Defining political and economic freedom

The debate and some of its main arguments are muddied by conceptual disagreement when studies effectively argue against Hayek's – but not Friedman's – conception of political freedom (e.g. Zencey, Reference Zencey2012). The HFH is often discussed as a hypothesis about the association between economic freedom and democracy, but without clearly defining either concept. Friedman (Reference Friedman1962) defined a situation without economic freedom as one of centralized control of economic activities while Gwartney et al. (Reference Gwartney, Lawson and Hall2015: 1) define economic freedom as a state of society where ‘individuals are permitted to choose for themselves and engage in voluntary transactions as long as they do not harm the person or property of others’. While this is the operational definition in most research studying economic freedom, definitional standards are substantially more mixed in democracy studies.

The definition and operationalization of democracy remains a contested field, including everything from proponents of clean, minimalist definitions emphasizing the existence of free and fair elections with full suffrage that effectively allow the alternation of government power between different parties or interest (cf. Cheibub et al., Reference Cheibub, Gandhi and Vreeland2010) to much more maximalist definitions with strong normative components. These definitions include features of political freedom and human rights such as press and media freedom, freedom of assembly and freedom of speech, but some maximalist definitions also include a set of specific policies deemed to be normatively desirable as outcomes of democracy as well as the constitutionalization of socio-economic rights (Kerr, Reference Kerr2013; Morlino, Reference Morlino2004; Stilz, Reference Stilz2014).

Such conceptual disagreements are major problems when discussing the HFH as most critique against it tends to rest on a very particular maximalist definition of democracy. By applying a maximalist definition, this strand of literature effectively defines a normative and ideological ‘quality’ of democracy, which contrary to the HFH is inconsistent with economic freedom. Olssen (Reference Olssen2010: Chapter 3), for example, attacks a so-called ‘neoliberal’ conception of democracy as one that ‘avoids questions concerning the sharing of resources or the benefits of the world's wealth’. Yet the enforcement of socio-economic rights is, for example, logically inconsistent with the rule of law as it provides individual citizens with specific rights based on their belonging in particular groups or categories. Hahnel (Reference Hahnel2009), in a radical left-wing critique of the liberal market order and private property rights, instead claims that economic freedom actively undermines democracy, and advocates something she calls ‘participatory planning’. Common to all of these writers is a definition of democracy as a much more encompassing and maximalist concept than electoral democracy with free and fair elections and a full franchise. As such, their concept of a proper democracy is logically inconsistent with limited government.

Reich (Reference Reich2009) exemplifies another instantiation of the conceptual confusion that haunts political discussions surrounding this and related topics, where critics equate economic freedom with a neo-corporatist conception of society where government directly supports large industrial interests at the expense of average citizens, i.e. with a non-competitive version of capitalism. Such attacks on Friedman's version of the hypothesis claim that capitalism undermines democracy by creating inequality and giving undue power to large industrial interests. However, such a conception is also identical to what Zingales (Reference Zingales2012) calls ‘crony capitalism’ – a societal structure in which special interests are able to buy or otherwise procure policy and legislation that effectively limits or short-circuits competition and economic freedom. As such, Reich's critique of the HFH is remarkable only by employing a non-standard definition of the concept of economic freedom.

The mixed evidence

As such, some of the critical literature rests on conceptual definitions that are rather far from the way political and economic freedom is defined by Hayek and Friedman. The empirical evidence for the HFH remains more mixed, partly for similar reasons, and partly because Hayek in particular may not have thought of the hypothesis as testable in the same way as Friedman did.

Farrant and McPhail (Reference Farrant and McPhail2009) provide a representative example of the problem by summarizing the exchange between Hayek and Paul Samuelson, as well as some of the critique of Hayek's position. Hayek argued that he had issued a sincere warning about the likely path of economically unfree countries while Samuelson and several other commentators read the book as a direct prediction of a future to come (Alves and Meadowcroft, Reference Alves and Meadowcroft2014). The subsequent discussion, forming a background to the empirical studies, therefore came to revolve around the question of whether Hayek had described an ironclad law, providing a testable hypothesis stating that certain countries would tend towards autocracy, or merely engaged less formally in a normative political debate.

