Q&A| Economic freedom: the free and the unfree

Recently, I received a question from my student on different market systems. The questions run like this:


1. From what I understand, free market economy is where the government does not play any role in market transactions. I am wondering if it still exists.


2. Is there any planned economy left?


3. Bitcoin is widely regarded as free market. But can it be free as the existence of government, whether it be banned?

1. Free market has long become a relative rather than absolute term. In 2020, there is no economy operate without surveillance of some form from government agencies. However, some economies are more free than others.


Every year, Heritage Foundation ranks countries in term of their Economic Freedom. Hong Kong has been ranked 1st for 25 years. Since 1970s, Hong Kong operates its economy with a positive non-interventionism with low taxation, free trade, and pro-democratic policies. Milton Friedman praised Hong Kong as the closest form of free market in his article "The Real Lesson of Hong Kong”. The model was introduced by John James Cowperthwaite, Financial Secretary of Hong Kong from 1961 to 1971.

Official opposition to overall economic planning and planning controls has been characterized in a recent editorial as "Papa knows best". But it is precisely because Papa does not know best that I believe that Government should not presume to tell any businessman or industrialist what he should or should not do, far less what he may or not do; and no matter how it may be dressed up that is what planning is. (John James Cowperthwaite)

As to Sir. John, the dearth of national GDP statistics allows Hong Kong to develop its free market without "fiddling about remedying perceived ills" (Singleton, 2006).


Cowperthaite believes tax rates (both personal and corporate) should not rise above 15% and there shouldn't be any tariffs and subsidies. Nowadays, Corporate tax rate of Hong Kong is 16.5%. You can see how low Hong Kong tax is in comparison with other countries like the UK, China, Singapore, and Vietnam.

The country's highest and lowest PIT rates are 17% and 2% respectively. The graph bellow shows Hong Kong is standing as a country with the lowest personal tax rate.

The country runs low public debt (almost zero).

Under Cowperthwaite's term, the country should never borrow at any circumstance. He also refused universal primary education, limited the spending on health, and infrastructure. Most prominent case is when he opposed the construction of Mass Transit Railway. It was then built following his retirement and became one of the world's most profitable railways (Singleton, 2006)

In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralized decisions of a government, and certainly the harm is likely to be counteracted faster (John James Cowperthwaite)

His legacy continues till recent years. In 2015, Chief Executive Leung Chun-ying officially announced a more proactive government to tackle its income gap (Wong, 2015). China's intervention in Hong Kong also pushed the country to a less free country with "the high level of civil disobedience, acts of vandalism and intimidation of people holding a different political standpoint have inevitably tarnished Hong Kong's reputation as a safe and orderly place" (Ejinsith, 2020). The 2019 protest caused the country to lose its long-standing 1st position as most free economy to Singapore.


2. You can answer this question by looking back at Heritage Foundation's ranking. The most unfree country now is North Korea. All private companies are banned. Economics is run by State Planning Committee by North Korea. The central planning operates guided by the principles of "unified planning" (일원화,ilwŏnhwa) and of "detailed planning" (새분화,saebunhwa) as described in the bellow graph.

Source: Wikiwand

The process of central planning started from data collection, draft planning, and centrally approval from the Supreme People's Assembly. Central planning has shown its weaknesses. Over reporting leads to an overestimation of economic potentials, production, and finally plan errors. The repeated failures of other communist countries brings the country to different approaches from detailed planning to long term strategy in recent years. Yet overall, the country's economic activities are still heavily centralized. The North Korea system can be still considered as command economy.


3. Regulation of bitcoin have shown how politics and economics intertwined. The concept and operation of bitcoin are free at core. However, putting its operation at hands of citizens within government surveillance. Market volatility, speculative, or illegal transactions are some of many concerns of governments. Bitcoin phenomenon surpasses "Tulip Mania" making its the largest asset bubble up to date.

As of 2020, governments have different treatments toward bitcoin transactions (Graph bellow). In Vietnam, Bitcoin transaction is illegal. Ministry of Justice proposed a pilot regulation framework for cryptocurrency with uncertain effective date. So we shall see?


Further resources:

1. Econtalk on the Hong Kong and the Architect of Prosperity: https://www.econtalk.org/neil-monnery-on-hong-kong-and-the-architect-of-prosperity/

2. Joshua Wong: Teenager vs. Superpower (2017)

3. The Propaganda Game (2015)

3. North Korea: A Country Study, 4th edition https://ia800408.us.archive.org/28/items/PAM550-81/PAM550-81.pdf


References:

Singleton, A. (2006) Sir John Cowperthwaite: Free-market thinking civil servant behind Hong Kong's success, link: https://www.theguardian.com/news/2006/feb/08/guardianobituaries.mainsection

Wong, E. (2015), Hong Kong's move away from non-interventionism should be judged on its results, not intention, https://www.scmp.com/news/hong-kong/politics/article/1859163/hong-kongs-move-away-non-interventionism-should-be-judged

Ejsight (2020), Hong Kong loses 'world's freest economy' title to Singapore, https://www.ejinsight.com/eji/article/id/2406697/20200318-hong-kong-loses-worlds-freest-economy-title-to-singapore

Wikiwand, Economy of North Korea, https://www.wikiwand.com/en/Economy_of_North_Korea

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