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SPECIAL REPORT No. 114 | JULY 31, 2012from CENTER for INTERNATIONAL TRADE AND ECONOMICS

Commemorating Milton Friedman’s 100th Birthday

with the Index of Economic Freedom

Free-market economics meets free-market policies at The Heritage Foundation’s Tenth Anniversary dinner in 1983. Nobel Laureate Milton Friedman and his wife Rose with President Ronald Reagan and Heritage President Ed Feulner.

Commemorating Milton Friedman’s 100th Birthday with the Index of Economic FreedomAnthony B. Kim and Ambassador Terry Miller

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Photo on the Cover—© Chuck Nacke / Alamy

This paper, in its entirety, can be found at:http://report.heritage.org/sr114 Produced by the Center for International Trade and Economics (CITE)

The Heritage Foundation214 Massachusetts Avenue, NEWashington, DC 20002(202) 546-4400 | heritage.org

Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress.

About the Authors

Anthony B. Kim is a Senior Policy Analyst in the Center for International Trade and Economics (CITE) at The Heritage Foundation.

Ambassador Terry Miller is Director of CITE, and the Mark A. Kolokotrones Fellow in Economic Freedom, at The Heritage Foundation.

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SPECIAL REPORT | NO. 114JULY 31, 2012

July 31, 2012, is the one hundredth anniversary of Milton Friedman’s

birth. Friedman, “the most influen-tial economist of the second half of the 20th century, possibly all of it,”1 was the champion of the powerful idea that free markets and individual choice lead society to ultimate pros-perity and overall well-being. His contributions to economic theory, and the conviction with which he espoused them, made him truly an extraordinary giant among political and economic thinkers.

Friedman’s ideas and writings earned him the Nobel Prize in eco-nomics, but his greatest legacy is unquestionably the improvement in living standards of people around the globe who have benefited from the implementation of his theories, even though they may have never read one of his books, attended one of his lectures, or even heard his name. As Friedman’s ideas have been

translated into public policy in coun-tries around the globe, they have served as the invisible hand guid-ing—no, allowing—millions to pursue their individual dreams, endowed with greater economic and political freedom. In reviewing Friedman’s monumental Capitalism and Freedom five decades ago, The Economist mag-azine called the book “ideal reading for politicians of either party in this country, not because it would con-vince them, but because it challenges the reader to sort out his own ideas more fundamentally.”2

The Heritage Foundation, whose policy vision is “to build an America where freedom, opportunity, prosper-ity, and civil society flourish,” is proud and honored to cherish and spread the legacy of Friedman’s powerful ideas for innovative policy solutions. As Dr. Edwin Feulner, president of The Heritage Foundation, pointed out in a tribute to Friedman in 2006:

Over the last 30 years, Friedman enjoyed a close relationship with The Heritage Foundation. He was the featured speaker at the 1979 dedication of our headquarters building, our 1983 10th anniversary “Heritage 10” celebration, and other occasions.

Commemorating Milton Friedman’s 100th Birthday with the Index of Economic FreedomAnthony B. Kim and Ambassador Terry Miller

AbstractJuly 31, 2012, is the one hundredth anniversary of the birth of the great economist and thinker Milton Friedman. It was Friedman who first suggested that the economic freedom of countries be measured and monitored, and The Heritage Foundation has been doing so since 1995 in its Index of Economic Freedom. Friedman’s most important legacy is unquestionably the improvement in living standards of hundreds of millions of people around the world thanks to the implementation of his theories. Unfortunately, the policies of an increasingly leviathan government have placed America on a path that diverges sharply from its historical quest for greater freedom. At Milton Friedman’s centennial, Americans should renew their commitment to economic freedom, as well as their confidence that a people who are free to choose will ensure their own future well-being.

Illustration of Milton Friedman by J. William Middendorf II, Heritage Foundation Trustee

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COMMEMORATING MILTON FRIEDMAN’S 100TH BIRTHDAY WITH THE INDEX OF ECONOMIC FREEDOM

In 1998, I awarded Rose and Milton Friedman The Heritage Foundation’s Clare Boothe Luce Award, our most distinguished honor. Friedman and Heritage have been closely linked in the policy arena for a very long time.3

Indeed, many of Friedman’s per-spectives and policy ideas are not only far-reaching, but truly enduring throughout generations via his own publications, as well as through oth-ers’ countless scholarly researches, whose underlying theses trace back to Friedman’s insights.