Samuelson (Reference Samuelson1970) nevertheless interpreted Hayek's argument as a directly testable and therefore falsifiable claim. More recent studies such as Farrant and McPhail (Reference Farrant and McPhail2009) and Alves and Meadowcroft (Reference Alves and Meadowcroft2014) have likewise emphasized mixed economies and the largest welfare states in northern Europe as counter-examples of Hayek's original hypothesis, as these are able to command about half of all income without degenerating into totalitarianism. Yet as shown by Bergh (Reference Bergh2014), the Nordic welfare states have only survived by continual reform that has left Denmark and Sweden in particular with large government sectors but otherwise with some of the least regulated economies and strongest private property rights in the world. His main point is that the protection and expansion of economic freedom – apart from government transfers and insurance – has proved necessary to finance the welfare state without the use of force.

More conceptually benign tests of the HFH – with a relatively minimalist definition including free elections, full participation and political competition, but not specific policy or institutional choices – suggest that the main thrust of the hypothesis tends to fit empirical tests. Lawson and Clark (Reference Lawson and Clark2010), for example, note that during the four decades in which measures of both freedoms have existed, no society without some minimum degree of economic freedom has succeeded in upholding democratic political freedom. While societies exist with high levels of economic freedom but little democracy or other aspects of political freedom – Singapore being the most obvious example – the opposite combination is extremely rare, suggesting that economic freedom is a necessary but not sufficient condition for sustained democracy. Similar studies associating the overall ideas with the hypothesis known as either ‘douce commerce’ or democratic peace also tend to find support (e.g. de Soysa and Vadlamannati, Reference De Soysa and Vadlamannati2013; Mousseau, Reference Mousseau2000). Yet the empirical literature remains mixed.

Mechanisms connecting economic freedom and press freedom

While empirical studies have successfully tested the main thrust of the hypothesis, the additional critique that the HFH is undertheorized remains. The most important strand of the HFH literature thus reflects the general informality and imprecision of the main argument. As such, several studies by researchers critical to the hypothesis have pointed out the imprecision, and attacked Hayek's arguments in particular for being inconsistent.

The starting point of this paper is that requiring limited economic freedom to lead to a direct and approximately immediate loss of democracy is both empirically impractical and theoretically uninformed, as it could involve a very large number of potential transmission mechanisms, which may prevent clear identification of any single mechanism. Instead, I approach the HFH from the common element in the two contributions by asking if economic freedom affects the degree to which a regime respects the freedom of the press.Footnote ¹ The conceptual starting point is therefore that a sufficiently free press is arguably a necessary precondition for citizens, with the formal and effective freedom to vote, to be able to cast an informed vote (Leeson, Reference Leeson2008; Sen, Reference Sen1997; Strömberg, Reference Strömberg2015).

First, while the HFH is certainly undertheorized, this is partly a consequence of the general lack of consensus of how to define democracy. Focusing on one necessary element of political freedom – the freedom of the press – offers a situation in which it is easier to formulate more precise and more directly relevant theoretical mechanisms. It also begs two clear questions: who would be interested in limiting press freedom, and how would they go about doing it? At a basic level, two types of actors can have an underlying interest in limiting the freedom of the press: political actors and economic actors.

The political interests of limiting the information that is available to the general public are well described as a particular type of elite capture (e.g. Djankov et al., Reference Djankov, McLiesh, Nenova and Shleifer2003; Enikolopov and Petrova, Reference Enikolopov, Petrova, Anderson, Strömberg and Waldfogel2016). Any government has an incentive to stay in power, which is easier to achieve if the flow of information can be controlled so that any unfortunate news are either suppressed or only partially reported. With limited press freedom, government may also be able to place unchallenged information in the media that presents it in a favourable light. Having government control over the press thus allows government to avoid costly and potentially embarrassing social conflict, and to protect any political or economic perks that the general public may take issue with (Leeson, Reference Leeson2008). Following the introduction of special interest regulation and other policies that create economic perks for specific groups or the political elite, government may therefore have a particular interest in limiting press freedom in order to avoid opposition and a loss of perceived public legitimacy. In general, the more government does and the more ways it intervenes in society, the more likely is it that such situations will arise. Finally, limiting press freedom may also be a way to protect one's international reputation by limiting any potentially damaging information from being accessible abroad.

