Today we continue our journey in Sintetia on punk liberalism by dealing with one of the fundamental and most controversial principles of the liberal movement: economic freedom. Having laid the foundations of the groundbreaking nature of classical liberalism today, defended the key role of institutions in its implementation and analyzed its complex relationship with taxation, it is now time to reflect on the need for autonomy of individuals and businesses to make their own economic decisions, with the least possible interference from the state.
This is not the first time we have written about economic freedom in this house. In 2014 we performed an analytical pastime, which we repeat in 2016 and 2019, to put into perspective the concept of economic freedom that is defined, valued and ordered in the ranking regularly published by the Heritage Foundation. The comparative analysis of various global indicators of economic, social and human development allowed us to formulate a definition of what should constitute true economic freedom: one in which not only economic transactions are unimpeded and legally secured, but where the rest of the civil liberties enjoy a high degree of maturity in their exercise, all materializing in a prosperous, long-lived, healthy and well-educated citizenry.
Such elements constitute, nothing more and nothing less, the pillars of the liberalism we so enthusiastically defend here. However, although economic freedom has brought with it undoubted prosperity and innovation, it is essential to recognize that this freedom has certain restrictions and limitations that must be taken into account in order to ensure a balanced and equitable society.
Economic liberalism and its benefits
From a historical perspective, economic liberalism emerged in the 18th century as a reaction to mercantilism, a system based on state interventionism, trade protectionism and colonial monopoly. The first liberal economists, such as Adam Smith, David Ricardo and Jean-Baptiste Say, criticized restrictions on trade and competition, and defended free initiative, the division of labor and the law of supply and demand as the engines of progress and wealth.
From a philosophical perspective, economic freedom is based on the idea that individuals are free and equal in rights, and that they possess a rationality that allows them to pursue their own self-interest and the common good. Liberal philosophers, such as John Locke, Immanuel Kant or John Stuart Mill, argued that the state should respect and guarantee the natural rights of individuals, such as life, liberty and property, and that it should only intervene to protect them from external or internal aggressions.
Therefore, from a liberal perspective, freedom is a prerequisite for human development, and has multiple dimensions, including freedom of expression, freedom of the press, freedom of religion and the free market. The exercise of these freedoms is guaranteed within the framework of a democratic state governed by the rule of law, with respect for private property and also with constitutional separation and limitation of powers.
In a liberal economy, the market is the best instrument for allocating resources efficiently, encouraging innovation and productivity, satisfying consumer preferences and facilitating personal development:
- The market allows for the best possible allocation of resources through prices, as they reflect the relative scarcity of goods and services. Prices also convey information about consumer preferences and production opportunities, allowing producers to adapt to the needs of their environment.
- History has shown that countries with higher levels of economic freedom tend to experience greater economic growth and prosperity. The ability of individuals and businesses to freely engage in economic activities fosters individual freedom and responsibility, innovation, entrepreneurship and competition, which in turn leads to increased productivity and wealth.
- The economic autonomy of the individual in turn extends to educational, career and investment decisions, which are vital aspects of personal freedom and fulfillment.
- Finally, the market facilitates voluntary cooperation between economic agents, since every exchange is beneficial to both parties. A spontaneous social order is thus generated, based on implicit rules and mutual respect.
All that glitters is not gold
All the benefits described above would always be given if we lived in a perfect world. However, the market, like any human phenomenon, is not a perfect or fair mechanism, but is subject to failures and imperfections that require external corrective adjustments in order to prevent and mitigate the social, environmental and financial imbalances associated with such imperfections. This is where state intervention takes place.
- First of all, we know that the free market does not always generate an optimal allocation of resources, since there are situations that prevent a balance between supply and demand from being achieved, to the detriment of consumers, such as the existence of public goods, externalities, monopolies, information asymmetries and incomplete markets.
- The lack of free competition, in particular, favors the concentration of economic power in a few companies that dominate the market and abuse their position. These companies can set prices above marginal cost, reduce product quality and variety, and hinder the entry of new competitors. Unfair business practices, such as fraud, collusion and labor exploitation, can undermine free market principles. Effective regulation and antitrust laws are essential to maintain a level playing field and ensure fair competition.
- Although inequality is a natural consequence of responsible freedom, unregulated or unmitigated market failures eventually lead to excessive inequality, which can have social and political repercussions, eroding the sense of fairness and justice in society, potentially undermining the legitimacy of the liberal system and giving way to much more interventionist and authoritarian solutions. Therefore, in any modern state, social safety nets and welfare programs are needed to provide protection to those on the margins of the system, who are much more fragile in the face of changes in the economic cycle.
- Nor can we forget the overexploitation of natural resources and environmental degradation that can result from the exercise of absolute economic freedom. This is why regulations are often needed to protect the environment and ensure the long-term sustainability of resources.
However, these necessary adjustments from the public sector must be limited and proportionate to the imbalances they are intended to correct, otherwise they end up exacerbating them. Excessive State control and interventionism leads to paralysis of economic initiative, clientelism, regulatory saturation, arbitrariness and authoritarianism: distorts prices and resource allocation; reduces social equity and business competitiveness; generates perverse incentives that undermine institutional quality and, again, confidence in the democratic system; restricts individual and collective freedoms, limiting human development and innovation; creates dependency and paternalism, which discourage personal effort, social responsibility and solidarity.
All this, in turn, leads to a loss of legitimacy and credibility of the State, which hinders its capacity to solve public problems and to respond to citizens’ demands and expectations, generating a false need for greater intervention. In times of crisis, this excessive intervention ends up aggravating the situation. And back to the usual refrain: “it’s the market’s fault”.
In balance lies virtue
Economic freedom, the cornerstone of liberalism, has undoubtedly contributed to the progress and prosperity of societies around the world. However, such freedom is subject to limits that we must know and monitor, limits that arise from the need to effectively address phenomena such as excessive inequality, market failures, environmental concerns, social safety nets and the lack of real competition. Striking a balance between economic freedom and the prevention and mitigation of these constraints is the key to creating a just and equitable society.
Liberal democracy, when practiced with full awareness of these constraints, fosters economic growth, individual autonomy and long-term social progress. There is no other regime more effective for this. The challenge lies in finding the right combination of freedom, institutional quality and public intervention that allows societies to reap the benefits of liberalism and at the same time mitigate its possible maladjustments without necessarily interfering in all facets of the individual’s life. An exciting challenge worth working and fighting for. In these times, it seems even