In the 2004 film Collateral, silver-haired assassin Vincent (Tom Cruise) forces cab driver Max (Jamie Foxx) to taxi him to his various would-be targets throughout the night. In an early scene, an unsuspecting Max is patiently waiting outside when a dead body falls from a second-story window onto the hood of his cab. When Vincent returns to the scene and the realization sinks in that the hitman is responsible for the fresh corpse, a shocked Max accusingly asks, “You killed him?” Vincent, unfazed, coolly responds, “No, I shot him. Bullets and the fall killed him.” It is a distinction without a difference.
I was reminded of this scene when I read a journalist’s piece years ago that—quite earnestly—attempted to argue that claims about socialism’s contribution to Venezuela’s economic collapse were “fundamentally false.” Instead, “it was a government rife with corruption that shattered Venezuela. … Corruption, not socialism, is the malignant tumor on democracy worldwide—in Venezuela, but also here [in the United States].” This kind of talk was typical of journalists and apologists for socialism at the time. Yet, the empirical work has shown these talking points to be mistaken. Nonetheless, even if one ignores the highly contestable economic claims of unserious journalists, to say that “corruption, not socialism” led to Venezuela’s downfall is akin to Vincent’s retort in Collateral: “I shot him. Bullets and the fall killed him.” It is a distinction without a difference.
In his Lectures on Jurisprudence, Adam Smith wrote,
Whenever commerce is introduced into any country, probity [which means “integrity” or “strict honesty”] and punctuality always accompany it. … Of all the nations in Europe … the most commercial, are the most faithfull to their word. … When people seldom deal with one another, we find that they are somewhat disposed to cheat. … When the greater part of people are merchants they always bring probity and punctuality into fashion, and these therefore are the principal virtues of a commercial nation.
In The Wealth of Nations, Smith said it was “the fear of losing … employment which restrains … frauds and corrects … negligence.” And in The Theory of Moral Sentiments, he concluded that success within commercial societies “almost always depends upon the favour and good opinion of … neighbours and equals; and without a tolerably regular conduct these can very seldom be obtained. The good old proverb, therefore, That honesty is the best policy, holds, in such situations, almost always perfectly true.” Thus, according to Smith, the market in many ways makes us accountable to others. When economic associations are voluntary, reputation is king. This is a strong incentive for us to keep our honorable reputations intact. And the best and most endurable means by which to achieve this is through genuinely honest conduct.
Centralized economic planning is ultimately the restriction of economic decisions by the masses and coerced (dis)associations. As more economic decision-making power is placed in the hands of fewer and fewer people, the opportunities to abuse this power increase. When those in power give into temptation and become opportunistic, what results is the kind of dishonesty and corruption that journalists like the one above fret over. More centralization is just asking for more corruption. We shouldn’t be shocked when we get what we ask for. What’s worse, this rampant dishonesty at the top has a trickle-down effect. Economic decentralization, on the other hand, might be the cure for corruption that journalists—along with the rest of us—are looking for.
Market Societies are Less Corrupt
Relying on Transparency International’s Corruption Perceptions Index (CPI), Raymond Fisman and Miriam Golden find that “corruption is worse in poor countries.” This holds true for states and provinces as well. They note that economic development appears to be a major contributor to the reduction of corruption, while a free press also acts as a buffer against corruption. This opens the door for indirect effects of economic freedom on corruption. For example, empirical work confirms the positive effects of economic freedom on economic growth. There is even some research that suggests economic freedom promotes (or at least goes hand-in-hand with) freedom of the press. Economic freedom lays the groundwork for more honest political and economic institutions.
The indirect effects of markets seem to be large enough to label economic freedom as an anti-corruption policy. However, further research suggests that the market process itself—and its institutional framework—incentivizes and in some sense trains participants to engage honestly with one another. Centralized economies, it appears, are synonymous with corrupt economies.
One way of exploring this link is to employ the Fraser Institute’s annual Economic Freedom of the World index. The 2010 report compared the level of economic freedom within countries to their level of corruption (based on the CPI). On a scale of 0 to 10—with 0 being “highly corrupt” and 10 being “highly clean”—the freest countries ended up with an average score of 7.4, while the least free countries came to an average score of 2.6. Employing the CPI and EFW indices, political philosophers Jason Brennan and Peter Jaworski corroborated this finding. They showed an “overlap between the most economically free and least corrupt countries,” with “the most marketized societies” being “significantly above the trend line.”
