What is prosperity to you? Is economic freedom something you believe you have? I live in a Northern suburb of Chicago and pay relatively high taxes with what I perceive as a minimal benefit (Illinois has the 10th-highest tax burden in the country). I'm grateful to have fire, police, and property protection, but at what cost? Furthermore, is this "feeling" justified, or am I just another uninformed American disconnected from the rest of the world?
I started to get curious about the U.S. capitalistic economy and how high or low taxes are in my country v.s. the rest of the world. As a result, I got some exciting information about a concept called economic freedom.
So, let's start at the beginning. The United States Constitution set the rules to create the U.S. economy. The U.S. has a mixed economy, combining elements of the command and market economic models.
The United States economy operates as a free market for consumer goods and business services. However, it also functions as a command economy (government-controlled) in defense (and concerning certain aspects of retirement benefits and medical care).
The government regulates these activities and, along with the Constitution, protects the mixed economic structure of the nation. Driven by supply and demand, labor and natural resources are supply forms, and personal consumption is an example of market demand.
Therefore, the U.S. is not a solely capitalist economy; it is a mix of capitalism and socialism. Pull politics out of this statement, as I'm sure you will. We have an economic system that serves the free market (Laissez-faire) and its citizens (socialism) to maintain a thriving economy. Who created this system and why?
Up and Adam
To answer this question, we must learn about Adam Smith. He was an 18th-century Scottish philosopher and is considered the father of modern economics. Smith is most famous for his 1776 book, "The Wealth of Nations." So, how does a 300-year-old Scottish philosopher end up writing the definitive work on economics? Read on, and I'll tell you.
In Smith's early school career, he attended the University of Glasgow when he was 14 and studied moral philosophy under Francis Hutcheson. Here he developed his passion for liberty, reason, and free speech. In 1740, he was the graduate scholar presented to undertake postgraduate studies at Balliol College, Oxford, under the Snell Exhibition.
However, when Smith attended the highly touted Oxford University, he considered the teaching at Glasgow far superior to Oxford, which he found intellectually stifling. In Book V, Chapter II of The Wealth of Nations, he wrote: "In the University of Oxford, the greater part of the public professors has, for these many years, given up altogether even the pretense of teaching." One more time, in English. The University professors were more interested in managing a student's thought process than allowing them to do their own critical thinking.
Don't think, Do
Smith continues to share his poor experience in England in Book V of The Wealth of Nations. His central thesis is that rich endowments of the colleges at Oxford and Cambridge, which made the income of professors independent of their ability to attract students, and the fact that distinguished academics could make an even more comfortable living as ministers of the Church of England.
As a result, Smith left Oxford and gave public lectures in 1748 at the University of Edinburgh, sponsored by the Philosophical Society of Edinburgh. Furthermore, his topics included rhetoric and fine writing and later the subject of "the progress of opulence ." On this latter topic, he first expounded his economic philosophy of "the obvious and simple system of natural liberty."
In 1751, Smith earned a professorship at Glasgow University, teaching logic courses, and in 1752, he was elected a member of the Philosophical Society of Edinburgh. He soon earned the title and position of the head of Moral Philosophy in Glasgow, where he would spend the next 13 years. Smith published The Theory of Moral Sentiments in 1759, embodying some of his lectures. Following the publication of The Theory of Moral Sentiments, Smith became so popular that many wealthy students left their schools in other countries to enroll at Glasgow to learn under Smith. Consequently, Smith began to give more attention to jurisprudence and economics in his lectures and less to his theories of morals.
It's the People
As Smith continued cultivating his understanding of moral theory and law, he saw a connection in economic productivity. For example, Smith lectured that the cause of increased national wealth was labor rather than the nation's quantity of gold or silver, which was the basis for mercantilism. This economic theory dominated Western European economic policies at the time.
Adam would eventually leave Glasgow University in 1764 to be a private tutor to the young Duke of Buccleuch, Henry Scott. Through his travels, he met Benjamin Franklin in France and discovered the Physiocracy school founded by François Quesnay. Like Smith, Physiocrats opposed mercantilism, illustrated in their motto Laissez faire et laissez passer, le monde va de lui même! (Let do and let pass, the world goes on by itself!).
