From 1850 to 2020, industrialized economies went from roughly $3,000 per capita to $40,000 per capita, inflation adjusted. This was also a period of expanding economic freedom, as documented in the new analysis, “Economic freedom, 1850–2020: New evidence” by economic historian Leandro Prados de la Escosura.
There are two important things to note about that chart. First is the definition of economic liberty or freedom being employed. A rough rule of thumb: A society that relies more on the market and less on government intervention, the greater its economic freedom. However, as the author notes by quoting Friedrich Hayek, freedom of economic activity implies “freedom under the law, not the absence of all government action.” A capable government is essential for economic liberty as it provides protection from coercion, and thus the size of government isn’t considered a dimension of economic freedom. It’s the nature of government action that’s important. So there are a number of factors involved:
The other thing to note are the big downturns in that first chart, meaning a whole bunch of economic freedom—and, as I see it, the gains from economic freedom—has been left on the table:
Long-run gains in economic freedom have been achieved over the last 170 years, amounting to three-fifths of the potential maximum, but its progress was far from steady, as the world wars broke the series in distinct phases. Substantial gains took place from 1850 to 1913 and, again, during the second half of the 20th century (39% and 37% of its potential maximum, respectively). Economic freedom peaked by 2000 and stagnated and declined in the early 21st century.
According to the analysis, economic freedom has stagnated and declined in the 21st century after peaking in 2000. Given how much economic openness—trade and mobility—drove the index in the second half of the past century, such a result isn’t surprising. America needs to lead here. Economic freedom and openness are vital for America’s prosperity, innovation, competition, and individual liberty. By embracing these principles, the country can unleash its full economic potential, create opportunities for its citizens, and keep secure its position as a global economic leader, as well as a be model for developing economies.