Improving Our Standard of Living (Wattpad Edition)

Chapter 11: Market Freedom Index

I've created what I call the Market Freedom Index. It assesses how easy it is to start and run a business in each country, and each nation's friendliness to free trade. It's based on four other economic freedom indices which I describe below.

The first is the Index of Economic Freedom created by the Heritage Foundation. It measures several indicators that are associated with economic freedom and GDP growth. I only included some of these variables in my index for reasons that I explain in a moment. The ones I included are listed below. (If you don't care for the details, just read the bold parts.)

Property rights [1]. This component measures how well a country's laws protect the right to own private property and the extent to which those laws are respected. It also evaluates how often the government takes property away from people and businesses. For example, suppose the government took over a company, replacing the shareholders that owned it. That would be a violation of property rights.

Business freedom [2]. This component looks at how easy it is to start, run, and close a business in a country. It looks at the average number of days it takes to start a firm, the average cost (as a percentage of per capita income), and the number of legal hoops that must be jumped through. Examples of legal hoops include government-required licenses, fees, inspections, certifications, mandatory reports, and other bureaucratic red tape that businesses must deal with.

Monetary freedom [3]. This component looks at the severity of inflation and price controls. Recall that inflation occurs when the government prints too much money too quickly. Price controls are laws that prevent businesses from raising prices beyond what the government deems appropriate. Price controls are meant to protect consumers, but they discourage investment and innovation. People are less likely to start businesses if the government makes it harder to earn profit. Price controls also reduce the incentive for companies to invest time and money into improving their products out of fear they won't make enough profit to justify the risk.

Trade freedom [4]. This component assesses how easy it is for a country to buy and sell goods and services to and from other nations. It looks at the tariff rate and the number of trade barriers in place. Tariffs are taxes that the government requires people to pay when they buy goods and services from businesses in other countries. Another type of tariff is taxes that companies pay when they sell their products to individuals and businesses in other nations. Tariffs are designed to discourage free trade by making foreign products more expensive. A trade barrier is another type of restriction. An example of a trade barrier would be if the United States banned manufacturing companies from moving their factories to China.

Investment freedom [5]. This component assesses how open a country is to foreign investors and how restrictive it is of allowing people to invest in other nations. For example, suppose the United States prohibited foreign investors from buying stocks of US companies. That would reduce America's investment freedom score. Likewise, if the government prevented American investors from buying stocks of foreign companies, it would curtail investment freedom.

Financial Freedom [6]. This component assesses the extent of government ownership and control of the banking industry. If, for example, the government banned private loaning and became the dominant provider of banking services, that would be a restriction of financial freedom. Another example would be banning cryptocurrency or placing burdensome regulations on it.

There are other components of the Heritage Foundation's Index of Economic Freedom than the six I just listed. But I didn't include them in my Market Freedom Index because they were correlated with positive economic performance, but the Heritage Foundation scored them as if they were bad for the economy.