At this year’s Mont Pelerin Society (MPS) meeting in Miami, where political and economic thinkers gather from around the world, we talked about the fabled economic freedom index that was started by Milton Friedman and other founders of the MPS. Two indexes are published, one by the Fraser Institute in Canada, and the other by the Heritage Foundation in the United States.
What can we learn? First, there’s a direct relationship between economic freedom and economic growth and a higher standard of living. The more freedom, the more per capita income — it’s that simple. See the following chart to confirm this:
In general, countries with more economic freedom tend to have rising stock markets. But not always. Japan has a relatively free economy, but its Nikkei Index has been sluggish for 20 years now. The United States has been declining in its economic freedom, and is now ranked #12, yet its stock market continues to rise.
Money managers have tried to create mutual funds that invest according to the economic freedom index. However, the figures that constitute the index are usually 2-3 years old, and therefore lack information about the level of economic freedom today. Moreover, the key to making money in stocks is to anticipate the future of the markets and a nation’s economy. By the time the data comes out about a shift in a country’s economic freedom index, the markets have probably already responded to the new situation.
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