Economic freedom, material wellbeing, and the good capitalist governance index

This paper assesses the economic importance and the limits of using the Economic Freedom Index (EFI) to help explain and realize higher levels of per-capita income. Specifically, I elaborate on the need to disaggregate and place the EFI into a coherent and meaningful theoretical context in order to generate economically cogent analytical predictions as well as more reasonable public policy recommendations. As it stands, the EFI can produce highly misleading causal results with potentially disastrous consequences for public policy. Hereby, I make a preliminary attempt at constructing an alternative aggregate index to measure the importance of market-related institutions for achieving higher levels of per-capita income. This alternative index, termed here the Good Capitalist Governance Index (GCGI), better correlates with per-capita income and has a higher threshold value than the Economic Freedom Index. The GCGI highlights the importance of secure private rights, limited corruption, and sound money for the realization of higher levels of per-capita income. The evidence supports the hypothesis that good capitalist governance requires a well-working, but not minimalist government.