Economic special interests may also have an interest in limiting press freedom, arising out of a desire to prevent the public dissemination of information on either the existence or consequences of monopoly-like conditions, political connections, or unwanted consequences of economic activity such as pollution (Friedman, Reference Friedman1962). Similar interests may apply to religious organizations that often have particularly close political connections. Bjørnskov and Freytag (Reference Bjørnskov and Freytag2016) also hypothesize that a free press is likely to constitute a threat to organized crime and corrupt agents, which may subsequently threaten the life of journalists. In such cases, the media may be formally free in the sense of not being subject to legislative control, but will still be unfree since particular special interests – a Berlusconi in Italy, for example – are able to control the news flow. In such situations, government policies can create private incentives to limit press freedom through private means rather than through active lobbying for legislation. As such, limited press freedom may be either a reaction to legitimacy problems created by regulatory activity or a direct consequence of regulatory capture.

Subsequently, any mechanism connecting changes in economic freedom to intended as opposed to purely incidental changes in press freedom must logically rest on one of two types: either economic freedom that directly affects the ownership structure of the media or the de facto control that either government or large private and organizational interests have over the media (cf. Leeson and Coyne, Reference Leeson and Coyne2005). Regardless of the particular mechanism, reduced press freedom is therefore a logical consequence of elite capture that is also likely to be reflected in other regulatory policy and government support schemes.

Given that any agents are interested in limiting press freedom, the next question is the mechanism through which they do so. Strömberg (Reference Strömberg2015) emphasizes that media can serve three main political purposes: agenda setting, priming influence and framing. First, the most direct way of achieving the level of influence that allows a government or an economic interest necessary to control the agenda in public debate, for example, is to actively own the media. As such, Djankov et al. (Reference Djankov, McLiesh, Nenova and Shleifer2003) show empirically that government ownership of majority media is strongly associated with substantial losses of press freedom across most countries, as governments attempt to direct which information flows to the public. However, they also emphasize that the more homogeneous government-owned media's news coverage becomes, the better is the business case for alternative newspapers and other media. Despite even very concentrated ownership, it can therefore be difficult for private economic interests to control the media agenda (Petrova, Reference Petrova2011). Conversely, government may have an interest not only in controlling the domestic media but also in restricting access to foreign media. This almost always entails restricting market openness as information often flows through similar channels as trade and international market information. This type of mechanism is logically unavailable to private interests.

In total, there are a number of mechanisms through which the HFH could operate. Regulatory activity, the size and influence of the public sector, market openness and the general quality of public institutions all may affect press freedom in one or more ways. However, more recent thinking, in part inspired by Hayek's (Reference Hayek1960) study of constitutional political economy, provides a potentially important qualification, which I also take into account in the following. The main argument is that policies and institutional choices that affect economic freedom may be of relatively little importance if implemented in polities with weak veto institutions. Hayek (Reference Hayek1960) stressed the importance of checks and balances, and veto institutions that protect minority interests. Yet another consequence of having strong veto institutions that can block policy decisions is that they tend to make policy choices more persistent, as veto institutions also prevent policies from being changed (Keefer and Stasavage, Reference Keefer and Stasavage2003). Justesen (Reference Justesen2014) therefore argues along with Henisz (Reference Henisz2002) that the main effect of veto institutions is to lock in institutional changes such that institutional improvements are unlikely to be rolled back. Similarly, for the effects of policies changing economic freedom to affect de facto press freedom, sufficient political constraints must be in place. If not, journalists and other actors who take advantage of nominally improved press freedom may be hurt if policies change again. For policies to have full effect, central actors – in this case journalists and other actors within the media – must in other words expect that the policies are unlikely to be changed in the near future. As such, based on arguments that derive from Hayek's further work, the HFH is more likely to hold when veto institutions tend to lock in (both good and bad) policies and institutional choices, and unlikely to hold when relevant policies can be changed easily and thus becomes unstable. This and the more general HFH is tested in the following.

Institutional conditions

Yet economic reforms can be short-lived and are always surrounded by some level of policy uncertainty. Justesen (Reference Justesen2014) therefore argues that property rights institutions in particular may only have long-run consequences when permanence is supported by strong veto institutions. In the additional results reported in Table 3, as well as in an online appendix, I therefore employ the specific areas of economic freedom in combination with an interaction with the Henisz measure of veto player strength.

