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, “lLittle 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 “eEconomic fFreedom of the wWorld”
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 four4 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 eight8 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. 60Sixty
years later, 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 reports, “tThe eEconomic fFreedom 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 that 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 dollars higher in Maryland than in West Virginia. Clearly, they should have followed Adam Smith’s
advice. He got it right. Individual freedom in and economic life leads to economic progress.
sSo if you care about growth and prosperity, you can’t ignore the importance of economic
freedom.