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.

Freedom Correlations, Part 1: Economic Freedom and State Failure

A significant portion of my political debates involve discussing the effects of libertarian-style economic freedom on a country’s well-being. This type of debate includes two major components: quantifying economic freedom and quantifying a country’s well-being. Measuring these quantities alone is a challenge in itself, but in order to really make an argument regarding their effects on each other, they must be measured independently, without having one measure create bias in the other. When looking at just one country’s policies and well-being, any number of historical events with any number of interpretations can be invoked to suggest that any of these measures are outliers. As an example, just think about how many different explanations there are regarding the causes of the 2007 global financial meltdown. Each different ideological group will adhere religiously to their own explanation, and reject all others. In order to get past all of these political games, we need to find a way to look at every country at once, averaging out the effects of historical anomalies and coincidences. Only if we find a way to do this, can we truly evaluate the general effects of economic freedom on the well-being of countries without politically biased interpretations of events getting in the way. I believe that I have found a set of indices that makes this possible.

I. The Indices

I’ve often referred to the Heritage Index of Economic Freedom, which tries to quantify how “economically free” a country is. Their index is compiled from a purely capitalist perspective, which may lead those who operate from a socialist perspective to reject their ordering as a measure of “true freedom.” However, what we can say is that their index is a great measure of how closely the policies of various countries adhere to the capitalist libertarian vision of economic freedom. This excludes any direct description of non-economic personal freedoms. Their scoring system is broken down into 10 categories:

1. Rule of Law
-Property Rights: The extent to which a country’s laws protect the right of individuals to acquire and keep private property.
-Freedom from Corruption: The extent to which a country’s people perceive their government to be free from corruption.

2. Limited Government
-Fiscal Freedom: A measure of how low the tax burden is upon the people.
-Government Spending: A measure of how little of the GDP the government spends.

3. Regulatory Efficiency
-Business Freedom: A measure of how easy it is to start, operate, and close a business in the country’s regulatory framework.
-Labor Freedom: A measure of the absence of regulations on employers’ hiring, use, and firing of employees.
-Monetary Freedom: A measure of the stability of prices, and the absence of government control of prices.

4. Open Markets
-Trade Freedom: A measure of the absence of tariffs, and other government-imposed barriers to international trade.
-Investment Freedom: A measure of how little the government controls investment activities, and the flow of investment resources.
-Financial Freedom: A measure of the independence of banks from government control.

Again, I’d like to emphasize that I’m not asking anyone to assume that these measures are an objective way of measuring freedom. The Heritage Foundation’s index is clearly a measure of how closely a country’s policies adhere to a minarchist libertarian’s view of economic freedom. The higher a country’s score on the index, the more that country’s economic laws and governmental activities follow the libertarian view of individual liberty, avoiding government activism, socialism, technocracy, and other forms of centralization of economic control. It is this description that I will be referring to when I talk about economic freedom throughout the remainder of this series. According to this description, Hong Kong has the world’s most economic freedom with a score of 89.9, and the United States is down at #10 with a score of 76.3. The country with the least economic freedom (that’s fully ranked and scored)1 is Zimbabwe.

So what effects do these policies have on a country’s well-being? A socialist or progressive or technocrat would argue that these policies would destroy a country by making the poor poorer and the rich richer, destroying a country’s foundations. They say that Hong Kong and Singapore can only prosper with such policies because they’re so small, making them outliers. But a libertarian or conservative or capitalist would disagree, saying that these forms of economic freedom allow for the investment, competition, and innovation that make a country grow and prosper. So how do we resolve these differences and ferret out the effects on a country’s well-being of the economic policies originating from these two different perspectives?

