I have much respect for Wall Street Journal’s Mary O’Grady and Heritage Foundation’s Jerry O’Driscoll who put out the annual Index of Economic Freedom, the next issue of which will be published next month. The CATO Institute and the Fraser Institute, who recently published the latest issue of their own Economic Freedom of the World index, must also be commended for their promotion of economic freedom. However, in trying to measure it with simplistic index numbers, our friends unwittingly betray their cause.

The importance of economic freedom, i.e., the liberty to produce, own, consume and exchange goods and services without coercion, can hardly be underestimated. Economic freedom produces general prosperity, and is a (necessary and perhaps sufficient) condition for all other kinds of liberty. The problem is whether a simple index can really measure that.

The Heritage/WSJ index ranks 155 countries based on equal weighing of 10 factors: trade policy, fiscal burden, government economic intervention, monetary policy, restrictions on capital flows and foreign investment, banking, determination of wages and prices, property rights, regulation, and black market activities. The CATO/Fraser index ranks 123 countries based on the same sort of criteria, under four general headings: size of government, legal structure and property rights, access to sound money, and freedom to exchange with foreigners.

It is not surprising that Western countries like the United States, the United Kingdom, Switzerland or Canada would come in the head pack of both indexes. These countries are among the most important recipients of foreign direct investment. Presumably, economic freedom is an important factor in investors’ decisions, simply because, other things being equal, returns will be higher in freer countries. Of course, other things are not equal, and less free countries, like Sweden, Mexico or Japan, also get big chunks of foreign direct investment.

If the two indexes don’t tell much when they give good scores to the same major countries, they are utterly unreliable when they surprise us – for example by putting Hong Kong and Singapore at the top of the ranking, and way above countries like, say, France or Italy. This is because both indexes are based on subjective judgements about selective parts of reality.

Singapore gets its second rank there mainly because of its sound money and freedom of international trade, but it also obtains very good marks for regulation and protection of property. Hong Kong also gets top marks for regulation and trade, despite its now being under the rule of one of the worst tyrannies on earth.

Criticizing the indexes, Dr. Christopher Lingle, who had to flee Singapore after criticizing the government in the International Herald Tribune, ask: "Isn’t it more important that the government of Singapore controls almost 40% of all earned income through a mandatory pension scheme ... or that the government owns all the land (as in Hong Kong) and leases it out as it fits into the game plan of the ruling party? Is a country economically free if a single-party uses threats of withholding contracts, licenses and the like against opponents?"

Obviously, the indexes miss something about the deep meaning and the secure character of economic freedom.

Index measurements are crude. Estonia gets the 4th place in the Heritage/WSJ ranking, due to its excellent showing in four of the eight categories of the index: trade, monetary policy, foreign investment, and flexibility of wages and prices. But the same country only gets the 35th place in the CATO/Fraser ranking, because other elements of sound money (besides the inflation rate) and of business regulation are less favourable in this index.

Why is Canada 8th in the CATO/Fraser calculations, but only 15th in the Heritage/WSJ index? The latter index is especially critical of Canada on taxes and regulations (including barriers to foreign investment) and, although the criticism is probably well taken, the measurements of one index are not more objective than the other’s.

These indexes are only very rough approximation of reality – so rough that they are either useless or misleading. Although both indexes do show some correlation between prosperity and measures of economic freedom, the Heritage/WSJ index concludes that "repressed" countries (i.e., the ones with the less economic freedom) have larger incomes per capita than the group of "mostly unfree."

The unreliable character of the freedom indexes also appears when one looks at their evolution. The CATO/Fraser index suggests that economic freedom has increased in the world since 1980, which is far from obvious. A recent study by the Murray Weidenbaum Center on the Economy, Government, and Public Policy shows that the U.S. federal regulation expenditures have increased virtually non-stop since the 60s. Who believes that this is unique to the U.S.? Who would seriously argue that economic freedom has constantly improved in Canada or in the U.K. since 1975, as the CATO/FRASER index would have us believe? The indexes miss all the new regulations in the form of tighter surveillance and control of participants’ behaviour in financial markets (disclosure, insider trading, suspected money laundering, etc,), as well as international cartelisation of state power like in the OECD’s assault on international tax competition.

While relatively pessimistic about the ranking of civilized countries (in North America and Western Europe), the indexes seem naively optimistic on their evolution. They thus give us a false sense of contentment. At best, they provide our politicians and bureaucrats with another tool to persuade us that we live in "the best of all worlds," as Candide would say. At worst, it gives them unreliable data to bring us there willy-nilly.

As the CATO/Fraser report admits, "something as complex as economic freedom is difficult to measure in practice." Perhaps we can go one step farther. It is not true that any number is better than no number at all, especially if it risks being used by the state’s busybodies. Just like Keynesian, holistic constructs like gross domestic product, freedom indexes correspond to nothing that individuals can buy, consume or even just observe; their main use is political – i.e., generally to undermine economic freedom and prosperity.