True by Definition: Redistribution and Economic Freedom

My main complaint about Scott Sumner is that he still hasn’t joined the faculty of George Mason’s Economics Department.  But I’m also unhappy about the distinction he frequently makes between “size of government” (or “redistribution”) and “market freedom.”  The latest example:

Scandinavian economies are some of the most market-oriented on the
planet.  Noah is probably confusing two completely separate issues; size
of government and degree of market freedom.  For instance, although
Denmark has a very high level of government spending on social welfare
programs, if you look at the 8 out of 10 categories in the Heritage
Foundation Ranking on Economic Freedom that are not related to level of
taxes and spending, then Denmark is the most market-oriented country on
earth.  Sweden has been very aggressive in privatizing, deregulating,
and having a very open policy for international trade and investment.
 Every single Swedish child is eligible to use vouchers to go to any
school they wish.  Scandinavian voters have quite rationally voted for a
very free market regime, and then decided to redistribute the fruits of
that system for utilitarian reasons.

The truth is that size of government and economic freedom are inextricably connected.  Any definition of “economic freedom” that doesn’t directly incorporate the size of government is a crummy definition.

To illustrate, consider the following hypothetical.  The government of Ruritania allows consenting adults to sell one another anything on any mutually agreeable terms.  Ruritania has no minimum wage restrictions, no hiring or firing restrictions, no licensing, no zoning, and no paternalism.  It even – wonder of wonders – has totally open borders.  Anyone can hire anyone regardless of their national origin. 

Before you packs your bags, I should point out that the government of Ruritania does have one little function.  Namely: It imposes a 100% tax rate on all income, and redistributes that income equally to all.  To enforce this tax rate, Ruritania has an all-pervasive system of surveillance – and punishes tax evasion with torturous death.  Leaving the country counts as tax evasion.

By Scott’s standards, Ruritania is a free-market utopia.  But almost no one else – economists, non-economists, or its own citizens – would see it that way.  Ruritania is functionally equivalent to North Korea.  No one can earn an extra dime by his own efforts.  Given these awful incentives, everyone would have to survive on an equal share of virtually zero output – or risk death by earning illegal income or fleeing the country.

The essence of a free market isn’t merely that people can buy and sell whatever they want on whatever terms they find mutually agreeable.  Without the right to keep what you earn, freedom of contract is utterly hollow.  A society that redistributes most of what you earn is economically unfree.

My point is not that redistribution, rather than regulation, is The Key to economic freedom.  My point is that economic freedom has Two Keys.  A solid measure of economic freedom wouldn’t merely take points off for both redistribution and regulation.  A solid measure of economic freedom would only classify countries as “economically free” if they had low redistribution and low regulation – and would classify countries as “economically unfree” if they had high redistribution or high regulation.

I’m still open to the possibility that Scott’s right about Sweden.  Maybe, taking redistribution and regulation into account, Sweden is economically freer than the U.S.  Especially nowadays. 

Yet I’m skeptical.  Swedish school vouchers sound great.  Nevertheless, Sweden’s tax/GDP ratio in 2011 was almost double that of the U.S – 47.9% versus 26.9%.  The comparison for spending/GDP isn’t quite as lop-sided, but it’s still pronounced: 52.5% versus 38.9%.  If you don’t think that weighs heavily against Sweden’s free market credentials, you’re making a big mistake – and abusing language along the way.

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