Free Market Institute of the Pacific

Exploring Business, Economics, and Freedom

Financial Freedom...Understanding the Concept

One of the most basic freedoms enjoyed by members of a free market society is one we call “financial freedom”...a somewhat misunderstood term.

If you were to ask friends and neighbors for a definition you might be told that financial freedom means having not to worry about money...not to fear of how the bills will be paid or how to manage costly emergencies.         

This answer may be the one that immediately comes to mind, but the true meaning is far deeper. A person with minimal funds can still have a degree of financial freedom in that they have a choice as to what to do with those funds. More importantly...they had a choice in how those funds were acquired and in how they might acquire more.

The concept of financial freedom begins when an individual is allowed to find out what it is they do best and how they are most likely to trade their skills and labor for money. They have the ability to quit a job and take a new one during this learning phase; an ability unrestricted by government and regulation.

In a free market, the individual can hone their skills and knowledge, bargain with prospective employers, make decisions based on their own needs, and act on those decisions despite the needs of society or government.

As the individual learns, becomes more valuable as an asset, and increases their financial standing, they gain more and better options. They have increased freedom to decide where they and their families will live, what type of home they will live in, what type of property and goods they will own, where their children will go to school, and how they will spend their free time. The more financial freedom they obtain, the more personal freedom they will have overall.

This seems obvious to most of us; the more wealth you have the more choices are available to you. This is hardly an earth-shaking revelation.

But now let’s look at a society as a whole. When we observe a nation, for example, we can see a set amount of “wealth” represented by the accumulated production of people and business minus that part of the accumulated production that has been used up, wasted, or lost.

This wealth is divided up through a system of barter; employees and employers, shoppers and shop owners, investors and entrepreneurs...all are involved in negotiating with one another for their share of this wealth; trading their time, labor, and money for desired goods and services.

The missing part of this simple equation is government. All societies function using some sort of government to facilitate efficiencies in size and buying power. To pay for those functions they elect to have government manage, they create a tax system which is then used to siphon off some of the production and use it to compensate those who work in the government.

The catch here, of course, is that the functions given to government generally do nothing to increase production, and even when they do, they do so at a net loss of overall production. The result is that there is less wealth to be divided among the participants of the free market. Less wealth means less financial freedom, and wealth given to government means the government suddenly gains certain freedoms and powers even as the populace loses a degree of their freedoms and powers.

Recall your first class in economics; one of the basic rules you probably learned was that taxes are a form of “taking.” Taxes take wealth out of the productive system and place it into a non-productive system. Little or no new wealth can be created in this way and the net result is always a loss in wealth. This is easily understood and is accepted as simply being the price paid by society to have a functioning government providing a degree of order and efficiency.

You might also recall some basic rules that closely follow that help explain the how’s and why’s of maintaining a vibrant and growing free market while still paying the burden brought about by owning and maintaining a government. One of the tools you might remember is called the Laffer Curve, a simple curved graph illustrating the range of relationships between tax rates and revenues generated.

The curve begins with a 0% tax rate and ends with a 100% tax rate. At the 0% end of the graph, actual tax revenues equal zero. But the revenues would also equal zero at the 100% end of the graph, as there would no longer be any reason for anyone to work and produce wealth. Somewhere between the two is a point of maximum return...where either a lower or higher tax rate would result in a decrease in government revenue.

Another aspect of the Laffer Curve is that at the 0% end of the graph you might have 100% production capacity being filled. At the 100% end of the graph you might be down to 0% production capacity.

We should note that societies have been known to maintain a degree of production, despite extremely high tax rates, through the use of slave labor. Whether it be to build great pyramids in the desert, or tennis shoes in sweat shops, this practice helps a nation maintain a facade of productivity beyond its means.

For every society there can be a debate over the location of the optimum point. But haggling over maximizing government revenue misses the greater point; why is maximizing government revenue important? And why would anyone consider such maximization to be desirable?

Maximizing government revenue is basically another way of stating that government power is being maximized. In the process, the financial and personal freedom of individuals will be dramatically reduced.

Think about that statement: If your family is suddenly required to give up more income to the government, you just as suddenly have less options available to you as to where you live, the home you live in, what you drive, eat, where your children go to school...literally every aspect of your life is suddenly narrowed. You have less choices. The greater the taking...the more choices are lost to you. As government revenue is maximized, there is a risk those in seats of power will become isolated from the populace and be tempted to go “over the top”...moving tax rates into the range of ever-decreasing what will be a failed attempt to bring in more revenue.

When that happens, and government revenue begins to go down...production goes down as well and the individual’s wealth plummets even more quickly as more and more freedoms are lost. This actually happens from time to time.

For an example, view the last few years’ exercise in government stupidity in the nation of Zimbabwe. The government created taxes and takings that left little or no wealth of any type in the hands of the people. With all wealth concentrated in government, production literally came to a halt leaving the nation with a shortage of food and other goods. With everything becoming scarce, people had to begin bidding up prices on what little was remaining.

From having been the second richest nation in Africa as a free market, Zimbabwe became the most devastated by economic collapse in African history. Inflation reached more than 2,200,000%...better than 6,000% per day. This meant, if you woke up one morning with enough money in your bank account to buy 6,000 cans of the following morning your entire savings would only buy one can.

The nation became a draconian totalitarian state...ruled by terror and violence. The collapse of financial freedom and individual freedoms went hand-in-hand by necessity.

There is a dramatic lesson to be learned from this recent historical example, as well as hundreds of examples in the more distant past. Citizens of a free nation can only maintain their freedoms by maintaining freedom in the market place. We should strive to keep government, and its unproductive functions, lean and cost effective.

Moreover, we need to remind ourselves, every time we think of something we’d like someone else, such as the government, to do for us...that once done, we will lose the ability and perhaps even the right, to make decisions and take actions for ourselves. Once we start down that path, as did the people of Zimbabwe, it is a difficult path to step off.