The problems with the Economic Freedom Index

Into, what is the index? Hello everybody, this video will be on the economic freedom index. You might remember that it was a central claim in this video which I made a reply to and I kept saying I’d make a video on the index. And that’s what this is, a video on the economic freedom index Let’s start with the seemingly easy question what’s that? There are different answers ranging from “the economic freedom index tells you how much capitalism there is” over “the economic freedom index is a metric used by economists to describe how well an economy is doing” to “the economic freedom index is a load of bollocks which tells you nothing about anything” And we’ll have a look at these things in detail, first I will explain the basics about the index, then I will talk about the heritage foundation who made the index and talk about why they say what they say, then I’ll explain how they calculated the index followed by which we do a deep dive into the data and see whether their claims hold water and in the conclusion I mention what we can learn from this. If you aren’t interested in hearing about the heritage foundation just skip to the data part of the video, use the new YT chapter thingy for that And before I really get going, we’ll be talking about “facts and statistics collected together for reference or analysis” a lot Which is also known as this word. And it can be pronounced “Da-Ta” or “Day-ta” and I have made the executive decision to switch between those two pronunciations at random in order to make the video harder to watch Anyway, what’s the economic freedom index really? Simply put it’s a score put together by the American Heritage foundation which ranks most countries on earth and gives every single one a score between 0 and 100. This score is supposed to represent the economic freedom In this case freedom means ease of doing business So, it’s freedom of a rich person to open a business, not freedom of an employee to get a fair wage. That’s an important distinction and will become more apparent later. It’s about the freedom of corporations and those who are rich. It says nothing about whether the people work in air-conditioned offices or sweatshops And this is the map that goes along with the index. As you can see it handily colours countries according to which score they got. This map is used a LOT on the internet, especially be right wing free market people. Or neoliberals if that’s what you want to call them And the first argument they like to use is that the higher the score is, the more capitalism there is. This seems to be a rare argument so I won’t dwell on it for too long. Basically capitalism is by definition the institution of private property. This means that if a country has private property then it’s capitalist And if that private property leads to people dying then they are dying because of a problem caused by private property, AKA capitalism So, we can blame capitalism for those deaths And using a low score to say that an economy based on private property is not capitalist would be dishonest and not consistent with what capitalism means. The Congo is still capitalist, even if it’s red on this map The map does not, and does not claim to represent how much capitalism there is. This will become more apparent once we talk about what the score is made up off Another claim, and this one is more official let’s say, is that a high economic freedom index means a high GDP. I’ve been asked to clarify that a high GPD does not mean a good quality of life. The GDP just shows how much was value produced, it does not show whether that value was gathered by slaves in gold mines or by well treated computer programmers If someone tries to use the GDP as an argument please keep in mind that the GDP has little influence on the actual quality of life. This also means that, if a high economic freedom index causes a high GDP, that does not then mean that the people are better off. It could also mean that it’s easier for the rich to become richer of the backs of everyone else. Hypothetically of course So, so far, we’ve established that the index does not describe how much capitalism there is and that GDP and quality of live are not related in any meaningful way. But to be fair that’s not the point of the index. But what is? Let’s have a look at the heritage foundation who made the thing to find out The heritage foundation The heritage foundation is an American conservative think tank which spends most of it’s time lobbying in Washington. If you think this is a biased explanation take it from their website: “The mission of The Heritage Foundation is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defence.” So I’d say it’s fair to say that they have a bit of a bias. And that’s alright, everyone has, I have a bias as well. They are a 501(c)(3) organization which is American tax speak for don’t have to disclose their financials. Also, they are tax exempt and donations to them are tax deductible. According to source watch their main funder is the Koch brother, formerly Koch brothers but one of them died. The Koch family is a group of oil billionaires that like to fund conservative propaganda institutions like this one The heritage foundation’s donors probably

