Last time, I examined how economic freedom (as defined by the Heritage Foundation) correlates with state failure (as defined by The Fund for Peace) by plotting each country on a graph of economic freedom score vs. failed state score. I found a strongly negative correlation between economic freedom and state failure, with the best-fit model being a monotonically negative sigmoidal curve. This model predicted that for countries at the extremes of economic freedom, changes in economic freedom have little effect on state failure, whereas countries with economic freedom scores in the middle of the pack compared to the rest of the world change rapidly with changes in economic freedom, gaining 40 points of state failure for every 15 points of economic freedom lost. Furthermore, it was found that with a (economic freedom score, state failure score) value of (76.3, 34.8), the United States is right on the brink of this “Fast Failure Region,” and headed in the the wrong direction, validating the widespread perception of U.S. decline. At this point, I would like to gain greater insight into the policy-based causes of state failure by investigating how each subcategory of economic freedom impacts state failure. This will give us information about which policies have the greatest effect on a country’s prosperity, hopefully presenting a feasible solution to prevent national decline.
For each subcategory of economic freedom, I performed an analysis similar to the one used to produce the graphs shown in Part 1. Definitions of each subcategory are provided in Part 1 of this series. I plotted the country scores for each subcategory from the Heritage Foundation’s Index of Economic Freedom against that country’s score in The Fund For Peace’s State Failure Index. I then searched for the curve of best fit that could be used to model each correlation, while being careful not to over-parameterize the functions. The resulting fits (described by R2 value and the sign of the correlation) are summarized in Figure 4. It’s important to note that the correlations are not all described by the same functions.3
As can be seen from the chart, not all forms of economic freedom show a negative correlation with state failure, and not all forms show much of a correlation at all. For instance, Labor Freedom, which is the freedom for a business to make any voluntary contract it wants with its laborers, shows very little correlation at all with state failure. This would indicate that, contrary to the hopes of all the unions and the fears of all the business leaders out there, labor laws don’t really have any effect on a country’s overall prosperity. Also, providing a little bit of support for the Keynesian worldview, it would seem that the Freedom from Government Spending subcategory actually has some indirect positive relationship with state failure. An exception to the monotonicity of these correlations arises from the observation that State Failure is not actually a function of Fiscal Freedom, but still does have a correlation. Fiscal Freedom, which is the freedom from taxation, is actually dependent on State Failure, rather than the other way around, peaking around a State Failure score of 65, and declining towards the extremes of both national prosperity and national collapse. Perhaps this can be explained through the idea that both tyrannical governments and well-trusted, benevolent governments have the greatest capability to extract taxes from the people, but that’s a topic for another day.
Though not all forms of economic freedom stave off state failure, it’s clear that some categories do have a very strong record of keeping nations prosperous. Investment Freedom, Business Freedom, Financial Freedom, and Trade Freedom all have similarly strong levels of negative correlation with state failure. These four correlations also have similarly shaped models, giving the overall freedom correlation its Boltzmann Sigmoidal fit. It makes sense that these forms of freedom would act so similarly, as these are the forms which are most closely associated with the productive operations of our economy’s businesses. It should come as a major warning to regulation advocates that depriving businesses or the financial sector of their freedom has such a huge impact on the prosperity of a country. The initiation of the Great Depression in 1929 showed us what can go wrong if countries get too manipulative and protectionist with their trade policies, and the 2008 Great Recession showed us what can go wrong if countries get too manipulative with their financial sectors. The correlations here suggest that perhaps these devastating economic incidents weren’t freak accidents, but laws of nature.
But of course, the most significant correlations observed in this study were the State Failure negative correlations with Property Rights (R2 = 0.73) and Freedom from Corruption (R2 = 0.75) (Figure 5). Perhaps it should be obvious that increasing corruption leads to increasing state failure. That might even be considered a tautology, depending on how you define “corruption.” But therein lies the problem with this analysis: “Corruption” does not have a universally-accepted singular definition. Nobody tries to legislate corruption, and everybody agrees that corruption is bad. Furthermore, it’s probably a good assumption that corruption is probably already illegal in every country in the world. So how can we propose prosperity-promoting policy changes to reduce corruption when nobody can even agree on what it is?
It turns out, it’s not important for this analysis how you or I or how any politician defines corruption. What’s important is how the Heritage Foundation defines corruption, because they’re the ones that made this index and assigned these scores. So how does Heritage define corruption? Well, they defer the definition to Transparency International’s Corruption Perceptions Index (CPI). And how does Transparency International define corruption for their index? Well…they don’t. As stated in their FAQ, “There is no meaningful way to assess absolute levels of corruption in countries or territories on the basis of hard empirical data,” so they instead base their index on, “how corrupt a country’s public sector is perceived to be” in population surveys. So Heritage’s definition of corruption is based on everyone’s definition of corruption, which nobody can agree upon. Great, we’re running in circles.
In order to get to the bottom of this quandary, I tried something that Heritage probably should have done when they first started publishing this index: I plotted the corruption scores for countries against the other measures of economic freedom, and found something very interesting. The Freedom from Corruption scores correlate with the Property Rights scores through an exponential relationship with an R2 value of 0.92 (Figure 6). Given that the data for these two different measures come from two completely different type of surveys, this correlation is strong enough to suggest that they’re measuring the same thing. In other words, the correlation is definitional. Freedom from Corruption is the protection of Property Rights. The fact that the corruption perceptions data came from population surveys suggests that most people at least subconsciously feel that violations of property rights are corruption, even if they won’t necessarily acknowledge it on either the philosophical or practical levels. The lack of exceptions here is surprising, given that most countries are philosophically very socialist, and that there are even quite a few shamelessly communist nations in the world. Perhaps this is a case of, “When it happens to me, it’s a crime, but when it happens to you, it’s business.”
