More neoliberalism, less inequality

Or is it the other way around?

It’s not easy to define neoliberalism in clear terms, and it’s even harder to measure it. I’m happy to grant that off the bat. But one pragmatic suggestion I like and have often used in the past is to rely on economic freedom indexes, especially the one provided by the Fraser Institute, to get at the phenomenon. (Even sociologists, publishing in the International Journal of Sociology are happy to use economic freedom as a proxy for neoliberalism!)

This is sometimes criticized for a variety of reasons. Some are very misguided, like saying that Fraser’s index can’t be trusted because the institute has a libertarian identity and is thus biased. The conclusion might apply to the Heritage Foundation’s construct, but doesn’t follow in the case of Fraser’s index, because it’s not made in-house but has all of its components sourced from third parties, like the World Bank, V-Dem, and so on. There are also no special, proprietary weightings applied to components or subcomponents when deriving the overall score. It’s all completely open and transparent.

Other critiques are more sensible. The index is made up of 5 components – namely, size of government, legal system/property rights, sound money, freedom of trade, and regulation. But are policing quality, the rule of law, impartial courts (all parts of the legal system component), and inflation (part of sound money) really strong indicators of neoliberalism (or even just “capitalism” in general)? Probably not. This, however, is not a fatal problem because one can just focus on the most plausibly neoliberal components of the index, and we’re good to go.

Who can deny, as a first approximation at least, that large and heavily redistributive governments, strongly tariffed and closed trading systems, and strict labor and business market regulation are not the quintessential ways of defining/measuring to what extent neoliberalism is present or absent in a country? So, throw out the legal system/property rights component and sound money if you want, and focus just on what’s undeniable.

“Carrying the neoliberal banner”

Though many revere him, I’m not too crazy about Quinn Slobodian or his research on neoliberalism. That’s again for at least a couple of reasons that need not detain us here too long. For one thing, I’m sorry to say I just don’t find intellectual history that interesting, because it says nothing about whether an idea is correct or not or how a social phenomenon actually works on the ground. I’m interested in what the empirical correlates and effects of neoliberalism are, not how people wrote about it in books 50 or 100 years ago. For another, though I couldn’t care less about von Mises, and I actively dislike how acerbic Phil Magness is on social media, Slobodian seems to have done some sloppy work.

But what I do appreciate about him is how he characterizes economic freedom indexes. Here’s what he said a few years ago in a Guardian piece titled Democracy doesn’t matter to the defenders of ‘economic freedom’:

If Hong Kong were a country, it would be in the world’s top 10 most unequal.¹ Observers often use the word neoliberalism to describe the policies behind this inequality. The term can seem vague, but the ideas behind the economic freedom index help to bring it into focus.

… The ideal world described by these indexes is one where property rights and security of contract are the highest values, inflation is the chief enemy of liberty, capital flight is a human right and democratic elections may work actively against the maintenance of economic freedom.

…

[E]conomic freedom indexes carry the neoliberal banner by deeming the goals of social justice forever illegitimate and pushing states to regard themselves solely as guardians of economic power.

To Slobodian, it seems completely obvious and damning that economic freedom indexes like Fraser’s are soaked through and through with neoliberalism. That’s both because they were invented by people like Milton Friedman and because countries get dinged if they tax and redistribute too much. Moreover, economic freedom indexes don’t put actually democratic, nice countries at the top of the list. Instead, authoritarian places like Singapore, Hong Kong, and (in the distant past) the Guatemalan dictatorship can all rank high.

Slobodian is of course outraged by this. “True” economic freedom by definition means more democratic power to the people. “True” economic freedom means lots of redistribution and business regulation (not deregulation!), so that workers are protected and free from the clutches of Capital. That all of this is missed by the actual economic freedom indexes we have, Slobodian suggests, is a clear sign that what they’re concerned with is mere sham economic freedom – freedom for the capitalists.

Now, I’m happy to accept all of that. Neoliberalism is sham economic freedom. Worker power and democracy is the true, non-neoliberal economic freedom. I don’t mind the outrage, and we can always define words however we want, so I wouldn’t want to insist on what the only correct definition of economic freedom is. I only care about whether the existing indexes of “economic freedom” help us measure neoliberalism. It seems I have Slobodian’s approval in that department. He even chucks in inflation for good measure, which as he sarcastically characterizes it, neoliberals see as the “chief enemy of liberty.” (I was willing to give up on the sound money component of Fraser’s economic freedom index as a bad proxy for a neoliberal economy, but he has made me rethink my position.)

The more neoliberal we are, the more equality there is…

Okay, armed with the permission (from one of the greatest researchers of neoliberalism today) to use the index to measure this phenomenon, let’s look at what it tells us about inequality. Focusing on Hong Kong, Slobodian suspects that a strong positive relationship between the economic freedom index and inequality (meaning that the one increases the other) is an undeniable pattern. Where there’s more neoliberalism, there’s not more democracy or quality of life, but there will be exploding inequality.

