You Have Nothing to Lose but Your Chains? Re-examining the Hayek-Friedman Hypothesis on the Relationship Between Capitalism and Political Freedom

By Nicholas Reinarts, Gabriel Benzecry and Daniel J. Smith. They are all at Middle Tennessee State University.

"Abstract

Is capitalism a necessary condition for political freedom? Friedrich Hayek argued that capitalism is necessary for political freedom in what is now known as the Hayek-Friedman Hypothesis. While previous empirical work using economic freedom as a proxy for capitalism has somewhat confirmed the hypothesis, these results are sensitive to the definition of capitalism and political freedom. We argue that while Milton Friedman claimed that political freedom could not exist without economic freedom, Hayek argued that political freedom could not exist without private ownership of the means of production. Since indices of economic freedom include factors beyond government ownership of the means of production, this distinction could affect empirical results. We test the Hayek Hypothesis using V-Dem’s measurement of state ownership of the economy and its political civil liberties index, which provides annual data going back to 1789. Our primary results find only one robust instance where a country with heavy to complete state ownership of the economy maintained political freedom: Belarus during the fall of the Soviet Union in 1991. Relaxing our definition to include mixed economies with moderate to heavy ownership of the economy also overwhelmingly confirms the Hayek Hypothesis with only a few robust violators."