Freedom Correlations, Part 2: The Most Important Form of Freedom

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

Figure 4: The magnitude and direction of correlations of each type of economic freedom with state failure. Freedom types are arranged by increasing magnitude of correlation.

Figure 4: The magnitude and direction of correlations of each type of economic freedom with state failure. Freedom subcategories are arranged by increasing magnitude of correlation.

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?

Figure 5: The correlation between Freedom From Corruption score and Failed State score with an asymptotic exponential fit.

Figure 5: The correlation between Freedom from Corruption score and Failed State score with an asymptotic exponential fit.

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.”

Figure 6: The correlation between Property Rights score and Freedom from Corruption score with an exponential fit.

Figure 6: The correlation between Property Rights score and Freedom from Corruption score with an exponential fit.

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.

Figure 7: The correlation between Property Rights score and Failed State score with a Boltzmann sigmoidal fit.

Figure 7: The correlation between Property Rights score and Failed State score with a Boltzmann sigmoidal fit.

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.”

Figure 8: The magnitude and direction of correlations of Property Rights score with each type of State Failure. Failure types are arranged by increasing magnitude of correlation.

Figure 8: The magnitude and direction of correlations of Property Rights score with each type of State Failure. Failure types are arranged by increasing magnitude of correlation.

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. For peer-reviewed journal articles showing similar trends, refer to this list

Footnotes
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.

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Socialist Myths That Just Won’t Die, Part 1

I end up encountering these myths far too often when debating socialist-minded individuals. I’m putting these myths and my responses to them here so that I don’t have to rewrite these responses so many times later. I expect this won’t be the last of this sort of post I’ll be publishing. To prove that I’m not just beating up on straw men, this is the guy I was responding to this time.

Myth: When the economy grows, only the wealthy benefit.
Truth: If that were even close to true, then you wouldn’t see people below the poverty line talking on their cell phones, going to McDonald’s, driving it home to eat in their shared 2-bedroom apartments, and putting the leftovers in the refrigerator. Compare this to poverty in North Korea, or Venezuela, or India, or even France. There’s a stark contrast between these pictures. Now, which picture do you think compares more effectively with 19th century American poverty? Did the American poor have cell phones or cars or refrigerators or even apartments in the 19th century? Not at all. There are countless ways in which the growth of the American economy has made life easier and more prosperous for the poor over the last 100 years. Lower-class wages first began to grow in the US in the 1870s, right in the middle of the “Gilded Age,” and stopped only recently, due to the replacement of wages with “benefits” (health benefits, retirement benefits, etc.).
Now compare this story with the one Argentina has lived for the last century. Argentina was far wealthier than the US on a per capita basis in 1900. However, their Socialist Party was on the rise at that time, and soon succeeded in irreversibly converting Argentina into a devoutly socialist nation. So how are the Argentinian poor doing now? Would you rather be poor in Argentina or the US? Argentina or Australia? Argentina or Switzerland? Argentina or Singapore? Note that poverty-stricken Central Americans looking for a better life tend to migrate north, not south.

Myth: Australia/Germany/Canada/etc is more socialist than most countries because they have socialist health care.
Truth: You can’t just base your entire idea of how socialist a country is on one policy, and expect to be correct. At one time, the US was the least socialist country in the world, but that’s simply not true anymore. If you think the US represents the epitome of capitalism, your preconceptions are entirely subjective and out-of-date. If you want to determine which countries are actually “more socialist” and which are less, you need a more objective measure, like the economic freedom indices I’ve posted countless times.
You’ll find in those indices that both Australia and Canada are consistently less socialist than the US. Germany is more socialist, but not by much, and they’re certainly not faring as well as their less socialist neighbors.
So how can you even pretend that it’s these countries’ socialist elements that brought them prosperity, when in fact these are some of the most economically libertarian countries in the world? In reality, prosperity correlates strongly with economic freedom, with private property rights being the strongest driving force.

Myth: We had a recession 5 years ago, so it makes sense our economy would still be growing slowly.
Truth: Not even close to true. Anyone who has studied recessions throughout US history knows that a big recession usually means a big recovery. The only two exceptions to this rule come from the results of FDR’s New Deal politics, and the results of Obama’s New Deal-inspired concentrations of power. Jimmy Carter brought this country into a rather long series of recession, but it took the pro-liberty policies of Ronald Reagan to bring real recovery. The fact is, so long as we have Obama continuing to suppress the economy with further regulation and taxes, we will always be on the brink of a new recession. If we had elected Mitt Romney instead, and if he had followed through on his promises to reduce tax rates, repeal ObamaCare, and reduce the burden of socialist welfare programs (a huge “IF”), I can guarantee you there would have been a near-instantaneous economic boom.

Myth: The economic crisis was caused by capitalist greed.
Truth: I’ve debunked this one too many times before. The economic crisis was caused by government programs that encouraged risky lending for the sake of racial benefits.

Myth: Clinton’s higher tax rates balanced the budget.
Truth: At the time the budget was balanced, Clinton’s tax rates were bringing in 20.8% of the GDP in revenue. The truth is, Clinton’s tax rates could never balance Obama’s spending, because he’s been spending about 25% of the GDP every year he’s been in office. This is why libertarians say, “Sure, we can go back to Clinton-era tax rates- if we go back to Clinton-era spending and regulation.” To go back to those spending levels, we would need to cut projected spending over the next 10 years by more than $8 trillion, not the mere pittance of $400 billion that Obama has proposed, or the slightly higher pittance of $800 billion that the Republicans have been toying around with. Obama is not even close to serious about balancing the budget- even the Republicans need to step up their spending cuts game if they want to get anywhere close to taking America off the path to Greece. Either we deal with this through spending cuts now, or we deal with this through even larger spending cuts later. That much is inevitable.