At first glance, that’s not only incorrect but actually the opposite of reality. Where there’s more of Friedmanite sham economic freedom – remember, “economic freedom indexes carry the neoliberal banner” – there’s significantly less inequality. See below. This is not only true of the standard Gini measure of income inequality, but it also shows up with income inequality measured through the top 1% income share, as well as wealth inequality!

An obvious catch with this is that countries don’t differ from each other only on inequality and economic freedom. There are myriad other factors that might be confounding the relationship. One candidate could be economic development. At high levels of development, inequality usually drops (for many reasons). But highly developed countries are also likely to be more neoliberal (or are they?!). If that’s the case, we might want to control for development or investigate the relationship separately in developed and developing societies.

You’ve heard of the Simpson’s paradox, right? Sometimes, you have a strong relationship in a larger group of societies (or individuals), which completely disappears or even reverses when you break that larger group of observations down into smaller groups.

… Or not really

When we do so by developed/developing status, the picture changes dramatically. In the developing world, nothing happens to inequality as we go from least neoliberal to most neoliberal societies. In the developed world, there are inklings of a positive relationship, though it’s uncertain with only ~35 societies. All developed societies are neoliberal-leaning, but when you lean stronger toward neoliberalism, you also have higher income and wealth inequality.

Up to this point, we were looking at the aggregate economic freedom index. What if we disaggregated it and focused solely on the most neoliberalism-relevant aspects? This is what we get. (The results are virtually identical for wealth inequality.)

That’s some interesting heterogeneity we got here.

(1) Countries with leaner governments in the developed world are more unequal. The same isn’t really true for the developing world.

(2) Virtually all developed societies have very liberalized trade, so there’s not much variation to exploit there, as you can see. However, interestingly, both in the developed and developing world, as trade gets more liberalized, inequality seems not to budge.

(3) Deregulation in the developed world goes hand in hand with more inequality, while in the developing world, having more deregulation means being somewhat lower on the inequality spectrum.

As you can also see, we basically have big inchoate blobs of observations, so it’s not like these are some kinds of tight and very informative relationships. Perhaps the biggest takeaway so far is that, in simple cross-sections, neoliberalism and inequality don’t seem to have a very robust and clear relationship either way.

Meta-analytic results are mostly null too

So much for simple, descriptive relationships. What does the more systematic research literature tell us? More or less the same thing.

Bennett surveyed 16 peer-reviewed studies in 2024, and found an overall mixed result. 4 studies reported more economic freedom to be associated with less inequality, 5 with more inequality, 2 found a nonlinear/U-shaped relationship, and 5 found no significant relationship.

Lawson and colleagues did a larger quantitative review (26 papers) and arrived at a similar conclusion in 2024, though noted some limited evidence that moves over time towards more economic freedom may correlate with inequality. Here’s how they conclude (note the weird result with regards to lean government):

The best estimate is that overall economic freedom is simply unrelated to inequality, though liberalization (i.e., moving toward more economic freedom) may engender some additional inequality. Though the estimates were mostly insignificant, it appears that (counterintuitively) smaller government size and stronger property rights might be associated with more equality.

And then there’s the narrower 2026 review again by Lawson and colleagues, in which they intentionally restricted their inequality measure solely to the Gini coefficient of income inequality to make the evidence more comparable across studies. Here are the headline results:

The literature suggests that stronger property rights and rule of law are associated with greater equality, while sound money, freer trade, and lighter regulation show weak correlations with inequality. Government size appears unrelated. Overall, greater economic freedom tends to correspond with modestly higher inequality: a 1.25-point increase in EFW is associated with about a 1.2-point increase in the Gini coefficient.

Put slightly differently, when looking at the aggregate economic freedom index, 58% of all estimates are positive and statistically significant. More economic freedom, more income inequality, at least judging by the (slight) majority of findings. As they said in the cited passage, the actual strength of the relationship (“a 1.25-point increase in EFW is associated with about a 1.2-point increase in the Gini coefficient”) is very modest: note that economic freedom is on a scale from 0 to 10, while Gini goes from 0 to 100.

Interestingly, leaner governments don’t mean more inequality (only 35% of estimates are positive and significant, while a near-majority are negative and significant). If anything, leaner governments tend to go together with lower inequality. Trade liberalization and deregulation lean positive (i.e., boosting inequality), though only a minority of estimates are actually significant (23% and 37%, respectively). And relationship size is miniscule (standardized effects of 0.07 and 0.01, respectively). Anything smaller than 0.1 is typically said to be negligible.

It wouldn’t surprise me in the slightest if neoliberalism was not just strongly related to inequality but actively causing it. From the (admittedly not impressive) observational evidence we have, I’m not at all convinced this is so. Very weird, but the evidence is what it is. Those critical of neoliberalism on the grounds of inequality should take note.

1. We know how unequal Hong Kong is. It has a Gini of income inequality that’s around that of the US. It’s not at all among the top 10 in the world by inequality.