Economic freedom is technically defined as the method of organizing economic activity characterized by personal choice, voluntary exchange coordinated by markets, freedom to enter and compete in markets, and protection of people and their property from aggression by others. Economic freedom is complex and multidimensional making it hard to measure. It is, however, a state that nations strive for.
Although economic freedom is a difficult concept to measure, in the mid-1980s the Fraser Institute of Vancouver, Canada began a project meant to measure the consistency of a nation’s institutions and policies with economic freedom, which eventually lead to the development of the Economic Freedom of the World (EFW) index. The EFW index utilizes forty-two components to measure a nation’s institutions and policies with personal choice, freedom of exchange, and protection of private property.
For a nation to achieve a high EFW rating, it must provide secure protection of privately owned property, enforcement of contracts, and a stable monetary system. In addition, it must also keep taxes low, refrain from creating barriers to domestic or international trade, and allow markets rather than governments to allocate goods and resources, all of which are very contributive to an economy’s success and freedom. For instance, low taxes encourage prices to operate more consistently at their equilibrium level or the point at which the demand for a good or service meets the supply for that good or service. In addition, allowing free trade both domestically and internationally allows for specialization and comparative advantage. It allows one country to specialize in producing that good or resource that comes with the least cost of production to them and then to trade with other countries for those goods and resources that are costly for them to produce, thus, benefiting all. Moreover, allowing markets to operate freely under the invisible hand rather than having the government regulating everything encourages benefit due to the fact that people motivated by their own self-interest will undertake activities that will prove advantageous to all.
Economic freedom is based on free market activities. Statistics prove that such methods prove successful too. More capitalist societies such as the United States tend to rank higher in the EFW index. Overall, it is safe to assume, and is statistically proven, that the more free and unlimited a country’s economy is, the more successful the country is as well. Therefore, economic freedom is essential to economic growth and prosperity.