Why are some places rich and others poor?
Why are some big cities bright and others dark?
These are some of the most important and enduring puzzles
in the history of economics.
Adam Smith saw these same contrasts in 1776,
and asked the same questions in his book,
“The Wealth of Nations.”
For Smith, the source of these differences was simple:
economic freedom.
In his own words, “Little else is requisite
to carry a state to the highest degree of opulence
from the lowest barbarism
but peace, easy taxes, and a tolerable administration of justice.”
Was Smith right that a limited government that keeps the peace
and administers justice is all we need for prosperity?
How would we know?
The "Economic Freedom of the World” report
measures how a country’s policies are consistent with
personal choice, private property, and voluntary exchange -
the economic system that Adam Smith advocated.
We can use these measures
to rank a country’s economic freedom
and then see how freedom is related to growth.
Let’s take these rankings and separate the counties into 4 groups,
from the least free to the most free.
The countries with the lowest economic freedom
have the lowest GDP per capita, but the freest countries
enjoy a standard of living over 8 times higher.
If you think that these results are skewed
by factors like geography or culture,
let’s look at the Korean peninsula.
North and South Korea have similar
culture, geography, and natural resources.
Now, let’s look at the peninsula at night. What happened?
In 1953, Korea separated.
The South chose greater economic freedom
while the North eliminated nearly every form of individual liberty.
Sixty years later, the average income in South Korea
is 10 times higher than in the North.
Now, let’s look a little closer to home.
Maryland versus West Virginia.
According to the report “The Economic Freedom of North America,”
Maryland is the 18th freest state, while West Virginia is 40th. Why?
The West Virginia tax code
makes it difficult for businesses to operate.
For example, the buildings you see in this photo,
on the Maryland side, those belong to a company
that was originally founded in West Virginia.
It moved across the border so its taxes and costs would be lower,
allowing it to grow, create more jobs, and increase prosperity.
This happens all over the state,
and these differences in prosperity are measurable.
The result is that per-capita incomes
are over $10,000 higher in Maryland than in West Virginia.
Clearly, they should have followed Adam Smith’s advice.
He got it right.
Individual freedom in economic life leads to economic progress.
So if you care about growth and prosperity,
you can’t ignore the importance of economic freedom.