The Economic Freedom Index Is a Steaming Pile Of Neoliberal Bullshit
On the fabrication of bullshit economic metrics
The recent exposure of the World Banks politicized methodology for calculating its «Doing Business» Index — framing Michelle Bachelet’s presidency as anti-business, in a bid to sway the Chilean election — is a timely reminder to take such indexes with a grain of salt. Despite their aura of objectivity, they are often political instruments camouflaged as science; designed, not to unveil truth, but to promote the agenda of their makers.
Like detectors in a double-slit experiment, an index collapses a vast spectrum of potential — and equally “true” — depictions of reality into one particular manifestation. By tweaking their algorithms until a depiction that fits their ideological or vested interests appear, the actors who control them can essentially cherry-pick the depiction they want. Mistaking their outputs for objective descriptions of reality is thus naive and dangerous; it bestows their creators tremendous influence over the filters through which we perceive society.
The Art And Science Of Using Metrics to Bullshit
Consider the ostensibly simple case of unemployment rates. For most developed countries, this rate can be calculated as any number between 4 and 40 % depending on the criteria of whom to include and exclude.
Should the discouraged and chronically non-employed qualify as ‘unemployed’, or should the label be reserved for active job seekers? What about involuntary part-time or ‘gig’ employees? What about inmates? Or housewives? These are altogether political, not scientific, considerations.
Saudi Arabia’s official unemployment rate is, for instance, just 12 %, even though the female half of its population is overwhelmingly non-employed (but not «unemployed», as defined by the Saudi state).
Unemployment is, in other words, a social construct. Each alternative way to define and measure it paints a distinct picture of the state of the economy, and underpins a corresponding set of policy prescriptions. None of which are objectively correct.
If the formal definition of ‘unemployment’ rested in the hands of a malign actor, it is easy to imagine how the narrative power entailed in it might have been exploited to promote said actor’s financial or ideological agenda. This is indeed the case with the Economic Freedom Index, published by the propaganda arm of Koch Industries, the Cato Institute, and the marked-fundamentalist think-thank Fraser Institute.
The Economic Freedom Index is NOT a Measure of Economic Freedom
Despite its deceptive title, the Economic Freedom Index doesn’t actually measure economic freedom. Upon inspection it turns out to be calculated from a cacophony of cherry-picked data culled from various open databases, all mashed together and assigned the deceptive label «Economic Freedom Index». Some of these data-points are indeed related to economic freedom (such as tax rates and state ownership). Others have nothing whatsoever to do with the subject, but are indicators of stable, capable governments (such as stable inflation rates and judiciary independence). Sneaking these indicators into the calculation guaranties that prosperous nations on average score a little higher than their actual level of economic freedom would suggest. The opposite is true for poor countries.
By artificially boosting the score of prosperous countries, while naming the result an index of «economic freedom» an illusory correlation between economic freedom and prosperity is fabricated. This correlation is built into the index by design. From the chosen definition of “economic freedom” the statement «economic freedom is correlated with prosperity» become tautological. It follows arithmetically.
This index is nothing but marked fundamentalist propaganda masquerading as scholarship, the way alt-right media masquerade paranoid ramblings as news stories. It’s a putrid all-you-can-eat buffet of bullshit, in the Frankfurtian sense of the term: Its creators, flagrantly indifferent to how poorly the index maps onto the intricate knot of conceptual nuances that is «economic freedom». Their concern is with influencing public discourse and economic policy.
Case Studies Of Bullshit
We can test the aptness of an index by subjecting it to what’s known as Wittgenstein’s ruler, which basically boils down to “when using a ruler to measure a table, one is simultaniously using the table to measure the ruler”. The less certain we are about the ruler’s reliability, and the more certain we are about the true lenght of the table - the more information we are getting about the ruler relative to the table. We can apply this concept by comparing the real-life economic freedoms of specific countries with their respective Economic Freedom Index scores.
Exhibit A, Saudi Arabia: A Wahhabist dictatorship, controlled by a nepotistic mafia family with tentacles penetrating all sectors of the economy; it’s the godfather of the OPEC cartel — the very antithesis of free markets; the female half of its population is denied even the most basic economic rights, while the male half by and large work for the public sector, or lives off welfare.
