Running head: CASE STUDIES IN FREE MARKETS 1

Case Studies in Free Markets

Anthony DeLorenzi

Peninsula College
CASE STUDIES IN FREE MARKETS 2

TABLE OF CONTENTS

I. INTRODUCTION

II. HONG KONG & ECONOMIC FREEDOM

III. AUSTRALIA & ECONOMIC FREEDOM

IV. THE UNITED STATES & ECONOMIC FREEDOM

V. ICELAND & ECONOMIC FREEDOM

VI. CONCLUSION

VII. REFERENCES
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INTRODUCTION

Free market capitalism has been hailed as the ultimate socio-economic model by many

theorists. Francis Fukuyama, an American political scientist, economist, and author, published a

book called The End of History and the Last Man (1992), in which he argues that the

combination of the political system of liberal-democracy and the economic system of free-

market capitalism together represent the ultimate form of human socioeconomic relations. It is

hard to disagree when we have a large body of empirical evidence that links freer markets with

higher degrees of social prosperity, one such example being the 2019 Index of Economic

Freedom, published by the Heritage Foundation think-tank. We see that many of the nations at

the top of the economic freedom list are nations in which the population enjoy relative

abundance and a higher quality of life (Miller et al, 2019). Countries are ranked according to a

series of scores on the following criteria: property rights, government integrity, judicial

effectiveness, tax burden, government spending, fiscal health, business freedom, labor freedom,

monetary freedom, trade freedom, investment freedom, and financial freedom. But how exactly

are free-markets to be defined? According to Investopedia, a leading reputable investment guide

and economics information website, free markets are defined as “economies with unobstructed

competition and only private transactions between buyers and sellers.” (Kenton, 2018). I will

examine a few different countries who rank highly on the 2019 Index of Economic Freedom, and

I will compare their governments’ market philosophies, attitudes towards business, labor,

industrial and social regulations, and I will show how free market policies lead to desirable social

outcomes such as increased employment and productivity.

HONG KONG AND ECONOMIC FREEDOM

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Hong Kong is widely regarded as having a very high degree of economic

freedom. It was ranked as the number-1 freest nation on the 2019 Index of Economic Freedom

(Miller et al, 2019). It scored highest with regards to the categories of property rights, fiscal

health, tax burden, business freedom, and trade freedom, while scoring notably lower in the

categories of judicial effectiveness, labor freedom, government integrity, and monetary freedom.

We will focus on how these policies have affected individual consumers, private firms, and

resource providers to obtain a microeconomic explanation of the link between policy and

outcomes. First, let us examine data on consumption and economic freedom in Hong Kong.

Consumers are satisfied with their own prospects in Hong Kong, as shown by their consumer

confidence index score of 105 (Hazan, 2018). Consumer confidence towards job prospects is

high (60%), and many consumers (72%) have the means to save money after taking care of

essential expenses. We know that savings in the bank stimulate the economy through bank loans

to individuals and firms. As it states in Economics: Principles, Policy, and Problems,

“Commercial banks accept deposits of households and businesses”, while at the same time they

“provide short-term financial capital to businesses, and finance consumer purchases of

automobiles and other durable goods” (McConnell et al, 2009). Consumers in Hong Kong have

access to a variety of goods, and the GDP/capita is an impressive $48,231. Consumer freedom is

complemented by civil liberties and low taxation, with a progressive salary tax which is imposed

at a rate of 2% for the lowest tax bracket to 17% for the highest tax bracket. Consumers are not

the only ones who benefit from their economic freedom in Hong Kong. Firms enjoy no capital

gains tax whatsoever, and the government rarely intervenes in business affairs. According to the

2019 Index of Economic Freedom, “business freedom is well protected within an efficient

regulatory framework. Transparency encourages entrepreneurship, and the overall environment

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is conducive to the start-up of business” (Miller et al, 2019). It is easy to see how this logic

encourages entrepreneurship and increased business and financial activity. If we look at trade

policy of Hong Kong, the average applied tariff rate is 0.0 percent, encouraging free trade with

other nations. Imports and exports amounted to 375.1 % of GDP when combined. Hong Kong is

a great case study for how a nation’s economy can benefit from minimal government

intervention, taxation, and control. Agents freely exchanging goods in an open market has made

Hong Kong prosperous.