aren’t the average people either. Last I checked the people where more concerned with trying to live off their low wages and survive high rent while also desperately trying not to get sick or else to have medical debt forever and not with a strong national defence or traditional American values, whatever that means That’s kind of a feature here, their founding mission is so generic that pretty much everyone can agree with it. Like, I love individual freedom and limited government, watch my video on my ideal world to hear more. But what do they actually mean when they say those things? What policies are they proposing? Well much like with their bias they are very transparent about this What do they want? They want to reduce the federal government, and empower the states, they want to abolish state welfare, state sponsored education, and the little government healthcare there already is. They want to ban gay marriage because of course. They want to reduce taxes and state debt. At the same time, somehow They want to deregulate, something. They want to reform the justice system in some vague way. And they want America to be more of a dick towards other nations. And I think this one just means they want to invade Venezuela Basically they are a mix of Neoliberal economic policy and conservative bs. They want to privatize government services in order to be able to make money there, they want to deregulate something and they want the power of regulations to be given to states And I think I know why they want that, it’s because it’s easier to subvert regulations when there are 50 different states with different laws. One of them has the weakest laws, you set up shop there, sell poisonous water or whatever and when they try to increase regulations you can threaten to leave and take the jobs with you. Decentralization like this disproportionately benefits people like their funders at the expense of almost everyone else So that’s what the heritage foundation is A conservative propaganda organisation paid by Billionaires that then obviously advances the interests of said billionaires. Of course that doesn’t mean that everything they say is wrong. Just because they are clearly conservative does not mean their data has to be wrong But it’s important to dwell on this for a second. No, the data they have doesn’t have to be wrong. It may be entirely legitimate, and as a matter of fact I assume so much in the data analysis part later on. But the fact that they know that they are biased also means that they are very likely to draw biased conclusions from the data they collect Confirmation bias is when you pick and choose which evidence to show to others in order to confirm something you already want to believe Like for example if you are a billionaire funded foundation your mission would be to deregulate the market, simply because that’s what people pay you for. If you then found data which showed that deregulating the market has no influence on the GDP or even general happiness then you might cherry pick the data until it looks like liberalizing the economy is good for more people than just your founders Hypothetically of course. I am not accusing anyone of anything here. So now, let’s get into how the index is created and what it’s made up of The Index explained Broadly it consists of these four things: Rule of law, Government Size, Regulatory Efficiency and Open Markets. They are then broken down to these twelve policies and we’ll now have a look at each of them. They have this 500 page book on the index where they handily explain what they mean by these 12 points Link in the description Every country is then given a score in these 12 points, the scores are averaged out and that’s the economic freedom index. From this we can also conclude that those are the policies they are pushing for. After all their goal is increasing the score so everything that increases the score is something they want The first one is property rights, they say that property rights are the basis for a capitalist economy and that those rights must be protected They say that that helps motivate workers and investors. And I have to admit, the fact that I don’t own any land because they all bought it up sure motivates me to go to work so that’s true. But I am not sure if that’s freedom Am I free if I have to live on the land of someone else because they have driven up the property values? I don’t doubt that securely owning land is a sort of freedom for those who can afford it. But it’s not freedom for you or me. It’s what those evil leftists would call a bourgeois freedom The next one is judicial effectiveness. They explain it’s important for individuals to be able to win against the government in court Now, I don’t know about you, but I’ve personally never had to sue the government Matter of fact I haven’t been in a court at all. This is another one of those “freedoms” which is nice to have if that’s your concern but it’s got little to do with the average person’s life. Though I don’t doubt that the people who give the heritage foundation money are very interested in suing governments The next one is Government integrity and this one is about corruption. They say that corruption is bad which I agree with. And then they ruin this agreement by saying that actually corruption

is the government’s fault because they have many regulations. So, I guess corruption is bad but when it happens it’s not the corrupt people who are to blame but the government for Quote “incentivizing bribery and encouraging illegitimate secret interactions” So it’s not the rich people who offer bribes that are the problem, but the big governments which make too many regulations to protect the citizens? Okay fair enough, they dislike big governments but then they expect that very government to fix the corruption problem So, is the government too big or too small? I have a theory, I think they don’t actually care about corruption, I think they just want states to deregulate so they have to bribe fewer people. And this corruption score is then added to the economic freedom index You might be wondering how you can even put a number on corruption and you wouldn’t be alone, I am wondering the same thing. Because they don’t tell us. They seem to be making the data up. Now that’s scientific. The same goes for the 11 other scores by the way The next one is the tax burden. Pretty obviously they want taxes to be lowered. The fact that this would hurt the vast majority of people seems not to phase them. Because at this