Well, I found another index out there which takes an entirely different approach to ranking countries. The Fund for Peace Failed States Index tries to quantify the extent to which a country has failed and collapsed based purely on symptomatic observation of the conditions people live in under the various governments of the world. Their mission is humanitarian rather than ideological, so their scoring system is based purely on an observation of the components of a failed state (things that nobody wants to end up with), and the extent to which each country has experienced those symptoms. Their scores are also broken down into a number of categories:

1. Social Indicators
-Demographic Pressures: The extent to which a population suffers from hazards beyond their own immediate control, such as natural disasters, scarcity, and environmental degradation.
-Refugees and Internally Displaced Persons (IDPs): The magnitude of the problems associated with populations being removed from their homes, creating refugees.
-Group Grievance: The extent of tension between different factional groups (racial, ethnic, religious, etc.), in the form of discrimination or violence.
-Human Flight and Brain Drain: A measure of the net emigration of the populace, especially the emigration of educated individuals.

2. Economic Indicators
-Uneven Economic Development: The extent of disparities and inequality in income, wealth, and economic opportunities among different groups.
-Poverty and Economic Decline: A measure of how severely a country suffers from economic recession, inflation, high public debt, unemployment, and other indicators of economic decline.

3. Political and Military Indicators
-State Legitimacy: The extent to which a government fails to represent its citizens through corruption, power struggles, or disenfranchising votes.
-Public Services: A measure of the effectiveness and prevalence of the infrastructure that most governments provide as public services, including police, fire, communications, transportation services, and others.
-Human Rights and Rule of Law: The extent to which a government violates human rights through deprivation of civil liberties, arbitrary exercise of the law, or cruel and disproportionate punishment.
-Security Apparatus: The level of militarized internal conflict, and the number of fatalities that result.
-Factionalized Elites: A measure of political entrenchment, brinksmanship, and other tactics that make real political change impossible.
-External Intervention: The extent to which a country has failed to meet its international obligations, leading to foreign intervention in their affairs.

The Failed State Index does not measure policy. It directly measures reports of how far a country has progressed towards failure, in terms of establishing a stable legal framework, protecting the people, and ensuring their prosperity. With such a comprehensive description of the factors involved in the collapse of a country, this index acts as an appropriate measure of a country’s well-being. Somalia gains the #1 spot in state failure, with a score of 114.9, while Finland comes in last place at #177 (in the game where you want to lose) with a score of 20.0. The United States sits at #159, with a failure score of 34.8.

II. Correlations in the Overall Rankings and Scores

In the Heritage Index of Economic Freedom, we have a good measure of how extensively countries adhere to the policies of libertarian-style economic freedom, and in the Failed State Index, we have a direct measure of various conditions that describe the well-being of countries. So if we can find any correlations between these two scoring systems, then we can determine the extent to which certain policies may create the conditions of a failed state. Though we must be careful not to say that correlation necessarily implies causation, we can certainly say that the stronger the correlation, the more closely a policy is related to the condition.

To elaborate, there are three scenarios that may be implied by a generalized correlation between a policy and a condition:
1. The policy caused the condition.
2. The condition leads countries to adopt this policy.
3. Some external factor leads both to the condition and the adoption of a policy.

No country is absolutely bound to legislate policy based on the conditions it experiences. In other words, while a policy can directly cause a condition, a condition can only indirectly cause a policy to be implemented, by exerting pressure on whatever legislative process a country uses. Thus, we would necessarily see stronger correlations in scenario #1 than in scenarios #2 and #3. Hence, we can say that the stronger the correlation observed, the more likely it is that the policy directly causes the condition, rather than any indirect relationship occurring between the policy and the condition. Using this standard, we can distinguish relationships that describe the direct effects of a policy from other types of relationships that may pop up.

With this evaluation standard in mind, I’ve plotted every available2 country on a graph comparing their Failed State rankings to their Economic Freedom rankings (Figure 1).

Figure 1: The correlation between Economic Freedom rank and Failed State rank. Each data point represents a country. The highest rank is 1.

As can be seen in Figure 1, there definitely is some sort of correlation between economic freedom ranking and state failure ranking. A linear fit can be applied to the data with an R-squared value of 0.55 and a slope of -0.731. This is a fairly strong, negative correlation, indicating there is indeed a relationship between these two rankings. Based on this data, we cannot be 100% certain that every component of economic freedom prevents state failure, but we can at least say that economic freedom clearly is not the cause of state failure.

