Free market capitalism and societal inequities: Assessing the effects of economic freedom on income inequality and the equity of access to opportunity,1990–2017

Abstract

Some blame free-market capitalism for increasing income inequality, arguing that richer classes could block access to others for maintaining their privileges. By manipulating the degree of political rights and resources available to others, the rich could reduce opportunities for others. Others argue that growth-promoting free markets raise all incomes, increasing aggregate welfare. We argue that governments more dependent on free markets are likely to focus on increasing access to human capital, thereby narrowing the gap between the rich and poor by increasing opportunities, even if income inequality rises with high growth. We assess the issue by examining the effects of an Index of Economic Freedom on income inequality measured by the standardized GINI and measures of the equity of access to quality schooling, health, and justice covering 128 developing countries during the 1990–2017 period. Our results show that, even if economic freedom is associated with higher income inequality, it also associates robustly with access to opportunity. Our results are robust to alternative models, sample size, and testing methods, including instrumental variables analyzes addressing potential endogeneity bias. Our results, taken together, do not suggest that growth-promoting economic freedoms hamper future progress by raising inequalities—on the contrary, economic freedoms promote equity of access to opportunities—findings inconsistent with the view that governments under free-market conditions are easily captured by the wealthy, who then block equitable access to public goods.