People often use “democracy” and “economic freedom” in incorrect ways। Sometimes their incorrect usage may reflect misunderstanding but, in other cases, it is almost certainly a deliberate effort to confuse. Economic freedom and political democracy are not the same thing. In fact, they are substantially different.
First, they differ with regard to the area of human interaction covered. Put simply, democracy relates to political decision-making while economic freedom relates to interaction through exchange and markets. Democracy is present when all adult citizens are free to participate in the political process (vote, lobby, and choose among candidates), and when political outcomes are determined by voting in fair and open elections. Economic freedom is about the freedom of individuals to decide how they will develop and use their productive abilities, exchange goods and services with others, compete in markets, and keep the fruits of their labor. Political restrictions that inhibit voluntary actions and personal choice in these areas conflict with economic freedom, even when they are adopted democratically. A country can be democratic and still severely restrict the economic freedom of its citizens. The experiences of India and Israel during the period from 1960 to 1990 illustrate this point. Correspondingly, it is also possible for a country with very little democracy to have a substantial degree of economic freedom nonetheless. Hong Kong during the last several decades provides an example.
Second, the basis for economically free action is fundamentally different than that for political democracy. Agreement and mutual gain provide the basis for economically free activities. Unless both parties to an exchange agree, the transaction will not occur. On the other hand, democratic political action is based on “majority rule.” The majority, either directly or through their representatives, decides and the minority must submit. It makes a huge difference whether mutual agreement or majority rule underpins economic activities. When mutual agreement forms the basis for economic activity, both buyers and sellers will be “winners” and there will be a strong tendency for resources to be used productively— that is, to produce goods people value more than the resources required for their production. In contrast, there is no such tendency under majority rule. When a project is undertaken politically, even if the process is democratic, the minority must pay taxes for its support even if the project makes them worse off. The political process creates “losers” as well as “winners.” Furthermore, there is no assurance that the gains of the winners will exceed the costs imposed on the losers. In fact, as the public-choice literature highlights, there are several circumstances under which there is good reason to expect that the cost imposed on the losers will be greater than the benefits derived by the winners. The political process tends to be shortsighted. It is biased toward the adoption of programs that provide immediate, highly visible benefits at the expense of future costs that are difficult to identify. Furthermore, when the government is heavily involved in activities that provide favors to some at the expense of others, people will be encouraged to divert resources away from productive activities and toward lobbying, campaign contributions, and other forms of seeking political favor. Predictably, the shift of resources away from production and toward such favor seeking will generate economic inefficiency.
It is the “special-interest effect” that provides the most important reason that the political process will ओफ्तें go awry—why it will often lead to policies that do more harm than good. Elected political officials will often find it attractive to support the positions of well-organized interest groups at the expense of consumers and taxpayers. This will be true even when the gains derived by an interest group are substantially less than the cost imposed on other voters. Well-organized interest groups प्रोविदे politicians with a readily available source of campaign contributions and other political resources that will help them win subsequent elections. In contrast, those harmed by special-interest policies are unlikely to provide much political assistance because they are largely unorganised and frequently poorly informed.
Thus, the democratic political process is characterized by politicians who “trade” programs that benefit special-interest groups at the expense of the general populace in exchange for political contributions that will help them win the next election. In contrast with market actions based on mutual agreement, there is no assurance that political action will be productive, that it will expand output and enhance the income levels of the citizenry.
Unconstrained democracy is not the political system that is most complementary with economic freedom; limited constitutional government is. Constitutional restraints, structural procedures designed to promote agreement and reduce the ability of interest groups to exploit consumers and taxpayers, and competition among governmental units (federalism) can help restrain the impulses of the majority and promote political action more consistent with economic freedom. It is widely recognized that the protection of civil liberties requires political constraints capable of controlling the excesses of the majority. Thus, we do not count on majority rule to protect civil liberties such as the right to free speech, freedom of the press, the right to assembly, and religious freedom. Rather, it is recognized that constitutional and structural protections are needed to secure these liberties. The same thing is true of economic freedom. Basic economic freedoms such as (a) the right to trade with others, including foreigners, at mutually agreeable terms, (b) the right to enter and compete in the business or occupation of your choice, (c) the right to keep what you earn, and (d) protection of your property from confiscation by others, including the government, are too important to be left to the “rule of the majority.” Like other basic liberties, they deserve constitutional, procedural, and structural protection.
Economic Freedom of the World: 2007 Annual Report 7
