1) Property rights and free markets that allow for voluntary exchange have led to unprecedented prosperity by incentivizing cooperation and specialization through trade based on comparative advantage. 2) Secure and transferable private property rights are necessary to define ownership, allow for the efficient allocation of resources via prices set by supply and demand, and incentivize innovation and wealth creation. 3) Countries with institutions that protect private property and allow for free exchange and trade, as measured by indices of economic freedom, tend to experience greater prosperity and growth.

1. Freedom for Prosperity
For
Liberty Dr. Tom G. Palmer
Tom.Palmer@AtlasNetwork.org
Justice Warsaw School of Economics
22.March.2011
Mutual Prosperity

2. Let’s start with a
Fact:
The Natural
Condition of
Humanity is
Poverty
The Change from
Poverty to Prosperity
is
“The Big Fact”
of History

3. What Accounts for the “Big Fact”?
?
?
Did the Earth simply become more generous?
Did people start to work harder?
Or did people start to behave differently?

4. People Started to Respect the Freedom
of Entrepreneurs to Innovate and to Keep
the Profits they Made
For the first time, Europe, and then the
world, became “a business respecting
civilization,” according to Joseph
Schumpter

5. “There is only one difference
between a bad economist and
a good one: the bad
economist confines himself
to the visible effects; the
good economist takes into
account both the effect that
can be seen and those effects
that must be foreseen.”
FrédéricBastiat, “What Is
Seen and What Is not Seen”

6. Institutions Shape Incentives, which Shape
Human Behavior
“Institutions provide the
incentive structure of an
economy; as that structure
evolves, it shapes the
direction of economic change
towards growth, stagnation,
or decline.”
 Douglas North, 1993 Nobel Prize
Winner in Economics

7. The Key is Incentives
Intentions should be distinguished from
consequences
Consequences arise from the
interaction of behavior with behavior
and with the natural world
Behavior is shaped at the margins by
incentives

8. The Problem of Economic and Social
Coordination to Produce Order ….
“is a problem of the
utilization of
knowledge which is not
given to anyone in its
totality.”
F. A. Hayek, 1974 Nobel Prize Winner in
Economics

9. Humans Need Some Institutional
Means of Transmitting Knowledge and
Coordinating Behavior
Property and the Market Rely
on Voluntary Action and
Provide Signals to Guide
Behavior

10. Legally Secure Property Rights Create both
Freedom and Incentives for People to Utilize their
Knowledge and to Cooperate Peacefully with Others
Property Rights Create Incentives for
Cooperation and Wealth Creation and for
Social Development
 To do that, they must be characterized by
the “Three D’s”; they must be:
 Definable (the legal system must be able to
define them clearly to avoid conflicts)
 Defendable (they must be secured through
access to a legal system)
 Divestible (they must be transferrable through
gift, sale, or other form of contract)

11. Wealth Production Requires:
1) Property that is Well-Defined, Legally Secure, and Easily
Transferrable; and
2) Freedom to Negotiate and Agree to Prices
1. The point of productive work is to add
value, not just to be busy.
2. Net wealth production (wealth in excess of
cost) requires prices to guide producers and
consumers
2. Without prices, production is blind
3. Without property, including the right to
freely negotiate, there are no efficient prices

12. Let’s Examine the Effects of Price
Controls
Through
Supply and Demand Analysis

13. Free Trade Based on Comparative Advantage
Creates Wealth
Through Specialization and
Trade, We Can Be Much More
Productive
An Example
“Blazej” and “Tom”

14. Consider an Economy of Apples and Fish
 Blazej has an absolute advantage in production of both:
If Tom specializes only in apples, he can gather 50 and
if he specializes only in fish, he can catch 50; in the
same time, Blazej can gather 100 fish or 200 apples.
Blazej is better at both….How could he benefit from
trading with inefficient Tom? By choosing to trade with
the lower cost producer.

15. Production in Isolation (No Trade)
Tom Blazej
Fish 25 50
Apples 25 100

16. Blazej proposes a trade…
37 apples for 25 fish
Tom Blazej
Production for
Trade
Fish 50 25
Apples 0 150

17. Trade Takes Place
Tom Blazej
Fish 25 (same as 50 (same as
before trade) before trade)
Apples 37 [12 more than 113 [13 more
before trade] than before
trade]
Tom can produce And Blazej can now
more….and benefits produce more
from the trade because of trade

18. It’s not a mystery…it’s comparative
advantage
 Despite being less productive in absolute terms
than Blazej, Tom is the lowest cost producer of
fish:
 Producing one fish costs Tom one apple, but for Blazej
to produce one fish costs him two apples;
 By specializing in his comparative advantage -- fish
production, Tom allows Blazej to exploit his
comparative advantage, for producing one apple costs
him one half of a fish, whereas it costs one whole fish
to Tom.

19. Economic Freedom: A Definition
 “Individuals have economic freedom when (a)
property they acquire without the use of force,
fraud, or theft is protected from physical invasion
by others and (b) they are free to use, exchange,
or give their property as long as their actions do
not violate the rights of others.” -- Definition used in
Multi-nation study of economic freedom: Economic Freedom of
the World Report
 (www.freetheworld.com)

20. Let’s Consider the Consequences of the
Institutions of Secure Property and Free
Prices, as Measured in the Annual Economic
Freedom of the World Report of the Fraser
Institute:
www.freetheworld.com

27. To have a Prosperous Economy, the State
Must Be Both Efficient and Limited
1.Provide Security
2.Provide Justice – Protect Property and
Enforce Contracts
3.Provide a Few Public Goods (Roads,
Courts, Police)
4.Leave Production of Wealth to
Entrepreneurs and the Market Exchange
Process

28. Successful and Desirable
Institutions
Create Space for Human Freedom
Create Incentives for Peaceful
Cooperation to Create Prosperity and
Order
Create the Foundation for Civil Society
Create Constituencies that Support
Liberty and the Rule of Law

29. Good Incentives and Institutions are
More Important than Good Intentions
Incentives give
signals to rational
actors about what
will advance their
purposes
Institutions give
form to incentives
What incentives
do different people
have to create
light?