The Heritage Foundation’s numerous innovative research publi-cations are no exception. Friedman’s economic, philosophical, and politi-cal writing has inspired decades of Heritage work in such diverse areas as welfare reform, competition in education, budget reform, and free trade.

The Index of Economic Freedom: Friedman’s Wisdom Around the World

People across the globe are partic-ularly indebted to Milton Friedman for his role in championing economic freedom, and that effort lives on in The Heritage Foundation’s annual Index of Economic Freedom. Friedman elaborated “the role of competitive capitalism—the organization of the bulk of economic activity through private enterprise operating in a free

market—as a system of economic free-dom.” Indeed, it was Friedman who first suggested that economic freedom of countries around the world be mea-sured and monitored.4

The Index, a data-driven policy guide that empirically evaluates countries’ economic policies and demonstrates why economic free-dom matters, was first published in 1995. Since then, the Index has con-tinued to echo many of Friedman’s insights on the power of freedom, documenting reform efforts, and monitoring ups and downs of eco-nomic freedom around the world. Dr. Kim Holmes, the founding editor of the Index of Economic Freedom, observed that the Index is “not only the first comprehensive economic freedom index, but one that has con-tinued to grow in importance ever since,” offering “many examples of what economic freedom can do.”5

To many who have long tracked economic freedom, the years since 2008 have served as a vivid reminder of the continuing struggle between the state and the free market. In times of uncertainty, it may be natural that people will look to their governments for answers. Yet the long-term solutions to our current economic problems do not lie in more government controls and regu-lations. They lie in a return to free-market principles.

Perhaps the most critical les-son of the past four years of

ever-growing government intrusion into America’s free-market system is that the fundamental superiority and value of economic liberty must be steadfastly reiterated, or even re-taught, to many political leaders and policymakers.

The Index offers plenty of evi-dence of the lasting values of free-dom that Milton Friedman so keenly articulated and advocated.

Greater Prosperity. Friedman told an interviewer in 1979:

In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about … they have had capitalism and largely free trade. … So that the record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enter-prise system.6

As the Index has repeatedly illus-trated over the past 18 years, the rela-tionship between economic freedom and prosperity is strongly positive. Gross domestic product (GDP) per capita is much higher in countries with greater economic freedom. On average, economies rated “free” or

“mostly free” enjoy incomes that are more than double the average levels in all other countries, and more than

1. “Milton Friedman: A Heavyweight Champ, at Five Foot Two,” The Economist, November 23, 2006, http://www.economist.com/node/8313925 (accessed July 24, 2012).

2. “A Tract for the Times,” The Economist, February 16, 1963, http://www.economist.com/node/8311321?story_id=8311321 (accessed July 24, 2012).

3. Edwin J. Feulner, “Feulner on Friedman: A Tribute,” Heritage Foundation WebMemo No. 1266, November 29, 2006, http://s3.amazonaws.com/thf_media/2006/pdf/wm1266.pdf.

4. Lee Edwards, The Power of Ideas: The Heritage Foundation at 25 Years (Ottawa, IL: Jameson Books, 1997), p. 152.

5. Kim R. Holmes, “Promoting Economic Freedom at the United Nations,” Heritage Foundation Lecture No. 823, February 24, 2004, http://s3.amazonaws.com/thf_media/2004/pdf/hl823.pdf (accessed July 24, 2012).

6. “The Phil Donahue Show,” 1979. See more in Travis Pantin, “Milton Friedman Answers Phil Donahue’s Charges,” The New York Sun, November 12, 2007, http://www.nysun.com/business/milton-friedman-answers-phil-donahues-charges/66258/ (accessed July 24, 2012). Emphasis added.

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seven times higher than the incomes of “repressed” economies (see Chart 1).

More important, a sustained com-mitment to economic freedom is criti-cal to ensuring economic growth and prosperity. Not only is a higher level of economic freedom clearly associ-ated with a higher level of per capita income, but countries’ improvements in economic freedom also increase their income growth rates, ensuring

economic and social progress (see Chart 2).

Also notably, as Friedman sug-gested, true economic freedom requires free markets at home and free trade around the world. Trade drives prosperity, providing greater economic opportunity in countries that choose to embrace free-trade policies. On average, economies with the most trade freedom have the highest per capita GDP (see Chart 3).

