How Political Rights and Civil Liberties Affect Open Markets Morgan Shields This Paper Was Written for Dr
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POLITICAL FREEDOM AND ECONOMIC FREEDOM: How Political Rights and Civil Liberties Affect Open Markets Morgan Shields This paper was written for Dr. Lightcapís Senior Seminar course. Introduction Famous economist Milton Friedman has claimed that democracy and capitalism are inherently linked. This association of economic freedom and political freedom is important to understand and assess for multiple reasons. These reasons can be approached from both a business and economic per- spective and also from a political perspective. From a business perspective, multinational corporations (MNCs) and business leaders, who are looking for countries to invest in, should be interested in the association. When looking for a market, if the association is strongly enough correlated, MNCs should be able to look at the political freedom of a country and automatically assume that if the political freedom in that country is high, the economic freedom in that country is also high. This association, if strong enough, provides a powerful argument “...for pursuing an expansion of global trade” (Griswold, 2004: 1) From a political perspective this association is important in cases such as Iraq ñ instead of invading the country and democratizing it, what if instead we had pushed for a free-trade agreement? Would this have had the same, if not better, effect on creating a democracy in the country? If the association is strong enough, there might be implications for this. If the relationship is strong enough, there could also be implications for countries that are in the process of democratizing. While building a democracy in a country, one must also build enough economic freedom to maintain that democracy. Nation building must consist of both political and economic freedom simultaneously ñ if the associa- tion is strong enough. If the association that this paper is trying to test holds true, it is also impor- tant for anyone who has an interest in enhancing and protecting democracy. It is important to understand the association between democracy and economic freedom because democracy is a multifaceted and complex system that is not simply a political (government) system—it is an economic system too. This paper tries to make the case that the association between democracy and economic freedom is strong enough to allow for these assumptions on the part of economists, business leaders, and world leaders. Literature Review In his classic work, Capitalism and Freedom, Milton Friedman (2002, 7) discuses the very subject of democracy and economic freedom. He starts 173 Political Freedom and Economic Freedom out in his first chapter by saying that, “It is widely believed that politics and economics are separate and largely unconnected...” While the masses may not believe that the two factors are linked or even think about the connection, according to Milton Friedman these two factors are not at all disconnected. Friedman (2002, 8) believes that you cannot have one without the other. He states that “Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom”. Friedman (2002, 9) believes that economic freedom (capitalism) leads to and maintains political freedom (democracy). Economic freedom is impor- tant for democracy because it is “Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also pro- motes political freedom because it separates economic power from political power and in this way enables the one to offset the other.” The reason that economic freedom leads to and maintains political free- dom, according to Friedman (2002, 13) is because: Fundamentally, there are only two ways of co-ordinating the economic activities of millions. One is central direction involving the use of co- ercion ñ the technique of the army and of themodern totalitarian state. The other is voluntary co-operation of individuals - the technique of the market place... Exchange can therefore bring about co-ordination without coercion. A working model of a society organized through voluntary ex- change is a free private enterprise exchange economy - what we have been calling competitive capitalism. Therefore, “So long as effective freedom of exchange is maintained, the cen- tral feature of the market organization of economic activity is that it prevents one person from interfering with another in respect of most of his activities” (pg. 14). Economic freedom allows for political freedom because (as we have all heard) money is power ñ what a free market and economic freedom does is to remove “...the organization of economic activity from the control of political authority....It enables economic strength to be a check to political power rath- er than a reinforcement” (pg. 15). When kept separate from political power, economic power serves as a check and balance to government and those in power. Another economist, Jagdish Bhagwati (2007, 93) states that “Globaliza- 174 Morgan Shields tion promotes democracy both directly and indirectly. The direct link comes from the fact that rural farmers are now able to bypass the dominant classes and castes by taking their produce directly to the market....In turn, this can start them on the way to becoming more independent actors, with democratic aspirations, in the political arena.” In his work, Jagdish Bhagwati (2007, 3) de- fines globalization as “...economic globalization [which] constitutes integration of national economies into the international economy through trade, direct for- eign investment (by corporations and multinationals), short-term capital flows, international flows of workers and humanity generally, and flows of technol- ogy...” Bhagwatiís (2007, 94) theory is straightforward —it states that “...Global- ization leads to prosperity, and prosperity in turn leads to democratization of politics with the rise of the middle class.” Bhagwati (2007, 94) cites historical cases to backup his opinion that economic globalization leads to and helps to maintain political freedom ñ he cites Russia and China. He states that: The strong belief that economic prosperity, engineered through global- ization as also the fostering of economic freedoms and associated use of markets rather than central planning, will promote democracy has also been at the heart of a different impassioned debate, contrasting the Russian and the Chinese experience. Russia under Gorbachev opted for glasnost (political freedom and democracy) before perestroika (economic restructuring, including an end to autarky); China opted for economic change while keeping democratization firmly away. Chinaís success and Russiaís astonishing failure have led many to think both that democratization should follow, not preceded, economic reforms, and that...the prosperity and the middle classes that follow the success of economic reforms will indeed lead to democratization down the road. Economists such as Bhagwati and Friedman have long hypothesized that capitalism and democracy are inherently linked. There have also been other economists and social scientists that have looked into this linkage. In the next section of this paper, several of these previous studies on the relationship be- tween democracy and capitalism will be discussed and analyzed further. Previous Studies There have been several studies done already on the association of politi- cal freedom and economic freedom. These studies have mainly dealt with (1) the effect that political freedom has on economic growth, (2) studies pertaining to political freedom and GDP, and (3) studies pertaining to the different eco- nomic and democratic effects between developed and developing countries. In an interesting paper, Feng (1997, 398) asserts”...that democracy is likely to have a significant indirect effect on growth through its impact on politi- 175 Political Freedom and Economic Freedom cal stability.” He states that his findings suggest that: Democracy tends to have a positive effect on economic growth by in- hibiting extra-constitutional political change and favouring constitutional political change. Democracy provides a stable political environment which reduces stability; democracy offers flexibility and the opportunity for substantial political change within the political system. Together with the positive indirect effects on growth of democracy through investment and education, this juxtaposition of macropolitical certainty and micropo- litical adjustability may be regarded as the ultimate basis for sustainable economic growth and expansion (pg. 414). Niclas Berggren (2003, 205) agrees, “Free markets are conducive to growth, which is why measures such as privatization, freedom to establish new busi- nesses, freer pricing, more flexible contract laws, and less regulation of domes- tic and international trade and of capital transactions are important.” He also states “An impartial and strong judicial system that protects private-property rights and upholds contracts and agreements is central for a strong economic development” (pg. 205). In an interesting study done by David Lake and Matthew A. Baum (2003, 333), the authors focus on democracy!s direct effect on