One would reasonably expect to find this totalitarian horrorshow’s Economic Freedom score lingering in the murky depths of the scale, wrestling the likes of North Korea for the rock-bottom spot. Its actual score however is a staggering 6,24, comfortably ahead of the likes of Ukraine [5.38] and Brazil [5,75]. Like any economically successful countries, Saudi Arabia’s score is boosted, which helps establish the statistical correlation between EFI and economic success.
Another breed of dystopia, from a marked fundamentalist perspective, is Norway: A welfare state where the government owns about 40 % of all stocks traded on its national Stock Exchange — Exercising “negative control” (ie. power to veto board decisions requiring two thirds majority) of companies constituting 56 % of the nation’s total market capitalization. It’s massive Public sector, accounts for nearly 60 % of GDP and employs 30 % of the Norwegian workforce. Somehow Norway is ranked in the top 25 [7.67].
The Bullshit Involved In Calculating The Economic Freedom Index
Understanding such case studies requires a closer look at the algorithm used to calculate the index. The calculation is based on 42 datapoints divided into 5 indicators, assigned the labels:
- «Legal System and Security of Property Rights»
- «Sound Money»
- «Freedom to Trade Internationally»
- «Regulation»
- «Size of Government»
The final score is calculated as the unweighted arithmetic mean of these five indicators, which are themselves unweighted arithmetic means of different sets of the 42 datapoints. This algorithm produces a numeric score with little in common with the philosophical concept of economic freedom, except in name.
The Fraser Institute assures us about the objectivity of their index:
«From the beginning, conference participants sought to carefully define economic freedom and develop an accurate measure for a large set of countries that was as fully transparent and objective as possible. We did not want our subjective views to influence the rating of any country so all data are taken from third party sources.»
Never mind the fact that the selection of indicators, weights, databases and which data to pick from the various databases were not done by third parties, and thus not protected from these subjective biases.
The decision to apply equal weight to each indicator, regardless of relevance and ambiguity is justified by pointing out the fact that:
«there are no objective basis for assigning weight».
Never mind the fact that assigning equal weights is just as non-objective. In fact, due to the EFI ostensibly being an attempt to quantify economic freedom, the choice not to assign a hefty weight to the indicators «Regulation» and «Size of Government» makes little sense.
Legal System and Property Rights
Calculated as the sum of 9 datapoints . 7 of these concern rule of law (“Reliability of police”, “Impartial courts” etc.). Only 2 datapoints concern property rights, “Regulatory costs of the sale of real property“ and “Protection of property rights”. The contribution of this indicator is thus 80 % determined by aspects of the legal system, irrelevant for describing marked freedom
This is why Saudi Arabia's Sharia-based legal system, somehow scores 5.29 on this indicator, putting it at about the global average.
Sound Money
Calculated is based on magnitude and stability of inflation rates and ability to use alternative currencies. This doesn’t tell us much about market freedom. Both market- and planned economies can achieve stable inflation as long as monetary policy is in the hands of competent bureaucrats. This indicator, constitutes 20 percent of the total score for the «Economic Freedom Index», despite being irrelevant to degree of marked freedom. It gives a significant boost to well governed, prosperous countries, including welfarestates like Scandinavia, Finland, Holland, Germany, Austria etc.
Freedom to trade internationally
Based on tariffs, customs efficiency and freedom of movement of physical and human capital. Attitude towards globalization, once championed by the right and condemned by the left, seems to be uncoupling from economic ideology. A trove of recent research indicates that contemporary anti-globalization sentiments are primarily correlated with inclination towards in-group favoritism / out-group hostility, not economic ideology.
Economist Dean Baker among others have lamented this indicator as treating any deal containing the phrase “free trade agreement” as a proxy for supporting free trade, while ignoring the content of the deal. The “free trade” label should not be taken at face value. The primary purpose of many such agreements is to boost “intellectual property” — that is protectionism, rather than reducing tariffs.
In the introduction to The Conservative Nanny State, Baker writes:
[N]ews reports routinely refer to bilateral trade agreements, such as NAFTA or CAFTA, as “free trade” agreements. This is in spite of the fact that one of the main purposes of these agreements is to increase patent protection in developing countries, effectively increasing the length and force of government-imposed monopolies. Whether or not increasing patent protection is desirable policy, it clearly is not “free trade.”