AUSTRALIA AND ECONOMIC FREEDOM

Australia is also high up on the economic freedom index, coming in at number 5

on the list (Miller et al, 2019). With an overall score of 80, 10 less than Hong Kong, we can

guess that Australia scored significantly lower in some categories. If we look at the categories

that Australia scored lowest in, we will find the main factors that prohibit economic freedom: tax

burden (62.8) and government spending (60.1). Beyond these, we see that Australia scores very

high with regard to financial freedom (90), judicial effectiveness (86.5), and trade freedom

(87.6). Australia has a decent growth rate of 2.3% GDP (PPP), and an unemployment rate of

5.6%. Australian consumers enjoy relative freedom and stability, with consumer confidence

increasingly optimistic rather than pessimistic (Reuters, 2018). Australians enjoy a GDP per

capita of about $50,334, which puts them in the top 11 countries in this respect. There are several

industries which appear well poised for growth in the Australian market: financial services, iron

ore and mining, online shopping, infrastructure and construction, and technology

(Santandertrade, 2018). Australia has a whopping 10 free-trade agreements with the United

States, China, Japan, South Korea, and ASEAN (Miller et al, 2019). As we know from
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Economics: Principles, Policies, and Problems, free-trade agreements tend to improve the

quality of life for the consumers and firms of all nations involved (McConnell et al, 2009).

Property rights are robustly protected, and there is little corruption due to the strong rule of law.

From the Australian firm’s perspective, it is quite easy to begin doing business. According to the

Economic Freedom Index, Australia has a very transparent and efficient regulatory environment

(Miller et al, 2019). There are only three procedures necessary to launch a business. For the most

part, government policies do not interfere with foreign investment. Peter Robertson argues that,

though there may be increased incentives and opportunities for corruption, globalized free-

market policies that generate economic growth and poverty reductions will ultimately make

Australia more secure (Robertson, 2013). By making it easier for businesses to launch and

operate, Australians benefit from good labor opportunities, abundance and efficiency from free-

trade, and efficient competitive markets.

THE UNITED STATES AND ECONOMIC FREEDOM

The United States has a relatively free-market economy and comes in 12th place in

the 2019 Economic Freedom Index. Compared to Hong Kong and Australia, the United States

scores slightly worse in most categories, and significantly worse in the case of two categories:

government spending and fiscal health. Despite this, Americans enjoy strong property rights,

effective judiciary policy, and high labor and business freedom (Miller et al, 2019). In 2018, the

unemployment rate in the United States fell to its lowest point since the 1960s (Morath &

Torrey, 2018). The United States has been the world’s leading economy since 1871, and GDP is

calculated to be 19.4 trillion dollars (Bajpai, 2019). This affords Americans a comfortable GDP

per capita of $59,501. American culture is known for its emphasis on consumption and
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individualism. Consumers in American markets have a wide variety of brands and products to

choose from, and because of trade agreements, prices are relatively low for goods produced all

over the world. This doesn’t necessarily mean that the market economy is completely free

however. The process of starting a business in America is relatively complex, with many steps

necessary to begin offering goods and services. I know this from personal experience: to start a

software consulting business, I had to fill out several forms, wait for responses from government

bureaucrats, and then I had to file lengthy tax reports frequently. It ended up wearing me down to

the point where I wanted to go back into the workforce rather than keep up with my business

costs and expenses, despite my comfortable consulting hourly rate of $75/hour. Business costs

and barriers are different in all 50 states however, and my experience can only speak to what it is

like to be an entrepreneur in the state of California. Many of the world’s leading banks and

investment firms call the United States home. JP Morgan Chase Bank, Bank of America, Wells

Fargo, and Citibank account for about 7 billion worth in assets (Ogden, 2018). The American

economy consists of a large real estate/renting/leasing sector, which accounts for 13% of the

national GDP, a state and local government sector which accounts for 9% of total GDP, a finance

and insurance sector which accounts for 8% of total GDP, a health and social care sector which

is also 8% of total GDP, and also features robust manufacturing, retail trade, wholesale trade,

and information sectors. Despite the United States not being quite as economically free as Hong

Kong or Australia, citizens enjoy a high quality of life and businesses enjoy steady profits. The

growth rate of the American economy has held steady at about 2.3% growth each year. America

has semi-recently instituted protectionist policies of high tariffs on certain manufactured imports,

and consumers and investors are just beginning to feel the effects of these policies (Miller et al,

2019). The positive relationships between Americans’ economic prosperity and market freedom
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seem to suggest that freer markets lead to more economic opportunity and a higher standard of

living. The United States continues to set an example of just how prosperous market economies

can make a nation.

