Business freedom and worldwide quality of life

In 2006, the World Bank published an extensive inventory of wealth sources in 118 nations.  Based on their analysis, natural resources like arable land and petroleum reserves contribute very little to the overall wealth of developed nations like the U.S.  Most of the wealth in developed nations can be attributed to "intangibles" like education and rule of law.  Reason magazine provides a useful summary for those who do not have time to read the 172-page report.

The World Justice Project quantified one of these intangibles by generating a Rule of Law Index based on the following nine components: constraints on government power, absence of corruption, open government, fundamental rights, order and security, regulatory enforcement, civil justice, criminal justice, and informal justice.  Since the World Bank attributes 57% of intangible capital to the rule of law, it is reasonable to assume that intangible capital is proportionate to scores published by the World Justice Project.

In earlier articles, I showed how minorities and blue-collar workers benefit most in states with a business-friendly "regulatory environment" as ranked by Forbes.  Similarly, the Heritage Foundation published international scores for "business freedom," which make up one of 12 components in its annual Index of Economic Freedom.  According Fig. 1, the benefits of business freedom appear to extend far beyond the availability of blue-collar jobs.


Fig. 1:  The x-axis is a component of the Heritage Foundation’s overall index of economic freedom.  The y-axis represents scores from the World Justice Project.  The data is limited to nations scored by both organizations.  Ch. = China,  In. = India.

Based on archived data from Heritage, the U.S. declined from 10th to 18th place for business freedom during the eight years of the Obama administration (seven places below Sweden!).  This is of no concern to progressives because they often believe that business-friendly policies are at odds with the environment and social welfare.  Nevertheless, those who are dismissive of overregulation cannot ignore the fact that all the nations in the upper right portion of Fig. 1 provide a far better quality of life.  What did Denmark, Norway, Finland, and New Zealand do to rank among the top 10 for both business freedom and rule of law? 

The aforementioned data come as no surprise to conservatives, who believe that business freedom goes hand in hand with intangible capital, but conservatives might be surprised by the lack of correlation between government spending and business freedom in Fig. 2.  It is beyond the scope of this article to discuss how business-friendly policies can coexist with big government.  Nevertheless, these results could serve as an opportunity to grow the consensus on regulatory reform.  After all, if fiscal restraint is not a precondition for business freedom, then it might be easier to persuade moderate liberals to question the pro-regulatory talking points of their more progressive colleagues.  Downsizing the government is just as important, but this battle needs to be fought separately.


Fig 2: The graph represents two components of the Heritage Foundation's index of economic freedom.  Government spending scores are obtained by subtracting from 100, so a higher score for government spending indicates that government expenditures make up a smaller portion of GDP. 

As the Trump administration rolls back job-killing regulations of the Obama era, some reporters wring their hands over safety and the environment.  Even if you believe that Republicans do not care about public safety or "want dirtier (and) dirtier water," you still must acknowledge that there is a point at which the cost of compliance exceeds overall benefits to society (in environmental science, we call it the "law of diminishing returns").  If everyone takes a closer look at the policies of nations near the top right portion of Fig. 1, then both sides might agree on where to draw the line on regulations.  Even though liberals will look to Finland and libertarians will look to Hong Kong as their models, they might at the very least come together on the need to minimize the administrative barriers to free enterprise.

Antonio Chaves teaches biology at a local community college.  His interest in economic and social issues stems from his experience teaching environmental science.

In 2006, the World Bank published an extensive inventory of wealth sources in 118 nations.  Based on their analysis, natural resources like arable land and petroleum reserves contribute very little to the overall wealth of developed nations like the U.S.  Most of the wealth in developed nations can be attributed to "intangibles" like education and rule of law.  Reason magazine provides a useful summary for those who do not have time to read the 172-page report.

The World Justice Project quantified one of these intangibles by generating a Rule of Law Index based on the following nine components: constraints on government power, absence of corruption, open government, fundamental rights, order and security, regulatory enforcement, civil justice, criminal justice, and informal justice.  Since the World Bank attributes 57% of intangible capital to the rule of law, it is reasonable to assume that intangible capital is proportionate to scores published by the World Justice Project.

In earlier articles, I showed how minorities and blue-collar workers benefit most in states with a business-friendly "regulatory environment" as ranked by Forbes.  Similarly, the Heritage Foundation published international scores for "business freedom," which make up one of 12 components in its annual Index of Economic Freedom.  According Fig. 1, the benefits of business freedom appear to extend far beyond the availability of blue-collar jobs.


Fig. 1:  The x-axis is a component of the Heritage Foundation’s overall index of economic freedom.  The y-axis represents scores from the World Justice Project.  The data is limited to nations scored by both organizations.  Ch. = China,  In. = India.

Based on archived data from Heritage, the U.S. declined from 10th to 18th place for business freedom during the eight years of the Obama administration (seven places below Sweden!).  This is of no concern to progressives because they often believe that business-friendly policies are at odds with the environment and social welfare.  Nevertheless, those who are dismissive of overregulation cannot ignore the fact that all the nations in the upper right portion of Fig. 1 provide a far better quality of life.  What did Denmark, Norway, Finland, and New Zealand do to rank among the top 10 for both business freedom and rule of law? 

The aforementioned data come as no surprise to conservatives, who believe that business freedom goes hand in hand with intangible capital, but conservatives might be surprised by the lack of correlation between government spending and business freedom in Fig. 2.  It is beyond the scope of this article to discuss how business-friendly policies can coexist with big government.  Nevertheless, these results could serve as an opportunity to grow the consensus on regulatory reform.  After all, if fiscal restraint is not a precondition for business freedom, then it might be easier to persuade moderate liberals to question the pro-regulatory talking points of their more progressive colleagues.  Downsizing the government is just as important, but this battle needs to be fought separately.


Fig 2: The graph represents two components of the Heritage Foundation's index of economic freedom.  Government spending scores are obtained by subtracting from 100, so a higher score for government spending indicates that government expenditures make up a smaller portion of GDP. 

As the Trump administration rolls back job-killing regulations of the Obama era, some reporters wring their hands over safety and the environment.  Even if you believe that Republicans do not care about public safety or "want dirtier (and) dirtier water," you still must acknowledge that there is a point at which the cost of compliance exceeds overall benefits to society (in environmental science, we call it the "law of diminishing returns").  If everyone takes a closer look at the policies of nations near the top right portion of Fig. 1, then both sides might agree on where to draw the line on regulations.  Even though liberals will look to Finland and libertarians will look to Hong Kong as their models, they might at the very least come together on the need to minimize the administrative barriers to free enterprise.

Antonio Chaves teaches biology at a local community college.  His interest in economic and social issues stems from his experience teaching environmental science.