It is clever policy for proponents of these agreements to label them as “free trade” agreements (everyone likes freedom), but that is not an excuse for neutral commentators to accept this definition.
Regulation
Calculated based on datapoints related to price regulation and degree of “regulatory activities that retard entry into business and increase the cost of producing products.” This indicator ignores the fact that some regulations that are good for business, others bad.
In the words of economist Will Wilkinson:
Free markets require the presence of good regulations, which define and protect property rights and facilitate market processes through the consistent application of clear law, and an absence of bad regulation, which interferes with productive economic activity. A government can tax and spend very little — yet still stomp all over markets.
Good and bad regulations are indiscriminately lumped together, the way employment rates lumps together fulltime, part-time, and gigg employment. The result is a hodgepodge “Regulation” indicator that measures nothing.
One example is the datapoint “bureaucracy costs”, stemming from a survey in the World Economic Forum’s Global Competitiveness Report. Business executives around the world were asked to rate their agreement with the statement
“Standards on product/service quality, energy and other regulations (outside environmental regulations) in your country are: (1 = Lax or non-existent, 7 = among the world’s most stringent).”
The question actually boils down to “How good are product service/quality and energy regulations in your country?”. Business executives from regions like Scandinavia rated their countries highly, praising its sound regulatory regimes. The Economic Freedom Index lumps this praise of national standards on quality, energy, etc. together with other supposed subindicators of “regulatory activities that retard entry into business and increase the cost of producing products.” The result is a phony bullshit indicator, boosting the EFI score of well-governed nations.
Size of Government
Calculated as the sum of four datapoints concerning «Government consumption», «Transfers and subsidies», «Government enterprises and investment» and «Top marginal tax rate». Why this indicator is not heftily weighted is beyond me. It singlehandedly measure most of the characteristics of Social Democracies and Democratic Socialism.
By only considering «Size of Government», and ditching all the less relevant indicators, Sweden, Denmark and Norway are ranked as the world’s 3rd, 6th and 13th least free economies. Seems about right.
Final Thoughts
Despite harsh criticism from organizations like the UN’ International Labour Organization for being “very misleading” and showing “strong conceptual bias”, the Economic Freedom Index is still treated as a touchstone gauge of economic freedom, by media and academic economists, alike. Correlation between Economic Freedom (as defined by the index) and various measures of prosperity are accepted at face value.
For instance women's rights. In countries with high Economic Freedom Index score, «women are twice as likely to be employed, and are three times more likely to have a bank account. Adult literacy rates for women are much higher (…) And crucially, in countries with high levels of economic freedom, women lives longer» (82yr vs 65yr)
«As ‘economic freedom’ rises, the lives of women improves»
No hint of how ‘economic freedom’ is operationally defined. When the general public is presented with statistics like these, the intuitive interpretation will be something like «Liberalizing the economy leads to improved conditions for women». This was clearly the intention of the index’ creators. They knew perfectly well that no one in their target audience would interpret the term «economic freedom» as «The non-weighted arithmetic sum of dozens of subindicators like inflationary stability, number of deals protecting intellectual property while containing the term “free trade”, Impartiality of courts etc». The reader is shepherded into the mistaken belief that liberalizing the economy leads to improved conditions for women.
Expressing «economic freedom» with a numerical value enables comparison and ranking in a way that feels objective. This plays perfectly into our primal inclination for interpreting our surroundings in terms of hierarchies, as well as our disdain for ambiguity. Like the music critic rating every album on a fictitious six-point scale of asthetic worth, or IMDB rating every movie on similar a ten-point scale. Claims and arguments are viscerally felt as more credible, more real, when backed by numbers. Our naive trust in numbers, and lazy resistance towards complexity, is highly exploitable.
The antidote lies in cultivating a habit of looking beneath the surfaces of metrics and indexes, by posing critical questions like “What does this number actually mean?”, “How was it measured?”, “Who funded and carried out the study?” and, most importantly: “What’s the political agenda of these actors?”
