One Graph Says it All; M. Skousen

Now, this may seem to be obvious; today we all nod our heads in agreement with this conclusion. But not everyone concurred during the postwar era. In fact, for much of the past fifty years, supporters of economic liberty were on the defensive. After World War II, laissez faire was an unwelcome phrase in the halls of government and on college campuses. Governments both here and abroad nationalized industry after in dustry, raised taxes, inflated the money supply, imposed price and exchange con trois, created the welfare state, and engaged in all kinds of interventionist mischief. In academia, Keynesianism and Marxism be came all the rage, and many free-market economists had a hard time obtaining full time positions oli college campuses. The big-government economy was viewed by the establishment as an automatic stabilizer and growth stimulator. Many top Dr. Skousen is an economist at Rollins College, Winter Park, Florida, and editor of Forecasts & Strategies, one of the largest investment news letters in the country.

economists argued that central planning, the welfare state, and industrial policy lead to higher growth rates. Incredibly, as late as 1985,Paul Samuelson (MIT)and WilliamD. Nordhaus (Yale) still declared, "The planned Soviet economy since 1928 ... has outpaced the long-term growth of the major market economies.,,2 Mancur Olson, a Swedish economist, also stated, "In the 1950s, there was, if anything, a faint ten dency for the countries with larger welfare states to grow faster."3 Henry C. Wallich, a Yale economics pro fessor and recent member of the Federal Reserve Board, wrote a whole book arguing that freedom means lower economic growth, greater income inequality, and less competition.. In The Cost of Freedom, he concluded, "The ultimate value of a free economy is not production, but freedom, and freedom comes not at a profit, but at a cost. ,,4 And he was considered a conserva tive economist!

The New Enlightenment Fortunately, the attitudes of the establish ment have gradually changed for the better. In recent years the defenders of the free market have gained ground and, since the collapse of the Berlin Wall and Soviet cen tral planning, have claimed victory over the dark forces of Marxism and socialism. Today, governments around the world are denationalizing, privatizing, cutting taxes, controlling inflation, and engaging in all 320 kinds of market reforms. And free-market economists can now be found in most eco nomics departments. In fact, almost all of the most recent Nobel Prize winners in economics have been pro-free market. Furthermore, new evidence demon strates forcefully that economic freedom comes as a benefit, not a cost. Looking at the data of the 1980s, Mancur Olson now con cludes, "it appears that the countries with larger public sectors have tended to grow more slowly than those with smaller public sectors.,,5 Contrast that with his statement about the 1950s.

Now comes the coup de grace from a new exhaustive study by James Gwartney, eco nomics professor at Florida State Univer sity, and two other researchers. They pains takingly constructed an index measuring the degree of economic freedom for more than 100countries and then compared the level of economic freedom with their growth rates over the past twenty years. Their conclusion is documented in the following remarkable graph: 20.-----------------. 15 a:~a c C> m10 .!9 5 .~ t= o Gi 5a. O~-"~ FOe B A 1995 Economic Freedom Grade If ever a picture was worth a thousand words, this graph is it. Clearly, the greater the degree of free dom, the higher the standard of living (as measured by per capita real GDP growth). 321 Nations with the highest level of freedom (e.g., United States, New Zealand, Hong Kong) grew faster than nations with mod erate degrees offreedom (e.g., United King dom, Canada, Germany) and even more rapidly than nations with little economic freedom (e.g., Venezuela, Iran, Congo).

The authors conclude, "No country with a persistently high economic freedom rating during the two decades failed to achieve a high level of income." What about those countries whose poli cies changed during the past twenty years? The authors state: "All 17 of the countries in the most improved category experienced positive growth rates .... In contrast, the growth rates of the countries where eco nomic freedom declined during 1975-95 were persistently negative.,,6 If all this is true, what of the data that seemed to demonstrate a positive correla tion between big government and economic growth in the 1950sand later? In the case of the Soviet Union, most economists now agree that the data were faulty and mislead ing. In the case of Europe, perhaps the economic incentives of rebuilding after the war overshadowed the growth of the welfare state. In other words, Europe grew in spite of, not because of, government. Once re buildingwas complete by the late 1950s,the weight of government began to be felt.

After fifty years of hard work, it is high time for FEE and the other free-market think-tanks to celebrate their untiring efforts to educate the world about the virtues of liberty. Their work is finally paying off. Let me be one of the first to say congratula tions-a job well done! D 1. Henry C. Wallich, The Cost of Freedom (New York: Collier Books, 1960), p. 146. 2. Paul A. Samuelson and WilliamD. Nordhaus, Econom ics, 12th ed. (New York: McGraw-Hill, 1985), p. 776. 3. Mancur Olson, How Bright Are the Northern Lights? (Lund University,1990), p. 10. 4. Wallich, The Cost of Freedom, p. 9. 5. Olson, How Bright Are·the Northern Lights?, p. 88. 6. James D. Gwartney, Robert A. Lawson, and Walter E. Block, Economic Freedom ofthe World: 1975-1995 (Washing ton, D.C.: Cato Institute, 1996), p. xvii.