point it’s pretty obvious that when they say economic freedom, they mean freedom of the rich to do how they please. And if you don’t believe that reducing taxes hurts the people please think about how to reduce government spending They want to privatize or abolish most government entities like schools or hospitals. And if you do that then the individuals have to pay way more for these services. That’s why America has such high per capita healthcare spending while having average healthcare standards Cutting taxes sounds nice, but it really only helps a few percent of the population at the cost of essential services everyone profits from The next one is Government spending, they want it to be low. Why? Because if the government doesn’t pay for something that means private investors can do it and get a lot of money for it. This again is such a niche thing that barely if ever affects the average person When are we going to talk about the freedom not to drown in medical debt or the freedom to be able to afford rent? Why are we only talking about the freedom of the corporations and those who are billionaires? The next is fiscal health, this one is just about how well a country is balancing it’s books. The fact that countries don’t need to make a profit the same a way a cooperation does seems to be new information to them They assume, low deficit equals good. The problem with that is that that’s not how governments work. A government doesn’t need to make a profit, they will often even go out of their way not to do so. Because what are you going to do with a lot of money in the bank if you’ve already decided how to spend the budget? Usually governments are in the red for a few years and then they make a profit for a few years. There is no reason a government should be profitable the same way a cooperation is This one score really shows their lack of understanding of governments and shows that they are thinking about the government as a business which will of course change the way they think about what it has to do The next one is business freedom. In opposition to the previous ones which where all about citizen freedom or what? By this one they mean the freedom to start and run a business Again, one of those things which are needed if you are rich already but not something the average person needs to bother with This one is Labour Freedom. Now THAT sounds like we finally found something applicable to the real life of most people! But what they actually mean is that they want to be able to quickly hire and fire workers. Which undoubtedly is a good deal for the employer but not so much for the employed. They also want to loosen labour regulations and they imply that they think unions are anti freedom So once again they are talking more about the freedom of the rich to make a profit and less about the freedom of the poor not to be exploited Next one is Economic freedom. This means a stable currency and market determined prices They complain about inflation in this one, and I don’t have time to explain inflation and why it can sometimes be good in here so we’ll take that as their position. They say they don’t really believe in the gold standard and that they want an independent central bank like the IRS Next: Trade freedom, they complain about tariffs in this one. Essentially, they want the entire world to be one big trade block without tariffs This can of course destroy whole economies and bring lots of suffering to many people but more about that later The next one is Investment Freedom. They complain about finance laws and advocate for no limits of payment in any way. This means if McDonalds made money in Austria, Austria wouldn’t be allowed to tax them since the profit is going to America or wherever they stash their money. If Austria tried to get taxes from this that would give Austria a worse score here. Obviously this is a good deal for those rich people, an average deal for the countries they are in and a horrible deal for the rest of the world The last one is Financial freedom, this one just means they want less restrictions on what loans they can give and they want the government to pay them bail out money as well Really there is a theme with these things They aren’t really the things that help the average person at all. They are all things which would bring no or only small benefit to the consumer but which would coincidentally ALL massively increase the profits of the rich people. And that would be fine if it

didn’t come at the cost of everyone else After all if the government can afford to cut cooperate tax rates that is because they closed some school somewhere. And of course that doesn’t bother the rich because they send their kids to private school anyway But hey, maybe I’ve been thinking about this incorrectly maybe it’s not supposed to make your life better. Maybe it’s purely economic. Maybe it’s just intended to be a way for a country to increase it’s GDP without regard for the people. We are gonna have a look at the data to determine this Just one note beforehand: Anarcho capitalists like to use the economic freedom index as a scale of how capitalist a country is. From this I’d assume they want the score to be higher everywhere. But the things the score wants and the things a free market needs are opposed to the ideas anarcho capitalists follow Like, the Economic freedom index wants a strong central bank, opposes the gold standard, wants the government to give money to businesses, wants strong legal protection enforced by the police and wants a strong national army All of which ancaps oppose. Really if a country moved towards anarcho capitalism it would be in the red on the economic freedom map So if you remember in my reply to Shane Killian he said that the green countries on the map are more capitalist but he himself has claimed that there is no capitalism if there is a state so logically he’d have to oppose