Intergenerational Income Mobility and Economic Freedom as Positive Liberty

Abstract

Economic freedom is often defined as a negative liberty – freedom from interference. This contrasts with positive liberty which is defined as freedom to do which refers to capacities. A well-established literature argues that income inequality reduces positive liberty by limiting the capacities of those at the bottom of the income ladder. This limitation generates the byproduct of a greater persistence of socio-economic status as measured by statistics of intergenerational income mobility. Thus, a case is made for policies that could reduce negative liberty (i.e. reductions in economic freedom) in order to enhance positive liberty. However, this argument neglects the issue of whether economic freedom generates positive liberty by increasing economic growth and the number of options available for people to escape from their initial condition. In this paper, we empirically evaluate – using new data on intergenerational income mobility – this question and argue that economic freedom does strongly relate to positive liberty. Even more interestingly, the (positive) effect of economic freedom is found to be stronger than the (negative) effect of inequality.