ICELAND AND ECONOMIC FREEDOM

I chose Iceland as the final component of my analysis of free-market economies because

Iceland follows a somewhat different approach to the free-market. In Iceland, free-trade is

encouraged, and entrepreneurship is welcomed, but there are robust entitlement programs open

to all members of society. This is commonly known as “welfare statism”. For a period, Iceland

closely resembled other Nordic countries such as Sweden, Denmark, and Norway, but reforms in

the 1990s steered Iceland in a less-burdensome direction as far as taxation and government

spending were concerned. According to the Economic Freedom Index, Iceland’s main strengths

are its fiscal health, property rights, government integrity, and business freedom; while its

weaknesses are judicial effectiveness, government spending, and labor freedom. There are

several characteristics that the Nordic countries have in common, and Iceland is no exception: 1)

relatively homogenous populations (with regards to religion, ethnic background, and culture), 2)

integration of church and state (with Lutheranism being the primary religion), 3) strong labor

movements and organized workforces, 4) a sense of solidarity and commonality among society,

and 5) highly engaged democratic populations. In Iceland’s 2016 election, there was a 79.2

percent voter turnout, in contrast to the United States’ 2016 presidential election, which yielded

only a 58 percent voter turnout (Nichols, 2016). If we examine how this relates to matters of the

economy and governance, we find that there is a high level of trust in the free-markets as well as

in the government. Central to the socio-economic Nordic model is a belief in the distributive and
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innovative power of an unregulated market. As evidenced by the Economic Freedom Index

itself, market economies generally produce a significantly higher standard of living to

alternatives, and market forces tend to encourage entrepreneurship and allocative efficiency

(McConnell et al, 2009). The main difference, when compared with more “small-

government”/low-taxation countries, is that Nordic countries have a high degree of economic

equality. Globalization has somewhat weakened the prospects for this social model, incentivizing

privatization of public services and encouraging a reduction in the public sector of the economy

to increase efficiency. Nevertheless, Iceland stands at position number 11 on the 2019 Index of

Economic Freedom, ranking just slightly higher than the United States (Miller et al, 2019).

Because Iceland is a small country, free-trade is a necessity to provide a high quality of life for

its citizens. Consumers enjoy a wide variety of products because of trade agreements with

Canada, Chile, Croatia, Israel, Jordan, Korea, Lebanon, Macedona, Mexico, Singapore,

Morocco, Palestine, the South African Customs Union, Tunisia, Turkey, the European Union

nations, and China. By having a very integrated workforce, collective bargaining plays a large

role in wage-determination. As with other Nordic countries, there is a balance struck between the

government, labor unions, and employers. Rather than seeing each other as adversaries, as in

some other developed nations, each of these groups see each other as vital elements of a thriving

harmonious partnership. Sometimes this is known as “social corporatism” and is something

notably absent in nations like the United States, which has only a very small percentage of the

workforce belonging to labor unions (McConnell et al, 2009). One aspect of the Nordic

countries, that many people from other regions of the world look upon with envy, is the

educational system. Because education is free, including university, there is a high degree of

social mobility. Perhaps this is one reason why we find such trust in the system among its
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constituents. Firms enjoy very little regulation despite high taxation, and the process to launch a

business is typically very simple in Iceland (Miller et al, 2019). The elements of a strong

workforce, free employers, and free-markets have produced a thriving economy in Iceland, and

perhaps other nations can learn from aspects of Iceland’s economic and social model.

CONCLUSION

Through these examinations of several high-ranking nations on the Heritage Foundation’s

2019 Economic Freedom Index, we can make conclusions based on some similarities. Above all,

the characteristic that these countries have in common is a fundamental belief in the ability of a

free-market economy, featuring few regulatory hurdles, to provide an abundance of goods and

services in efficient ways. At the core of each of these nations’ economic framework lie strong

property rights, high business freedom, high government integrity, high fiscal health, and large

amounts of investment and trade freedom (Miller et al, 2019). In contrast to the wealth of

countries which embrace free-markets, we find at the lower end of the index impoverished

countries such as North Korea, Venezuela, and Cuba, which collectively feature weak property

rights, low levels of business freedom, low fiscal health, low government integrity, and low labor

freedom (Miller et al, 2019). What is the lesson to be learned? An efficient way to approach the

issues of governance would be to examine how both businesses and workers can be given more

freedom, that is to remove rules and regulations that prevent growth from occurring. This could

be as simple as enforcing property rights more strongly, but, in reality there are likely a multitude

of changes that would have to take place to achieve a higher degree of prosperity in these

nations. Cuba, for example, could examine the path taken by China and Vietnam when it comes

to transitioning from a command economy to a mixed-market economy. These changes must

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come slowly and voluntarily by the people and governments of these nations, because if there is

to be a strong and lasting belief in these systems, it must not be enforced by the government of

another nation. In a similar effort to that of Mikhail Gorbachev in the early 1990s, the leaders of

these nations could try to incorporate elements of market systems into the framework of their

existing governments, and in turn a rise in the prosperity of the common people of these nations

could result. Despite the issues associated with market systems, such as inequality and cycles of

inflation and/or unemployment, it is hard to argue with the empirical evidence which points to

the fact that market-based economies tend to function well and provide opportunities and

freedom to the greatest number of people. Through this examination of market freedom, we can

see that desirable outcomes are obtained through the efficient application, and support of, market

economies.
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