Why is all of this important for the U.S.? Consider the date of Smith's new tutoring job, 1764. Through Benjamin Franklin, the U.S. coordinated its revolutionary efforts with France. And at the time, Louis XIV and Louis XV depleted the wealth of France in disastrous wars. Franklin needed a way to increase the money required by France to support the American revolution.
When questioned, Smith stated that France's agriculture was the only economic sector maintaining the nation's wealth. Smith concluded that "with all its imperfections, [the Physiocratic school] is perhaps the nearest approximation to the truth on the subject of political economy." The distinction between productive versus unproductive labor was the development and understanding of what would become the classical economic theory.
In 1766 Smith ended his tour and returned home that year to Kirkcaldy, and he devoted much of the next decade to writing his magnum opus. Smith was elected fellow of the Royal Society of London and a member of the Literary Club in 1775. The Wealth of Nations was published in 1776 and successfully sold out its first edition in only six months.
Smith had great success throughout his life; most importantly, he revealed that a nation's labor (working class) is the lifeblood of a prosperous country, not the gold it owns. Case in point, Nixon abandoned the U.S. Gold standard and would no longer convert dollars to gold at a fixed value. Taxes would pay the interest on the country's expenditures, and the more people employed, means more tax revenue can be collected.
We're number 1!
So, we are now full circle. How does the U.S. fair in the Economic Freedom index of 2022? Our country is ranked 25th in the mostly free category. The United Kingdom (monarchy) is 24th. Who is ranked number 1? Singapore.
Let's look at the numbers and see why. Over the past five years, Singapore's economy had grown slowly, except in 2020, when it contracted. Economic freedom was very high during that period, at or near the index's top. Singapore's highly developed free-market economy greatly owes its success to its remarkably open and corruption-free business environment, prudent monetary and fiscal policies, and transparent legal framework. Trade freedom is vital, and well-secured property rights promote entrepreneurship and innovation effectively. The general rule of law has high transparency and government accountability.
What are the taxes like? Singapore is one of the world's most prosperous nations and has a business-friendly regulatory environment and a very low unemployment rate. The top individual income tax rate is 22 percent, and the maximum corporate tax rate is 17 percent. Other taxes include a goods and services tax. The overall tax burden equals 13.2 percent of total domestic income. Government spending has amounted to 18.2 percent of total output (GDP) over the past three years, and budget deficits have averaged 0.5 percent of GDP. Public debt is equivalent to 128.4 percent of GDP.
We're number 25!
Let's look at the U.S. economy. The U.S. economy grew moderately well before the COVID-19 pandemic, which contracted sharply in 2020. Growth recovered in 2021. A decade-long trend of flagging economic freedom, interrupted briefly in 2019, has continued. Driven lower by a sharp decrease in its fiscal health score, the U.S. has recorded a 3.0-point overall loss of economic freedom since 2017 and has fallen from the upper half to the lower half of the "Mostly Free" category. Business freedom and the rule of law are strong, but the economy is failing due to brash government overspending.
The top individual income tax rate is 37 percent, and the maximum corporate tax rate is 21 percent. The overall tax burden equals 24.5 percent of total domestic income. Government spending has amounted to 38.9 percent of total output (GDP) over the past three years, and budget deficits have averaged 9.0 percent of GDP. Public debt is equivalent to 127.1 percent of GDP.
We The People
Singapore has one party, the People's Action Party (PAP). Prime Minister Lee Hsien Loong has led the government since 2004 and has suggested a near-term leadership transition. In contrast, the U.S. has a two-party system of Republicans and Democrats. The United States has to work within a democratic framework, and the Singapore government has no opposition. I believe that the answers lay somewhere in between the two. How can we, as American's understand our individual and collective power? Labor is the key to economic freedom. Adam Smith never mentioned governments.
The rule of law is important to a prosperous society, but not the reason one exists. Please read my blog on how the Federal Reserve ( a non-governmental body) came to be and why we pay taxes. We may just learn what economic freedom really is.