Scholarly Comments on Academic Economics

Leave Size of Government Out of the Measurement of Economic Freedom—Put Quality of Government In

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Abstract

Freedom is usually defined as the opportunity to choose by the absence of inhibitions and the availability of options. Economic freedom is freedom in economic decisions. The Fraser Institute rejects this definition and wants to put a high priority on the absence of inhibitions caused by government activities. The Institute finds that economic freedom can be defined in a formative way, meaning that the constituent dimensions define what it is, and that everybody is free to decide what these dimensions are. The Institute pays attention to five dimensions to be used as items in the measurement. Three items are supposed to contribute to economic freedom: rule of law and protection of property, sound money, and freedom to trade internationally. Two items are supposed to reduce economic freedom: regulation and size of government. The Fraser Institute is reluctant to assess the validity of this measurement of economic freedom as just the opportunity to choose. It is, however, an interesting and informative exercise to do so. I find that the measurement by the Fraser Institute of economic freedom, interpreted as the traditional opportunity to choose, is very reasonable. The measurement can be substantially improved, however, if we leave the size of government out as one of the items. This is understandable because size of government has a positive correlation with the results of the three positive items, and not a negative correlation as assumed. Another argument to leave out the size of government is that the correlation of the size of governments with happiness and freedom in general depends heavily on the quality of governments. This correlation is positive if the quality is good and negative if the quality is bad. These research findings are perhaps trivial, but nevertheless important. It is therefore an attractive option to substitute the size of governments with the quality of governments in the measurement of economic freedom. Another argument, to pay more attention to the quality of government is that the quality is more important than the size, in view of current problems such as pandemics, climate change, and aggression by bad governments.

This article is a response to On Whether the Size of Government Belongs in Economic Freedom Indices by Ryan H. Murphy (EJW, March 2022).