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Throughout their careers both Frederick von Hayek and Milton Friedman preached the unequaled virtues of freedom of choice. Their support of free-market economies was persistent throughout their lives. Their thoughts and positions on this matter had been clearly and consistently made clear. It remains for others who follow to assess their relative positions and evaluate their contributions to the discussion of the role of economic capitalism in a political state. This paper offers an empirical examination of the Hayek- Friedman Hypothesis which argues that societies with high levels of political freedom must also have high levels of economic freedom. Granger-causality tests are performed to identify directionality between levels of economic freedom and two separate, distinct measures of political freedom.
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INTRODUCTION
It should be made clear from the outset that the Hayek-Friedman Hypothesis (hereafter HFH) argues that politically free nations will exhibit a high degree of economic freedom. However, the diametric is not necessarily the case. That is, a nation may possess pronounced economic freedom yet its citizenry may enjoy very little political freedom. Perhaps Hong Kong serves as the best example. While under British domain Hong Kong thrived as a commercially free environment and today continues to enjoy considerable economic freedom. On July 1, 1997, the transfer of sovereignty from United Kingdom to the People's Republic of China occurred, officially ending 156 years of British colonial rule. In accordance with the Sino-British Joint Declaration, Hong Kong operates under the principle of "one country, two systems." Although Hong Kong still enjoys a pronounced degree of economic autonomy, it exists only as a Special Administrative Region of the People's Republic of China and its laws are subject to the interpretation of the Standing Committee of the National People's Congress.
Certain oil-rich nations in the Middle East also illustrate this principle. Many of these nation-states function in a relative free and open economy, but fail to enjoy even some of the most basic fundamental democratic principles.
HFH specifically states that politically free nations will invariably benefit from economic freedom. However, it offers no assurance that an economically free country will ensure political freedom. The purpose of this paper is to test the HFH as to whether political liberties promote economic freedom or...