Promoting Well-Being. Of course, life is not just about money or wealth. As Friedman observed: “It is in the free societies that there has been a far greater development of the nonmaterial, spiritual, artistic aspects of well-being.”7

7. Milton Friedman, Free Minds and Free Markets: Twenty-Five Years of Reason (San Francisco: Pacific Research Institute, 1993). Emphasis added.

$100,000

$10,000

$1,000

$10020 30 40 50 60 70 80 90 100

GDP PER CAPITA (PURCHASING POWER PARITY)

OVERALL SCORE IN THE 2012 INDEX OF ECONOMIC FREEDOM

Each circle represents a nation in the Index of Economic Freedom

POPULATION

Correlation = 0.65R2 = 0.42

Trend Line1 billion

500 million250 million100 million

10 million60 or less: “Mostly Unfree” or “Repressed”

China

India

CHART 1

Sources: Terry Miller, Kim R. Holmes, and Edwin J. Feulner, 2012 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2012), http://www.heritage.org/index; World Bank Group, World Development Indicators Online, http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,menuPK:476823~pagePK:64165236~piPK:64165141~theSitePK:469372,00.html (accessed November 4, 2011); and International Monetary Fund, World Economic Outlook Databases, http://www.imf.org/external/ns/cs.aspx?id=28 (accessed November 4, 2011).

Greater Economic Freedom, Greater Prosperity

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Quintile1st 2nd 3rd 4th 5th

3.7%

2.9% 2.8%

2.3%2.1%

NATIONS IN THE 2012 INDEX OFECONOMIC FREEDOM

Improvement in Economic Freedom Scores

Most Least

CHART 2

Sources: Terry Miller, Kim R. Holmes, and Edwin J. Feulner, 2012 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2012), www.heritage.org/index; World Bank Group, World Development Indicators Online, http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,menuPK: 476823~pagePK:64165236~piPK:64165141~theSitePK:469372,00.html (accessed November 4, 2011); and International Monetary Fund, World Economic Outlook Databases, http://www.imf.org/external/ ns/cs.aspx?id=28 (accessed November 4, 2011).

TEN-YEAR GROWTH RATE IN PER CAPITA INCOME

Economic Freedom andEconomic Growth

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In case after case, Friedman keen-ly observed that government inter-ventions in free markets are not only futile, but tend to generate the exact opposite outcomes of their intended purpose. He called this unseen force that makes things go terribly and perversely wrong with government social programs the “invisible foot.”8

It is economic freedom that effec-tively improves overall well-being for a greater number of people. The Index has documented various tan-gible non-materialistic benefits of

living in freer societies administrat-ed by limited government.

As Friedman witnessed again and again, not only are higher levels of economic freedom associated with higher material prosperity, greater economic freedom also strongly cor-relates with overall well-being, which takes into account such factors as health, education, and personal safety (see Chart 4).

Achieving Political Freedom. As Friedman wrote:

Economic freedom plays 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.”9

The Index has empirically explored this critical relationship

8. Feulner, “Feulner on Friedman,” and “Free to Choose: Volume 1—The Power of the Market,” FreeToChoose.TV, 1980 (original series), http://www.freetochoose.tv/ (accessed July 24, 2012).

9. Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962). Emphasis added

1

21

41

61

81

101

121416181101

RANK IN 2011 INDEX OF ECONOMIC FREEDOM

Each dot represents a nation in the Index of Economic Freedom


Trend Line

CHART 4

RANK IN LEGATUM PROSPERITY INDEX

Economic Freedom Promotes Overall Well-Being

Sources: Terry Miller and Kim R. Holmes, 2011 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2011), http://www.heritage.org/index; and 2010 Legatum Prosperity Index, http://www.prosperity.com/downloads/ 2010LegatumProsperityIndexBrochure.pdf (accessed November 1, 2010).

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TRADE FREEDOM SCORES IN THE 2012 INDEX OF ECONOMIC FREEDOM

Free Trade Drives Prosperity$29,406

$12,199

$3,888 $3,615

Top1/4

Second1/4

Third1/4

Bottom1/4

CHART 3

Source: Terry Miller, Kim R. Holmes, and Edwin J. Feulner, 2012 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2012), http://www.heritage.org/index.

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between economic freedom and political freedom or democratic governance. As illustrated in Chart 5, there is a strongly positive cor-relation between the two, and little doubt that higher levels in either generally have a positive impact on the other.