Because of the high R-squared value, there must be at least some influence from economic freedom that prevents state failure. No nation with less economic freedom than Slovenia (Economic Freedom rank #69) has managed to avoid failure better than Italy or Argentina (tied Failed State rank #145). Additionally, no nation with more economic freedom than Jordan (Economic Freedom rank #30) has ended up failing worse than Cyprus (Failed State rank #119). For every 10 ranks a country drops in economic freedom, you can expect them to go up about 7 ranks in state failure. Interestingly, between 2008 and 2012, the US has dropped 5 ranks in economic freedom, and gone up 2 ranks in state failure, whereas the linear fit would predict an increase in failed state status of 3 or 4 ranks. The predictive power there is not bad, though not perfectly accurate.

One source of error in predicting the trends a country will follow is the fact that each ranking is a measure relative to every other country, rather than an absolute measure. So, if a country is improving or worsening their economic freedom or state failure, they may remain at the same rank if the countries surrounding them in the ranking are moving in the same direction. To account for this error, we can plot the countries based on their absolute Economic Freedom and Failed State scores, rather than their rankings (Figure 2).

Figure 2: The correlation between Economic Freedom score and Failed State score with a linear fit.

Even if we look at the raw scores, there still appears to be a correlation. With a linear fit, the R-squared value is about the same, at 0.53, and the slope is -1.54. The data appears better grouped, but the similar R-squared value comes as a result of some bias in the residuals. Instead of a linear fit, a sigmoid might fit better (Figure 3).

Figure 3: The correlation between Economic Freedom score and Failed State score with a Boltzmann sigmoidal fit.

Indeed, a sigmoid curve fits the data comparing freedom and failure scores far better, with an R-squared value of 0.61. The correlation is apparently very negative, with a loss in 15 freedom points translating into a gain of over 40 state failure points in the steepest part of the curve. No country with a freedom score higher than 76 has a failure score higher than 45. Additionally, no country with a freedom score lower than 48 has a failure score lower than 67. With such a reliable negative relationship between economic freedom and state failure, this now appears to be a strong enough correlation to establish causation.

If a country’s freedom score drops below 76, they will end up in severe danger of rapidly climbing in state failure score. Countries with an economic freedom score as low as 70 already span nearly the entire spectrum of state failure, including failure scores from 20 to 85. Ominously, the United States currently has a freedom score of 76.3, putting this country right at the edge of the cliff of rapid state failure. Perhaps this observation relates to the general perception that the U.S. is headed towards decline. The curve fit predicts the U.S. state failure score to be about 34.96, and the actual state failure score is 34.8. The U.S. economic freedom score has dropped more than 4 points over the last 4 years, increasing its failed state score from 32.8 (predicted: 30.3). So far, this correlative model is very accurately predicting the trajectory of the United States as it abandons policies of economic freedom, putting this country on pace to be worse off than Spain by the end of a second Obama term, worse off than Greece and Kuwait within 10 years, worse off than Cuba, Mexico, and Vietnam within just 15 years, worse off than Israel and Madagascar in 20 years, and putting us among the worst failed states in the world within just 25 years.

I would hope that Americans would remember their heritage of liberty and stop this decline before we get far enough along to consider ourselves equal to any of the above-mentioned countries in well-being. But before this decline can be prevented, Americans need to recognize how great of an effect economic liberty has on our lives. We cannot continue to function as a successful, developed nation if we continue electing politicians who publicly disparage the principles of liberty, equating economic freedom with an attack on the poor. As the data presented here shows, it simply is not true that economic freedom creates poor social conditions, and in fact, the opposite appears to be true. If we favor the principles and policies of economic freedom, we will gain prosperity as a country. Australia (89.1, 23.2), New Zealand (82.1, 25.6), and Switzerland (81.1, 23.3) appear to have learned this lesson, so why can’t we?

I will be continuing this analysis in Part 2 of the series, with an analysis of how the subcategories of Heritage’s Economic Freedom measures correlate with State Failure.

Footnotes
1. North Korea is included in the ranking, but is not fully scored. Afghanistan, Iraq, Liechtenstein, Sudan, and Somalia are not ranked due to the difficulty of obtaining reliable data.
2. Countries were excluded if and only if data was not available from one of the two indices.