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September 14, 2005 / Gabriel

The Human Desire for Free Markets

All economic systems can be placed on a spectrum ranging from a fully centralized economy (e.g. communism) all the way to a fully decentralized economy (free-market capitalism), with a variety of other systems falling somewhere in between (e.g. socialism).

In a previous essay, the thesis advanced was that this range also represents a spectrum between economies based on fear versus those based on happiness.

Communism                                                                                                     Capitalism

<———————————————————————————————————————>

(Fear-based)                                                                                       (Happiness-based)

In a nutshell, the idea is that all transactions in capitalistic economies take place only when both parties are happier as a result of an exchange, whereas in centralized economies the only way the state can enforce its economic decisions for transactions is through the threat of force for non-compliance, or fear.

This is a great idea in theory, but is there any way to validate its truth in practice?

If the thesis is correct, then we should expect to consistently see people wanting to move from fear-based economies to happiness-based economies.

According to the Index of Economic Freedom[i], here are the 20 countries with the least economic freedom:

Congo, Republic of the

Vietnam

Guinea-Bissau

Syria

Suriname

Bangladesh

Nigeria

Belarus

Tajikistan

Haiti

Venezuela

Uzbekistan

Iran

Cuba

Laos

Turkmenistan

Zimbabwe

Libya

Burma

Korea, North

There is little doubt that these are not typically countries that people want to move to. In fact, in a number of them the economic repression is so extreme that it is even against the law to leave the country.

Net migration statistics confirm that these countries have a negative migration outflow of minus 1.12 per thousand[ii]. In other words, every year these countries see 1.12 more people moving to another country per 1,000 in population than people from another country moving in. Clearly, this represents overall dissatisfaction with life in that country (especially since these numbers would be higher if it wasn’t illegal to leave some of the countries).

On the flip side, the 20 most economically free countries in the world are:

Hong Kong

Singapore

Luxembourg

Estonia

Ireland

New Zealand

United Kingdom

Denmark

Iceland

Australia

Chile

Switzerland

United States

Sweden

Finland

Canada

Netherlands

Germany

Austria

Bahrain

Not surprisingly based on our thesis, these countries are much more desirable to live in and have a positive net migration inflow of 3.81 per thousand. And unlike those countries with extremely centralized economies where it was illegal to leave, in most of the economically free countries there are limits on immigrants allowed to move in due to overly high demand. If the restrictions weren’t there on either side we would see an even bigger difference in net migration.

So our theory is holding: the most extreme centrally managed economies see either a net outflow of their population (or make it against the law to leave), while the most economically free countries see a strong net inflow of people from other countries.

This principle holds true not just for the extremes. Of the 154 countries that are ranked by the Index of Economic Freedom, comparing the top 77 with the bottom 77 you also see that the top half (more economically free) has an average positive net migration inflow of 0.83 per thousand, while the bottom half (less economically free) has an average negative net migration of minus 0.57 per thousand.

Migration patterns of people around the world clearly show that people consistently move from centrally-managed economies to free-market economies (and in fact the results of the analysis are statistically significant, with a P value of 0.0220)

Now, some may advance the argument that only rich countries can afford to be economically free, and thus it’s normal to see migration from poorer countries to richer countries. Let’s put aside the fact that this ignores the fact that rich countries are rich precisely because of their economic policies and take this at face value.

Here are the 22 “first-world” countries of Western Europe, Australia, New Zealand, the United States and Canada, ranked by order of most economically free:

Luxembourg

Ireland

New Zealand

United Kingdom

Denmark

Iceland

Australia

Switzerland

United States

Sweden

Finland

Canada

Netherlands

Germany

Austria

Belgium

Italy

Norway

Spain

Portugal

France

Greece

All of these countries are among the most free market-based in the world, including 7 of the top 10. Even the three least economically free of this select group (Portugal, France and Greece, ranking at 37, 44 and 59, respectively) are well above average in their free-market orientation.

If our thesis is correct, even among these we should be seeing migration from less economically free to more economically free. After all, if the spectrum analogy holds true, people will always gravitate towards the greater happiness found in more free-market economies.

Of these 22 first-world countries, the 11 most economically free have an average net migration rate of 2.68 per thousand, while the 11 less economically free have an average net migration rate of 2.01. In other words, even among these countries the most economically free show 33% more positive net migration than their less free peers. The principle holds.

Even within a country, we can see migration from more restrictive to more free market policies. In the United States, net migration is 23% greater to states that have a conservative governor than to states with a liberal governor[iii], and as a general rule the conservative political platform is more pro-free market.

Even at the county level, 97 of the top 100 fastest growing counties in America voted conservative, or more free market, in the last election[iv]. Again, the principle holds.

By analyzing the net migration of millions of people making individual decisions every year in every country around the world, we are able to objectively validate the thesis: that on the economic spectrum ranging from centrally-managed economies all the way to decentralized free market economic policies, people will always tend to shun central planning and gravitate towards the free market. In all cases, people are happier with freer markets and repeatedly demonstrate this by their choice of where to live.


[i] Source: 2005 Index of Economic Freedom

[ii] Source: CIA World Factbook

[iii] Source: National Governor’s Association & U.S. Census Bureau 2000 – 2004 Migration Statistics

[iv] Source: Los Angeles Times, November 23, 2004

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2 Comments

Leave a Comment
  1. Jonathan Sinton / Nov 6 2008 12:25 pm

    Don’t almost all of the list of 20 most economically free countries (and most desirable to live in), have socialized health care systems? The USA seems like the exception to the rule on that, and it is not at the top of the list.

  2. Gabriel Openshaw / Nov 6 2008 1:04 pm

    Right. Socialized medicine is just one part of the measure of economic freedom.
    One thing to keep in mind is that many of the countries on this list have been able to “afford” heavier healthcare outlays in large part by slashing their defense budgets and implicitly relying on the U.S. for their military protection. In that sense, the American taxpayer is indirectly subsidizing social outlays in other countries.
    Here’s an overview of what these indices measure and how they’re calculated: http://en.wikipedia.org/wiki/Economic_freedom

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