the green countries since the things that make them green are strong legal rights for cooperation Anyway, let’s not waste too much time on an ancap that won’t bother watching until here. Let’s finally have a look at the data I’ve already explained why I think that the components of the score don’t show anything useful about the quality of life of the average person but now we are going to move past my theories and take a deep dive into the raw data and sort facts from fiction ALL THE DATA Let me start of by citing my sources. For almost all data here I relied on the website itself. The only other data I manually added was from the world happiness report This caused some problems you’ll see shortly All I did was take the data reported by the heritage foundation and have a look at it Let’s begin by refreshing your memory on how graphs and data relation work. This is a graph. This side has one type of data, like number of feminists in video games, and this one has another type of data, like amount of happiness in the world. Then we can add data points in here, let’s say we did a test in a world with many feminists were everyone was happy and one in a world with few feminists in which everyone was sad The honest thing to do would be to neutrally insert the data points. If I had a bias however, I could add a line here which suggests a relation This line is called a graph by the way. And the type of graph I use will really influence the way you think about the data. For this reason, I did not include any graphs in my data. Only data points Of course graphs can be used correctly, if we had lots of data which consistently showed one thing, like this here. We can see that on average the more right a point is the higher it is. In our example that would mean the more feminists there are the more happiness there is. And this can be used for predictions If we had all this data we could reasonably assume that increasing the amount of feminists would increase the amount of happiness. For comparison this is what it looks like if there is no correlation between our data sets And critically this isn’t a correlation either. In this case it may seem like they are related because it’s a straight line, but it’s horizontal, this means that no matter how many feminists we have, the amount of happiness is the same. Though it looks like a correlation at first, it isn’t one, the two values are independent of each other No matter how many feminists, the happiness stays the same. The reason I mention this was because someone said that there was a correlation here Which is not true, the only meaningful way a graph could be drawn here would be practically horizontal which means that those factors are not related. And while looking at this one, let’s talk about outliers. Sometimes for some reason a single data point will be somewhere completely different from the other ones. This is an outlier, and with a dataset of our size we can ignore single outliers because they would barely influence the graph However, all of this analysis only works if we have a lot of data, if we only have two points then we can’t use them to construct a meaningful graph. And the thing with the economic freedom index is that it only has 180 data sets. That being the amount of countries they recognise. Which by the way includes Taiwan and excludes Palestine. Not the point The point is that it could very well be questioned whether 180 points are enough to be useful I assumed so but you may have a different opinion And, I did not think I’d have to say this but not every graph conveys meaning. Mathematically as soon as you have a few points you can calculate a graph. This means even if the data is completely unrelated like here you can draw a ling through it. The reason I am mentioning this is because *someone* made a video about the index where he nonstop draws graphs in datasets which

have no clear relation Mathematically there is a way to figure out how close a graph is to the data points. This is R², and the lower it is the worse the graph is. R² of one means that the graph touches all points there are. Scientifically the lower end of the acceptable R squared value is 0.6 which means 60%. Anything below that is scientifically worthless. And any good statistician will always write the R² on their graph. And this is something we can see in the data used by this channel here Matter of fact, none of the graphs he uses in this video have an R² of above 0.6, this means they are all scientifically worthless Just be aware that if you see this little R² on a graph someone made and it’s below 0.6 it should be taken with a grain of salt And if it’s below 0.2 it’s most definitely worthless. And this person here unironically uses a graph that has an R² of 0.06 That’s 10% of the absolute minimum and somehow that video didn’t get him laughed off YouTube And one more thing, just because we are putting two things on a graph and they correlate, that does not mean that they are related directly To get back to our example, we could assume that the feminists increase the happiness But the same data would allow us to conclude that the amount of feminists increases because happiness increases. It’s just a graph, it doesn’t tell us what way the correlation is going. It doesn’t tell us which part is causing the other It could also be that no part causes the other Because it’s entirely possible that two things appear related but are not. Maybe it’s a coincidence that our graph shows this or maybe those two things share a cause. Maybe a feminist wrote a self help book and the entire world bought it and as a result more people paid attention to feminism and more people became happy. Those things share a cause but are not related. Increasing feminists would not make people happier in that case, even if it looks that way here Now then, let’s look at the data I compiled for the past week. This graph