Table 3.

Results, single areas of press freedom

Note: * (**) [***] denote significance at p<0.01 (p<0.05) [p<0.10]. All regressions also include a constant term; numbers in parentheses are robust standard errors.

With interactions, neither the interaction term nor the separate estimate of the main variable can be interpreted on their own: Because the marginal effect is the un-interacted estimate plus the interaction estimate evaluated at any value of the interacting variable, one must calculate marginal effects for a number of values (Brambor et al., Reference Brambor, Clark and Golder2006). The bottom panel of the table therefore reports the conditional effects of each of the four components of economic freedom at the 10^th, 25^th, 75^th and 90^th deciles and the median of the distribution of veto player strength. These results thus evaluate the effects of economic freedom at low to high levels of veto institutions and make it possible to evaluate the changing effects of economic freedom depending on the degree to which veto institutions make them permanent.

In Table 3 and further robustness tests in an appendix, certain results persist in both the full sample and across democracies. While the rule of law seems to positively affect the law and regulation component of press freedom (i.e. it negatively affects the index), this result nevertheless fails when the poorest countries are excluded. Instead, the only robust result is that the rule of law positively affects the index capturing the economic environment when veto players have some strength. The government size component, on the other hand, seems to negatively affect press freedom, yet this result also disappears when the poorest are excluded.

For the regulatory component of economic freedom, results are mixed. When excluding the poorest countries (in the appendix), more regulatory freedom seems associated with worse legal regulation of the press when veto player strength is limited.Footnote ⁶ Conversely, it is associated with a better economic environment for press freedom when veto players have some strength. Finally, the strongest result is that in the economic environment, market openness is unconditionally beneficial for press freedom. However, given the significant correlation between three of the four components – government size is only weakly associated with the remaining three – collinearity is a potential worry. In particular, changes in components would arise if reforms tend to be implemented as packages that include changes to multiple components, which would impede the identification of component-specific effects.

Robustness tests

Yet while the findings above suggest that only certain elements of economic freedom are associated with press freedom, they may still either be statistically fragile or not generalize to most countries. In this final section, I therefore test their robustness.

As a test of the conditional findings, I first perform a ‘beauty contest’ in which I include interactions with two measures of economic freedom at a time. The beauty contests addresses the problem that the four different interactions are strongly correlated – interacting four correlated measures with the same variable logically yields heavily correlated interaction terms – which implies that it can be difficult in practice to separate the effects. With four indicators and three outcomes, the full set of combinations of two interactions yields 18 permutations. Requiring that any interacted effect must remain significant and relatively stable in terms of size, these 18 tests show clear support for three associations: (1) for law and regulation indicators of press freedom, the conditional results pertaining to regulatory freedom and market openness remain robust; (2) for indicators of the political environment, only the effects of government size remain stable; and (3) for indicators of the economic environment, the beauty contest supports the robustness of the effects of market openness and regulatory freedom.

As such, the occasionally significant associations with the rule of law turn out to be statistically fragile. Conversely, the remaining findings are robust to a set of additional tests. The main result – that the market openness component of economic freedom is responsible for the effects on press freedom – could for example be due to changes in trade flows that need not be associated with policy changes. Yet adding a set of extra variables – trade volumes as a percentage of GDP, Dreher's (Reference Dreher2006) KOF measure of globalization that compounds trade and investment flows, the KOF measure of specific trade and global investment policies, and the KOF measure of social globalization and international information flows – does not change this result. Even though economic globalization in the sense of both flows and policies appears significant, their inclusion only increases the size and significance of market openness.

Additionally, I test the robustness and generalizability of the main findings by excluding the tails of the distribution of press freedom, in order to ensure that the results are not driven by extreme press freedom, and excluding the tails of the distribution of economic freedom, such that results are not driven by extremely high or low freedom. I also exclude the ten potentially most influential countries in the sample, defined as those with the largest changes in press freedom. None of these tests change the main result, although the latter test reduces the size of the point estimate by about 30%. To the extent that such tests can inform, the findings therefore seem to generalize to most situations and countries, as argued by Hayek and Friedman.