April 8, 2005
Every year for the last decade, the Index of Economic Freedom,
which we at The Heritage Foundation publish with The Wall
Street Journal, has shown a strong link between economic
freedom and economic growth. For readers with any acquaintance at
all with how markets work, this conclusion probably seems obvious.
Yet Doug Henwood of the Left Business Observer recently
demonstrated how hard it is for some people to grasp it.
In a March 26 "special report" that's been circulating on the
Web, Henwood condescendingly notes the truism that "correlation
doesn't prove causation." We agree, and we have never claimed
otherwise. The data show only that changes in the Index
score and growth rates rise and fall together.
But there are other ideas embedded in this test, such as "wealth
is created by people not governments" and "reducing the barriers in
the path of individuals allow them to use better their natural
abilities to achieve their goals in life." Statistics ultimately
can be used only to disprove. The data, when correctly tested, fail
to disprove any of these statements.
Those are the facts. Unfortunately, from here Henwood's analysis
deteriorates into the realm of ad hoc conjecture.
For example, in his attempt to conjure up an alternative theory
to explain the data results, he asserts, "Corruption lowers a
country's score, but when times are good, outstretched palms are
often hard to notice." Some consistency, please: Corruption is a
tax, for it raises the cost of doing business. The truism he
chooses to ignore here is that "it is a tax in bad times, it is a
tax in good times."
Henwood then descends into an argument about "how countries'
scores in a base year [are] correlated with subsequent growth." In
other words, how the level of economic freedom as measured by the
Index in a particular year is related to changes in income
over time. Who claimed that to be true? Certainly we did not. This
must be Henwood's theory, which he proceeds to test as if it were
In the process, he raises some red herrings about the use of
purchasing-power parity (PPP) data and per capita growth data.
Sorry, Doug, but no matter which data are used, our
results are essentially the same.
But when Henwood tests his theory, the data do not
support his assertion. Alas, his view of the world can be
disproved by the data. (For those who would like a sophisticated
analysis of this point, see
Most disturbing, however, is that this misrepresentation of our
data is precisely the same as raised by Jeffrey Sachs in his new
book "The End of Poverty." It is no more accurate when stated by
Henwood as it is when written by Sachs. They proceed to test the
level of the Index against the change in income,
while our arguments have always been that the level of the
Index is related to the level of income (see
/index/downloads/economicFreedomandPerCapita.gif), and changes in the Index are related to changes in income (See Figure 1 and explanation in http://www.heritage.org/research/features
To paraphrase Henwood, anyone who lasted a week in basic
statistics knows the difference between levels and changes in
levels. Have those who have become ossified in 20th century
economics forgotten the difference?
Sachs' and Henwood's screeds are not about good economics and
good statistics. They are apparently about trying to hold on
desperately to ideas of the past through misrepresentation and
snide little potshots (e.g., "It's so much fun being on the
right-you're liberated from the tyranny of having to make sense.")
C'mon, boys, the public deserves better than that.
Marc Miles is a Director of the Center for International Trade and Economics at The Heritage Foundation.