compares the economic freedom index with the GDP per capita As you can see here it sure seems like a high economic freedom score correlates with a higher GDP per capita. And this is the graph every person who tries to sell you on the Economic freedom index will use. We’ll get to why in a bit The way you’d assume they use it is like this, with an exponential growth function but this one only has a R² of 0.38 so they usually use this one which at least has an R² of 0.5 but it’s also a quadratic function so according to their own data having a low score would be good as well. So the way they get around this is by ignoring these 3 countries and beginning the graph at an economic freedom score of 35 to hide the fact that it’s a quadratic one. From now on I won’t be talking about graphs or R², just know that all other graphs are even less legitimate than this one, and this one doesn’t meet the minimum for scientific validity and has to ignore some data and cheat to reach that point Next, we’ll have a look at this one. It shows the relation between the economic freedom index and the world happiness index. As you can see there are many countries with a Zero on the happiness index. This is because the world happiness index includes fewer countries so for countries were this data was not available I entered Zero. If we ignore these ones the data is alright though. And once again we can see that there seems to be a correlation between happiness and the index. Though this one is less clear, the correlation is still here. If you are curious, the R² of this one is 0.44 which once again is lower than it would have to be to be taken serious but from now on I assume it’s a valid correlation Let’s now look at the thing neoliberal economists love talking about. GDP growth. This graph displays the correlation, or rather lack thereof, between the economic freedom index and the growth in the GDP in the pervious year. Curiously, it seems like all economies are more or less growing at the same speed, regardless of what the economic freedom index says. Ignoring a few outliers. This is the first time we see a complete lack of correlation in our data. But hey, maybe we are going about this the wrong way. Maybe the effects of the high index take a few years So, I also complied the same data but with the GDP growth between 2015 and 2020. And this one is somehow even less correlated than the one before. We can see that the economic freedom index has nothing to do with how quick the economy grows. There is no correlation between these things. So, we can conclude that a high economic freedom index does not show how well the GDP grows but it does show how high the GDP is already. Now that’s

a combination which implies that there is no correlation between the GDP and the index Or alternatively that GDP and GDP growth are not related but that doesn’t make sense So the correlation between the index and GDP seems to be on thin ice. So I guess we just don’t have enough data to know. We don’t know whether the economic freedom index really has influence on the wealth of a country The only way to find out is to increase the score in all countries and force them to accept out neo-colonialist values Except no. We have more data. I was tricking you when I said we don’t know. Because of course the economic freedom score goes back a few years. We can see how the score has changed over time and then compare how well other things changed in that time. For example here I mapped the change of the economic freedom index in the past year with the GDP per capita As we can see there isn’t much going on This means that increasing the score does not cause a higher GDP. Or does it? This is just one year, the DGP per capita doesn’t have time to increase within one year of economic liberalism. We need to look at the deeper trend for that! Like here, this one compares the GDP per capita and the change in the Economic freedom index since 2013. Why 2013? Because that’s the latest data they had to download. Please note how almost half of the data points are in the negative on the bottom axis. This means that almost half of the countries reduced economic liberalism. And curiously the richest country only increased their score within single digits. If you are very biased you could draw a graph in there but really the data is too spread out to allow any useful conclusion Let’s return to happiness. Remember how there was a correlation between the index and happiness? Here I connected the change in economic freedom to the world happiness index. The goal was to figure out if increasing the scores on the index made people happy And there seems to be absolutely no correlation here. But wait! I cheated, I used the change in one year again. Surely we can’t expect the increased index to show it’s effect instantly! Now this maps the happiness and the economic freedom index increase over 7 years. And is that a correlation? If you squint a little it might be. But really looking at this I wouldn’t be comfortable claiming that increasing the economic freedom makes people happier The data just doesn’t conclusively support that and the R² would be nowhere near big enough I also had a look at GDP growth again, remember we already kinda saw that there is no immediate relation between GDP growth and the economic freedom index. But Just to make sure I had a look at those as well. This one maps the one year change in the economic freedom index and the GDP growth over one year. This one maps the one year change in the economic freedom index and the GDP growth over 5 years This one shows the change in the index over 7 years compared to the GDP growth over one year. And finally this one shows the change in the index over 7 years compared to the GDP growth over five years. None of these show any correlations. And just in case you have already forgot what a correlation looks like: For fun I decided to compare