An analysis by Virgil Storr and Ginny Choi supports the findings above. In defining a market-oriented economy, Storr and Choi employed a number of indices, including the EFW Index, the Wall Street Journal/Heritage Foundation’s Index of Economic Freedom, the Doing Business indices, the Global Competitive Index (GCI), and the World Justice Project’s Rule of Law Index. Their results showed market societies average a CPI score of 7.27 and non-market societies an average of 3.24. The more market-oriented the economy, the less corrupt.
Multiple studies confirm that trade, economic globalization, and economic freedom reduce corruption. For example, a cross-country study by political scientist Daniel Treisman determines that one of the factors that reduces corruption is openness to trade. In a couple of studies, Wayne Sandholtz and his co-researchers found that low levels of state control of the economy, along with international trade and investment, curtail corruption:
Greater opportunity for economic gain through the market reduces the incentive to resort to corrupt activities. Increased involvement in international trade can dampen corruption by intensifying economic competition, reducing the opportunities for corruption … and socializing actors into the predominantly Western norms of the international economy.
In a 2007 review of the literature, Treisman found that trade openness and reduced red tape on business are two of the major factors that decrease the perception of corruption. However, in a later survey of the evidence, Treisman found no robust influence of trade openness on corruption. Nonetheless, he did report that higher levels of red tape on businesses are associated with more reports of bribery. This tracks with other studies that show high levels of regulation to be a strong predictor of corruption. A 2018 survey of the literature found a number of market-oriented factors that reduce corruption, including economic freedom, trade openness, globalization, and property rights. Overall, the evidence overwhelmingly suggests that market economies stifle the spread of corruption. “The most basic reforms,” economist Susan Rose-Ackerman has written, “are those that reduce the level of benefits under the control of public officials. … If the state has no authority to restrict exports or license businesses, no one will pay bribes in those areas. … In general, any reform that increases the competitiveness of the economy will help reduce corrupt incentives.”
Communist Countries are More Corrupt
Communism is an extreme form of economic illiberalism and centralization, which is why communist economies like the former Soviet Union are hotbeds of corruption. Rather than a unique economic endeavor, Gary Anderson and Peter Boettke have argued that the Soviet economy in practice was closer to the mercantilism found in sixteenth and seventeenth century Europe. This neo-mercantilist economy included an autocrat at its head, extensive government intervention in the economy, restrictions on competition, government sponsorship of various monopolies and cartels, and the monitoring and enforcement of these monopolies. Communism, in essence, is corruption run wild.
The market economy limits opportunities for corruption and leads to more honest behavior in the process.
Luckily, research on former communist states in transition finds that marketization (measured by the level of economic freedom and openness to trade) has a control effect on corruption. In other words, transitioning to a market economy does a better job of reining in corruption. Furthermore, greater centralization of administrative functions is found to raise the level of corruption. The duration of the communist regime also matters: the longer the state is under communist rule, the harder it is to root out the corruption.
After testing randomly selected German citizens on their willingness to cheat at a die-rolling game, another set of researchers found that those who had East German (communist) roots were significantly more likely to cheat compared to those with West German (capitalist) roots. And much like the study above, it was shown that the longer the exposure to communism (i.e., those at least 20 years old when the Berlin Wall fell in 1989 compared to those only 10 years old), the greater the likelihood to cheat. The authors noted that this behavior likely developed because communism (through economic centralization) creates a whole host of incentives that encourage rampant dishonesty and skirting the law, sometimes simply to get by.
This contention is supported by evidence that links large black market activity within economies (such as smuggling, counterfeiting, and tax evasion) to high levels of corruption. When economic activity is suppressed, it is often pushed underground and seeks to circumvent the regulations in place. This is also likely why we find that greater economic freedom reduces black market activity. These findings also provide an explanation for why researchers have discovered a significant difference in attitudes between members of market and non-market societies. More than double the amount of market residents, non-market individuals believe avoiding fares on public transport, cheating on taxes, and bribery are justifiable. Those from non-market societies are also more accepting of theft compared to those from market societies. Other researchers used similar questions about the justification of dishonest actions to measure the relationship between markets and “civic morality.” Their results confirmed that there is “a universal association between markets and morality” and “a robust association between an increase in market exposure and an increase in civic morality.”
