploit
people. It means a greater ability to harm others. It means a greater ability to despoil the
environment. All of this comes with the ability to act
more freely, but also with the ability to act more freely, people have a greater ability
to cooperate. They have a greater ability to help each other
and they have a greater ability to protect the environment. This also comes with more economic freedom. This suggests, then, the appropriate role
of government in society is to prevent people from harming each other, but otherwise leave
them alone.

25 thoughts on “Economic Freedom by the Numbers

  • Conclusion: If less government is better, then ZERO government is best. Central planners have no right to take money by force and then decide what services to provide. The free market will be most responsive to the individual's needs.

    However, if we insist that government must exist, then prepare for an endless squabble over what services each person considers appropriate for their "user fees" (taxes). Some will consider it reasonable to spend billions on bailouts for too-big-to-fail banks, subsidies for corporations and endless "defense" spending. Others will ask why that money couldn't be better spent elsewhere.

  • with great freedom comes great responsibility. If you're not allowed to be free, you're not allowed to be responsible. And if you're not allowed to be responsible, then what the hell is the point of life?

  • I would prefer to live according to my own terms even if I was less rich in a decentralised economy. But it looks like it doesn't have to come to that since decentralised systems are better economically too.

  • The problem is that what you describe is a one-player system: the only thing that exists is the people in your narrative. The reality is that the system has at least two players: the people and the corporations. If the government withdraws from this then it is an unbalanced system, the corporations will end up exploiting the people as much as possible (the cost of an epipen will be $100+, the cost of education, healthcare will be unaffordable, the food industry will do whatever they want to crops and products etc). This is why you need the government to intervene and create a three-player system, where the corporations have something to fear from if they overstep their bounds and the people have a way of exerting pressure on the corporations via the government.

  • Centeral planning can be corperate as well as goverment. Individuals having more control over their desicions does enable the individual to persue the wealth that matters to them. However, wealth can be created by patterns of trading goods and services repeatedly and often centerilized desicons that create marketplaces, currancy, and marketing that encourage wealth and income. I encourage deeper thought into what creates the wealth that individuals desire and how govenments and corperations can enable that.

  • As always, the answer is not quite that simple. High regulation is unwanted, but there are many legitimate cases where gov intervention other than physical protection is necessary to keep the scales from tipping too far.

  • More indisputable evidence that what liberals/socialists really want is more power for themselves and less individual rights for everybody else.

  • @ 15:07 Leave me alone and let me take care of myself.
    "Enable me and I will take what the taxpayer is forced to offer".


  • If I see those graphs, the first thing that comes to mind is: show me the statistical error bars nevermind systematic errors and that correlation does not equal causation. Taking those effects into account most of the years, both more centralised vs. more free are basically indistinguishable. Also, the yearly fluctuations are much much larger than the system choice. If you think about it It's actually a good presentation to showcase how you can read statistics and interpret it in a way that confirms your prior beliefs. (and I am not claiming the opposite is true, i.e. centralised is better)

  • I live in Alabama which was included in the centralized states. I don't understand that and would love to know how that was determined. I do live in the southeast corner which is not a good representation of the entire state in terms of poverty and such. This could answer why Alabama lives in the bottom of every economic measure made in spite of having the richest biodiversity in the country, some of the best Universities in the country and the most diversity of natural resources in the country.

  • Individual decisions are better, except when it comes to abortion? And without government intervention, my ability to protect the environment is zero. This video is bs, and your cherry-picked data is very weak.

  • The inequality in the USA is appalling => Decisions in the USA must be made centrally (and mostly they are — the impact of public opinion on government policy is about zero). There are a few people making most decisions, and individual decisions are mostly reduced to a few undesirable choices. Which of two dishonest politicians gets your vote? Which of a handful of miserable jobs will you take, or starvation will be better?

  • still i think household income is a REALY BAD kpi .. average income per worker is FAR FAR more precise and masks nothing..

  • Every video this dude does should be a required series that you must watch before you're allowed to graduate from Highschool.

  • God says individuals are authoritative over their own lives. Governments are authorized to execute wrath on the ungodly, but are not authorized to stomp on individual sovereignty. Doing things God's way always works better, whether you know Him or not.

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