So, now that we know that Heritage (and world populations in general) think of property rights when judging the level of corruption in a country, we know that the most important form of economic freedom for promoting prosperity is indeed property rights. The correlation graph is shown in Figure 7. Though a Boltzmann Sigmoidal fit provides the best match to the data (R2 = 0.73), it is only the lower Property Rights region that actually shows a deviation from a linear fit. Hence, a line with a slope of -0.79 can be fit to the data with an R2 of 0.72. Averaged over the whole chart, every 10 points lost in the protection of Property Rights leads to an 8 point increase in in State Failure. This trajectory is extremely reliable given how empty the chart is in the bottom-left and top-right quadrants. The most extreme outlier with low State Failure even with low Property Rights is Argentina (20, 46.5), which seems to have narrowly dodged the bullet of state failure even with some of the worst protection of property rights in the world. The most extreme outlier in the other direction, with high State Failure even with reasonably high protection of Property Rights is Israel (70, 82.2), for reasons which are probably obvious. New Zealand (95, 25.6) is the bottom-right-most point, achieving very low State Failure with the absolute highest protection of Property Rights. The United States (85, 34.8) falls very close to the best-fit line, and could probably get down to a failure score of 25.8 just by protecting property rights as well as New Zealand. That would bring us down to Canada’s or New Zealand’s low level of State Failure, even without any new social programs. In fact, it appears that no matter how many social programs a country puts in place, it can’t save them from failure if they do not protect property rights. It’s clearly property rights, not social services, that make a country generally prosperous.
I also plotted the countries’ Property Rights scores against each subcategory of State Failure to determine the mechanism by which a country collapses after diminishing the right to private property (Figure 8).4 Property rights apparently have a negative correlation with every component of state failure, emphasizing their importance. There is absolutely no silver lining to the degradation of private property rights. Still, there are some mechanisms of state failure which are more directly related to a failure to protect property rights than others. The correlation with State Legitimacy (R2 = 0.75) is extremely strong, suggesting that giving the government the power to deprive citizens of their property rights immediately leads to power struggles, cronyism, black markets, electoral manipulation, and protests of the whole mess. The Security Apparatus (R2 = 0.66) also suffers severely from the loss of property rights, creating rebellion, militant groups, gang violence, and riots. Without private property rights, other Human Rights (R2 = 0.62) also reliably suffer, leading to the loss of press freedom and other civil liberties, while increasing the incarceration and execution rates. Contrary to Marxist belief, private property rights are actually very good at inoculating a country against the entrenched aristocracy of Factionalized Elites (R2 = 0.62) and the income inequality of Uneven Development (R2 = 0.58). No matter how much money the government dumps into infrastructure, if that money is obtained by violating the private property rights of the people, then even Public Services (R2 = 0.59) will suffer. Ultimately, Poverty and Economic Decline (R2 = 0.51) is the result of any effort to replace private property rights with any philosophy deemed “more important.”
Collectivist philosophies survive on the belief that private property rights cause income inequality, poverty, bribery, and entrenchment of an elite class. However, these data sets show that the beliefs of socialists, Marxists, and communists are simply incorrect. The world very clearly does not work the way they believe it does. In fact, private property rights protect a nation from the economic and political ills that create squalor, stagnation, and sectionalism. And contrary to the beliefs of Liberals, it is impossible to protect the civil liberties of a nation without maintaining strong private property rights. Economic freedom is absolutely crucial to the protection of personal freedom. No country in the world has managed to lift its people out of poverty and socioeconomic turmoil without protecting private property rights. So, if you truly care about the prosperity of the people, and the lifting of the underclasses out of poverty, then beware of socialist politicians who advocate taking the property away from certain demonized groups as a means of bringing prosperity to the honest working people. They advocate the impossible. As they diminish the property rights of the people in general, they will drive their country towards failure, using the resulting socioeconomic collapse as further fuel for their cause. In reality, no matter how many scapegoats they identify, these socialists and communists and so-called “liberals” are the source of the pain that they rail against, even if they are very good at redirecting the perception of cause. They are their own demons. Any nation which falls into a popular mindset of “we just need more socialism and it will fix everything,” will trap itself in a perpetual spiral of self-destruction. The data presented here proves this.
As Americans used to know, the only true way to lift “your poor, your tired, your huddled masses” from squalor is through liberty. Protect the private property rights of the people, and give them the freedom to innovate, and they will find their own ways to survive with a prosperity that no central authority could have ever imagined. This is how Libertarianism aspires to help the people.
This analysis will be continued in Part 3.
3. The correlations of State Failure with Business Freedom, Financial Freedom, Investment Freedom, Monetary Freedom, Property Rights, and Trade Freedom were modeled with Boltzmann sigmoidal fits trending monotonically in the negative direction. The correlation with Freedom from Corruption was modeled with an asymptotic exponential decay function. The correlations with Labor Freedom and Freedom from Government Spending were modeled with linear fits, with negative and positive slopes, respectively. The correlation with Fiscal Freedom was modeled with an extremes peak function to account for the non-monotonic nature of this relationship.
4. The correlations of Property Rights with Demographics, External Intervention, Factionalized Elites, Group Grievances, Human Flight, Poverty and Decline, Public Services, Refugees, Security Apparatus, State Legitimacy, and Uneven Development were modeled with Boltzmann sigmoidal fits trending monotonically in the negative direction. Not all of these models showed the full range of the sigmoidal shape within the range of the charts, but the sigmoidal model was still necessary to capture the fluctuations in the monotonic trends in the data.