Despite the Chinese government’s adoption of pro-market reforms since the late 1970s, the Communist Party of China remains heavy-handed in its state control and cronyism. Its so-called “state capitalism” continues to be plagued with state corruption. Yet, even within this cronyistic context, research shows that the more market-oriented provinces of China tend to be the least corrupt. A 2013 study employed the National Economic Research Institute (NERI) Index of Marketization, which measures five major fields of Chinese marketization with 23 indicators. The authors’ analysis with the NERI index found, once again, that deregulation reduces corruption: a 1% rise in the marketization index leads to a 2.72% reduction in corruption. Regions that increase trade openness by 1% experience a 0.35% reduction in corruption.
More recent research shows that marketization in Chinese regions may increase the monetary gain of corruption. However, marketization makes it more difficult for government officials to make these corrupt deals in the first place. Markets make the economic pie bigger, which in turn makes the economic rents bigger. Corrupt actors can therefore make more money if they are able to pull off their scam. But extracting those rents is harder in a market economy. The chances of being successfully corrupt are lower.
Studies on China’s anti-corruption reforms also suggest that markets actually pave the way for these reforms. When anti-corruption reforms were introduced in China, stocks for non-state-owned enterprises actually declined in the least liberalized provinces. When bureaucrats rather than market forces allocate resources, bribes are often essential to getting things done. However, in more liberalized provinces, non-state-owned enterprises’ stocks performed well. In short, when markets are allowed to function, bribery is no longer seen as a necessary tool for doing business. As one set of researchers explained, “A virtuous cycle ensues—persistent anticorruption efforts encourage market-oriented behaviour, which makes anticorruption reforms more effective, which further encourages market-oriented behaviour.”
Adam Smith was Right
Fans of democracy often trumpet democratic institutions and political rights as the major means of combating corruption. Market skeptics—particularly those of the “democratic socialist” variety—might try to get around the evidence so far by claiming that I’m crediting markets with the work done by democracy. But as the latest Index of Economic Freedom report argues, there is an “undeniable” relationship between economic freedom and democratic governance. Economic freedom appears to “be an important stepping-stone to democracy.” Trade with democratic countries has also been shown to increase support for democracy and, consequently, improve the democracy scores of countries. Economic freedom and integration are a means of transmitting democratic values.
Now, one study finds that democratic states usually have larger governments. But before our champagne socialist friends declare victory, note that the researchers’ analysis also shows that corruption decreases when market forces drive the allocation of resources rather than government bureaucrats. (Some studies also conclude that more government tiers result in more bribery and corruption.) Another pair of studies finds that while democracy can alleviate corruption, it can only do so once the economic groundwork has been laid. In countries with low levels of economic freedom, democracy may actually increase corruption. In contrast, economic freedom reduces corruption in any political setting, though its effectiveness increases the more democratic a country becomes. What is probably most surprising to many is that when freedoms are empirically compared, economic freedom mitigates corruption to a greater extent than political freedoms. As economist Joseph Connors has noted, “Market competition diffuses power, and corruption thrives on centralized power. Thus, capitalism provides the environment that allows markets to keep corruption at bay.” A democratic society with secure political rights is a desirable thing. A democratic society with secure political and economic rights is a more desirable thing, especially if we want less corruption.
Returning to our journalist friend at the beginning of the essay, it is inaccurate to blame the fall of centralized economies on “corruption, not socialism.” Advocates of greater economic centralization and protectionism often engage in this kind of rhetorical hairsplitting. In order to combat the results of centralization and regulatory asphyxiation, greater centralization is called for. Unfortunately for these advocates, centralized economies are synonymous with corrupt economies: a distinction without a difference. Corruption may be the bullets and fall that kills the economy, but centralization pulls the trigger.
F. A. Hayek pointed out decades ago that the “chief concern” of economists like Adam Smith “was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which [Smith] and his contemporaries advocated is that it is a system under which bad men can do least harm.” The market economy limits the opportunities for corruption and leads to more honest behavior in the process. All in all, corruption and economic freedom seem to be antithetical to each other. Corruption and economic centralization, though, are a match made in hell.
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