Economic freedom is, by definition, expansive of creativity and human entrepreneurship.

Often, in debates about economics and politics, liberals are accused of wanting to “adjust people.”

We have to recognize it. Maybe we have some responsibility because if we are analyzing public accounts and, for example, they have a hole, we say that there is a “mismatch” that must be “adjusted”.

In this sense, the word adjustment has nothing wrong. Is that simply, if you come by a path that will make you end badly, you have to correct, adjust.

Fitting a nut is not bad by itself. In fact, it can prevent fatal accidents: So what could be the problem?

But what the so-called champions of the poor and standard-bearers of the workers mean when they associate liberalism (or, worse, “neo-liberalism”) with adjustment, is that we want to “adjust the workers”, that the wage falls, and that unemployment rises, that “people are left out, but with numbers well closed” .

Within this rhetoric, neo-liberalism is the enemy of the people, while populism, socialism and the welfare state are the true heroes of social sensibility.

Contradiction in terms

Done the mea culpa on the use of the word adjustment by economists, it is clear that there are two meanings of the term. One referred to correct imbalances, and another referred to worsen the quality of life of the people.

In this last sense, Liberalism and adjustment are clearly antonyms. That means the exact opposite, by definition.

Think of what liberalism means. Liberalism comes from freedom, so it implies that people are free to pursue their dreams, without being coerced by third parties. In the field of economics, that freedom is what generates the incentives to undertake, produce more and increase wealth.

Freedom is intimately related to private property. And when private property is respected, entrepreneurs launch to invest, create businesses and companies that offer goods and services. If they meet the needs of consumers, entrepreneurs are creating wealth.

As if this were not enough, as a side effect, the demand for workers increases. Finally, higher production and higher demand for employment raise wages in real terms.

What I say is not a fairy tale or a mere mental gymnastics. According to the latest publication of the Index of Economic Freedom of the Heritage Foundation, the freest countries in the world have a GDP per capita 7.5 times greater than that of countries considered “repressed”, a category in which Argentina was until recently.

Graph 1. GDP per capita and Economic Freedom

Source: 2018 Index of Economic Freedom – The Heritage Foundation

One could argue that the GDP per capita is a measure not at all indicative of the welfare of a society and that, therefore, the relationship is not so amazing.

However, economic freedom is not only correlated with the GDP per capita but also with the UN Human Development Index (the freest countries have an average of 0.93 points vs. 0.57 of the countries repressed).

Further, the countries that take the most steps to increase freedom to create and undertake their citizens, lowering taxes, obstacles, and distortions, they are the ones that end up growing faster, something that is directly related to the fall of poverty.

Graph 2. Improvements in economic freedom and per capita growth rate.

Source: 2018 Index of Economic Freedom – The Heritage Foundation

Given these data: how can one speak of liberalism as synonymous with adjustment? Economic freedom is the complete opposite of adjusting workers.

It is the necessary ingredient to increase entrepreneurship, encourage economic growth, and thus raise wages and reduce poverty.

Adjustment is populism

Having made it clear that liberalism has nothing to do with “adjustment,” in the sense of reducing workers’ wages, let’s see what really causes that.

It is here where we find ourselves with something very different: populism.

At the end of the decade of the ’80, two academics of international prestige gathered numerous experiences of Latin American countries, for a study that they called   “Macroeconomic Populism in Latin America”.

For Rudiger Dornbusch and Sebastián Edwards, macroeconomic populism, through the use of “Expansive fiscal and credit policies (…) highlights the growth and redistribution of income” while” It belittles the risks of inflation and deficit financing, external restrictions and the reaction of economic agents to aggressive policies outside the market. 

Read, unsustainable policies that, in the medium or long term, generate distortions that move investment away and eliminate the incentives to undertake, produce and grow.

The data collected by the authors and the team they commanded are compelling.

Graph 3. Real Salary in Chile (1967-1977).

Source:   Source: Macroeconomic Populism in Latin America. NBER Working Paper No. 2986

Graph 4. Real Salary in Peru (1980-1989)

Source: Macroeconomic Populism in Latin America. NBER Working Paper No. 2986

Populism highlights the short term over the long term. Thus, it carries out totally inadvisable policies, such as the fiscal deficit, inflation, price control, the increase of regulations … All that can generate an illusion of well-being at first, as seen in the previous graphs, but the end is sung.

For Edwards and Dornbusch, an inevitable phase of macroeconomic populism is that of orthodox stabilization, where reality comes to light, real wages fall, inflation jumps and the economy goes into recession.

Obviously, if the stabilization is successful, and populism is abandoned, the country grows again.

Argentina in recent years is a clear case of populism. It is that although there were years of “growth at Chinese rates”, given that these were driven by fiscal and monetary expansionism, one day the naphtha came to an end and reality had to be recognized.

After years of high inflation, increasing fiscal deficit, price, fare and exchange rate controls, the unviability of “the model” was exposed. Obviously, wages fell and workers were adjusted.

But who was to blame? The one who “turned on the light and lifted the carpet”, or the one who had been trying unsuccessfully to hide reality?

Graph 5. Private Real Salaries in Argentina (2013-2017)

Source: Ministry of Labor and IPCBA.

In 2014, when Kirchnerism still ruled, the real salary came to fall 8.9% per year. In 2016, with the new government in office, it fell again, up to 10.8%.

The adjustment against the workers is not the responsibility of liberalism, but of populism. Where countries are freer, the economy grows more and the income of the people is the highest of all.

But where populism rules, wages grow in the short term, but at the cost of plummeting to medium-long, as a result of inflation, capital consumption and the flight of investment.

For once, let’s put things in their place. Liberalism is not adjustment, adjustment is populism.

Written by Ivan Carrino

BA in Administration from the UBA and Master in Economics from the Austrian School from the Rey Juan Carlos University of Madrid.

Economic analyst in Global Investor, contributor to Libertad y Progreso.

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