Entrepreneurial Dynamism. Economic freedom makes it possible for independent sources of wealth to counterbalance political power and to cultivate a pluralistic society. In other words, economic freedom underpins and reinforces political liberty and market-based democracy. As Friedman stated, “The greatest

advances of civilization, whether in architecture or painting, in science and literature, in industry or agricul-ture, have never come from centralized government.”10

As the Index has demonstrated, economic freedom is highly corre-lated with entrepreneurial activity in the private sector, creating new jobs and increasing opportunities and choices for individuals in advanc-ing their own well-being (see Chart 6). When individuals are allowed to decide themselves how best to pursue their dreams and aspira-tions, their collective achievements driven by individual choices, not by

government mandates, add up to a better society for all.

To put it differently, economic freedom is positively linked to innovation that is often nurtured by free enterprise, not by central plan-ning (see Chart 7). The proven path to revitalizing economic growth is to advance economic freedom by promoting policies that generate a virtuous cycle of innovation, job cre-ation, and productivity growth that, in turn, helps to advance social and economic evolution.

10. Ibid. Emphasis added.

CHART 5

EIU DEMOCRACY INDEX SCORE

Economic Freedom and Democratic Governance

0

2

4

6

8

10

12

20 40 60 80 90705030

Sources: Terry Miller and Kim R. Holmes, 2011 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2011), http://www.heritage.org/index; Economist Intelligence Unit, EIU's Democracy Index, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf (accessed November 4, 2010).

Each dot represents a nation in the Index of Economic Freedom

2011 INDEX OF ECONOMIC FREEDOM SCORE

Trend

Line


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1

20

40

60

80

100

12013060120 90180 150


RANK IN THE 2012 INDEXOF ECONOMIC FREEDOM

CHART 6

Sources: Terry Miller, Kim R. Holmes, and Edwin J. Feulner, 2012 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2012), www.heritage.org/index; and 2011 Legatum Prosperity Index, http://www.prosperity.com/rankings.aspx (accessed November 4, 2011).

RANK IN THE ENTREPRENEURSHIP AND OPPORTUNITY SUB-INDEX

Economic Freedom PropelsEntrepreneurial Dynamism

Trend Line

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Time to Renew Commitment to Greater Economic Freedom

Milton Friedman was confident

that freedom would prevail, as indi-cated in the conclusion of Free to Choose, a powerful restatement of his beliefs co-authored with his wife Rose:

Fortunately, we are waking up. We are again recognizing the dangers of an over-governed society, coming to understand that good objectives can be per-verted by bad means, that reli-ance on the freedom of people to control their own lives in accor-dance with their own values is the surest way to achieve the full potential of a great society. Fortunately, also, we are as a people still free to choose which way we should go—whether to continue along the road we have been following to ever bigger government, or to call a halt and change direction.11

Though stated three decades ago, the Friedmans’ keen observations are shockingly relevant to today’s challenging time for America. The reckless and populist policy choices of an increasingly leviathan govern-ment have placed the United States on a path that diverges sharply from its historical quest for greater

freedom. Worse, the system of com-petitive capitalism that is respon-sible for America’s unprecedented prosperity is being replaced by a crony capitalism that encourages the concentration of power that Friedman warned was one of the greatest threats to freedom.

Still, there are signs that, as in Friedman’s day, the American public is waking up, and maybe—just maybe—one can be optimistic that freedom will again prevail in America.

As Dr. Feulner and Heritage Foundation trustee Brian Tracy pointed out in their recent book, The American Spirit, “Our inherent optimism is alive and well in every man, woman, and child in the coun-try, to one degree or another. That optimism is a key component of our future success as individuals and as a nation.”12

So, at Milton Friedman’s centen-nial birthday, Americans should renew this country’s commitment to economic freedom, as well as their confidence that a people who are free to choose will make the right deci-sions to ensure their future prosper-ity and happiness.

11. Milton and Rose D. Friedman, Free to Choose (Boston: Mariner Books, 1990).

12. Edwin J. Feulner and Brian Tracy, The American Spirit (Nashville, TN: Thomas Nelson, 2012) pp 53-54.

75

60

45

30

15

020 40 60 80 100


Trend Lin

e

OVERALL SCORE IN THE 2012 INDEX OF ECONOMIC FREEDOM

CHART 7

Sources: Terry Miller, Kim R. Holmes, and Edwin J. Feulner, 2012 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2012), www.heritage.org/index; and INSEAD eLab, The Global Innovation Index 2011, at http://www.globalinnovationindex. org/gii/main/fullreport/index.html (accessed November 4, 2011)

INNOVATION CAPACITY

Economic Freedom and Innovation

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