Towards a Worldwide Index of Human Freedom

200 • Towards a Worldwide Index of Human Freedom
within and between generations. In North, Wallis, and Weingast’s (2009)
terms, a productive economy requires “perpetually lived organizations.”
According to Jenner, “neither the state nor custom allowed large and
permanent private companies to emerge” in China (1998: 80). As documented
by Kuran (2010), Muslim civilization also made the establishment
of permanent private companies difficult or impossible. Only under
Western influence did Muslim civilization develop the idea of a legal person,
which is essential for large and durable corporations to do business.
Capitalism is characterized not only by the existence of residual claimants
and “perpetually lived” enterprises, but also by private property in
the means of production and scarcity prices. In the early twentieth century,
Mises (1920, 1927/2005) argued that socialism is bound to end in
economic failure because of a lack of scarcity prices for production inputs.
Under socialism all factories or means of production are at the disposal
of the political leadership. Since there is no competition for land, workers,
raw materials, machines, or other production inputs between different
owners of the means of production, there is no information about the
demand for and scarcity of these inputs. Opportunity costs remain hidden.
Without competition and scarcity prices, however, there can be no rational
allocation of resources. In a later book about bureaucracy, Mises (1944)
made another argument against administrative guidance of the economy.
In his view, economic and technological progress never result from following
laws, orders, rules, or traditions. Whatever the virtues of bureaucratic
dominion may be, the results cannot include innovation and progress.
Under which conditions can free or scarcity prices, i.e., the prerequisites
of a rational allocation of resources, ever arise? Almost all traditional
or pre-capitalist societies generated the idea of “just” or “fair” prices. Since
“just” or “fair” prices actually depended on habits or traditions, they had
to lack flexibility. Overcoming inflexible prices which do not respond to
changing patterns of demand and supply is a prerequisite of a rational
allocation of resources. Traditional prices are most easily overcome in
cross-border trade where nobody has the necessary authority to enforce
the terms of trade on both sides of the border. After people get used to
flexible or scarcity prices in cross-border trade, this type of pricing is
likely to spill over into domestic trade. Given the political fragmentation
of Europe, cross-border trade had to be much more important in Europe
than in Asia with its huge empires. Political units with the geographical
area and population of Spain, France, or England would have been a mere
province within China or India.14
The final basic component of my theoretical account concerns the
exploitability of knowledge. This concept can be traced back to Hayek
14 At different periods in history each of these nations was a contender for supremacy in Europe.
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