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3 Economic Facts Everyone Should Know

verdades económicas

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[Leer en español]

There is a well-known saying in Spanish that goes like this: “data kills story.” The truth is that the opposite is true. We can have all the data, but if there is a good story that assures the opposite, millions of people will prefer to ignore the evidence and stick with the talk. That is why we need to be clear about the issues that are facts. In this article, I will expose three economic truths that everyone should know.

Before we begin, it is necessary to agree on the terms. We understand socialism as the coercion of the state against the entrepreneurial human action of the individual. So if a country has high levels of state intervention and greatly impedes the economic activity of individuals, ranging from saving or selling their labor force to a company, to creating a company, then we are talking about a socialist country. In that sense, countries with less economic freedom are socialist, while the freest are capitalist.

The most socialist countries are the poorest

The average GDP per capita of the countries with the least economic freedom is $7,096, while that of the countries with the most economic freedom, i.e., the most capitalist, is $73,973. Countries with high levels of state intervention —high levels of socialism— have an average GDP per capita, more than 10 times lower than that of capitalist countries.

Although advocates of socialism often dare to claim that capitalism only benefits the wealthiest, a higher level of economic freedom benefits all of society. When we look specifically at what happens to the income of the poorest 10 percent of the population, depending on whether they are in a free or a socialist country, we see that even the lowest income people live considerably better in capitalist countries than in statist countries.

The annual per capita income of the poorest 10 percent of the population in the least free countries is $1,549, while in the most economically free countries the figure is $14,400. So a poor person in a socialist country earns up to 9 times less than a poor person in a capitalist country.

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Source: Economic Freedom of the World: 2021 Annual Report.

Countries with socialist policies not only perform poorly in their economy, but also have lower levels in other measures of well-being. If we look at the performance of the Human Development Index measured by the United Nations —which takes into account variables such as life expectancy and education— in countries with socialist economic policies versus countries with economic freedom, we see a considerable difference. A higher level of economic freedom translates not only into a better GDP per capita, but also into a better performance of multiple variables that measure the welfare of society.

3 economic facts
Source: Heritage Foundation

In the 2022 Index of Economic Freedom, prepared by Heritage Foundation, the last three countries on the list, the most intervened and therefore the most socialist, are North Korea, Venezuela, and Cuba. All three countries have been suffering for years from bloodthirsty regimes that have controlled all economic activity of the population and have plunged the majority of their inhabitants into misery.

More capitalist countries have higher incomes

Just as trying to control the economy generates poverty, allowing free enterprise generates wealth. Countries with greater economic freedom have higher incomes. The average GDP per capita of the freest countries is $73,973, as mentioned above, more than 10 times higher than that of countries with high levels of intervention.

The explanation for this is simple: wealth is created. If the government allows free human action, i.e., entrepreneurship, free movement of resources, savings, and investment, then wealth is generated. Whereas, if a government’s vision is to stagnate the generation of wealth by taxing and hindering entrepreneurial activity while it “distributes” the wealth already generated, poverty will inevitably increase.

3 economic facts
Source: Heritage Foundation.

The more capitalist countries, as discussed above, offer higher levels of prosperity, better welfare conditions, and much lower poverty rates than statist countries. According to the Fraser Institute’s annual report on Economic Freedom in the World, while in the least free countries 71.50% of the population can be found living on $5.50 a day, in the freest countries only 4.53% of the population lives on that figure or less.

3 economic facts
Source: Economic Freedom of the World: 2021 Annual Report.

The countries with the greatest economic freedom, according to the Index of Economic Freedom 2022, prepared by Heritage Foundation, are New Zealand, Luxembourg, Ireland, Switzerland, and, in first place, Singapore.

The greater the economic freedom, the greater the prosperity

The conclusion from the graphs and data we have seen so far is clear: there is a relationship between economic freedom and prosperity. Prosperity not only in monetary terms -which is already a good measure of well-being- but also in other human development variables. Numerous studies have analyzed this relationship in detail and almost without exception find that countries with greater economic freedom have higher GDP per capita and grow faster.

Finally, it is worth clarifying some aspects that cause confusion, as they deserve a full article and an extensive explanation. In this case, I will only mention the trap behind some arguments against the central assertion of this text, which is none other than the existence of a clear relationship between capitalism and prosperity.

There are those who mention some countries that are apparently capitalist and where there is poverty, as supposed proof that capitalism does not work and produces misery. Between the extremes, the less free countries (more socialist) and the freer countries (more capitalist), there is a long way to go. There are countries, like Colombia or Mexico, which people do not identify as socialist and which have important problems of poverty.

3 economic facts
Source: Heritage Foundation.

These countries, however, are not capitalist either, they are halfway there. That is why they do not have the wealth of the most capitalist countries, but neither do they have the misery of a country like Venezuela, which is in the last position. Colombia ranks 60th and Mexico 67th in the index of economic freedom. It is a blunder to consider a country with such a rating as capitalist. The fact that there is poverty in these countries is not a sign that capitalism does not work; it is a sign that they still have very high levels of intervention, and that is why they continue to face important economic problems.

Another supposed argument against the relationship raised in this article is that the Nordic countries are socialist and prosperous. One only needs to look a little at the data to realize how absurd that approach is. The Nordic countries have some of the lowest corporate tax rates in the world, they are also noted for minimal regulation of business activity. Several of these countries do not even have a minimum wage. The basis of the prosperity of these countries is that they have understood the key to capitalism: wealth comes from the private sector, which is why it must be given freedom.

Vanessa Vallejo. Co-editor-in-chief of El American. Economist. Podcaster. Political and economic analysis of America. Colombian exile in the United States // Vanessa Vallejo. Co-editora en jefe de El American. Economista. Podcaster. Análisis político y económico de América. Colombiana exiliada en EE. UU.

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