the economic freedom index to the growth in economic freedom index Unsurprisingly there is a correlation between having a high score and having increased the score. Not sure why I compiled this data but it’s refreshing to see an actual correlation again before the end Conclusion So what do all of these graphs tell us? Well, the truth is that there is a correlation between a high economic freedom score and a high GDP And there is a correlation between having a high economic freedom score and having a high happiness index. But when we have a look at what happens when we increase the economic freedom index there is no correlation. And as a matter of fact even that one graph is scientifically worthless if you don’t manipulate it a bit Increasing the score does not increase the GDP and it does not make people happier. But why is there a correlation in the first place then? Why seem the Economic freedom index and GDP related in this graph? Honestly, from this data we can’t tell. It might very well be another external factor which both of these are related to. Maybe rich countries have high GDPs and because of that high GDP the economy has lots of money to lobby for greater rights for cooperations which then increases the score We don’t know why there is this correlation But what we do know is that increasing the economic freedom score, which is what the heritage foundation advocates for, does NOT lead to short- or medium-term GDP growth, or total GDP, or happiness for that matter Increasing the economic freedom index does absolutely nothing according to this data set which might I remind you, I got form their own website. Their own data made me conclude that there is no correlation and most definitely no causation So why do they push for this? Why does the heritage foundation invest so much money in lobbying to increase the economic freedom score if there is nothing to support that the score has influence on the people or the economy? I would argue that that’s because their goal is not actually to increase happiness, or even GDP. I would argue their goal is to make it easier for them to become more rich Look at the factors that go into the economic freedom index. It’s quite obvious that those are things which makes business easier for people with lots of money not really things that the common person cares about. How does

monetary freedom make my life better? How does a high cooperate tax rate hurt anyone but the rich? And I would even argue that a high corporate tax rate is a good thing because it takes money from people who have enough of it and uses it on things that benefit most of us like roads and hospitals And here, trade freedom. This might sound shocking but free trade can be really dangerous Let’s say you have a small little economy There are many restaurant owners everywhere They compete, provide good products and so on. But then suddenly a foreign cooperation named McDonald’s comes along and outcompetes and destroys all of those businesses. Suddenly you’ve lost a vital tax income stream and have a lot of new unemployed people. And all of that profit McDonalds makes is taken overseas instead of local business owners This is why tariffs and investment constraints exist. To prevent big foreign cooperations from destroying entire economies. The only people who profit from a big cooperation destroying an economy are those few who own said cooperation And meanwhile all of those local restaurant owners are the losers, and so is the country this happened in. But in the economic freedom index all of this is seen as negative. Protecting an economy is a bad thing. Stopping your economy from being destroyed is bad And this goes to show what the goal of the Heritage foundation is. It’s not to actually improve the lives of people, or even to create a sustainable economy with competition. Their goal is to make it easier for their financiers to make money. They care more about helping rich corporations getting richer than about actually caring for the well being of the economy or the people Almost all of their factors have no measurable influence on GDP, and the data supports this, increasing the score does not lead to a more profitable economy. It does not increase happiness, it does not increase economic growth and it does not increase GDP. The only thing they use to support their claims is this one graph Ignoring all of the other graphs that show that this one is a coincidence. They do all of this to increase the wealth of their investors by purposefully deceiving pretty much everybody They must know that this one graph is an outlier, that this one says something all others oppose but they don’t care because the economic freedom index is a score designed by people with an agenda, who already knew what conclusion they wanted to come to in order to push for the things they were going to do anyway without regard for whether the facts actually support their conclusions. They don’t care that there is no connection between GDP and the index, they will just say it anyway and show the one graph that seems to confirm that From a scientific or logical point of view the Economic freedom index tells us none of the things they say it does. It’s essentially a worthless metric, even according to their own data and even the data they give out as proof of what they believe in does not meet the minimum standard for foundational validity It’s as valid as any random number Thanks for watching, I hope you enjoyed the video, I spent way too much time on this why not like and subscribe to stimulate the reward centre in my brain so I make more content? Do you want to see me play Minecraft and attempt to break a world record in the process? Subscribe to my second channel Viki2000. I would like to thank my patrons for making me make videos and I’d like to say an extra special thanks to Aaron J Peton and Jenarchist 77 for your generous donations