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Why are some places rich
and others poor?

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Why are some big cities bright
and others dark?

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These are some of the most
important and enduring puzzles

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in the history of economics.

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Adam Smith saw these same
contrasts in 1776,

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and asked the same
questions in his book,

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“The Wealth of Nations.”

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For Smith, the source of
these differences was simple:

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economic freedom.

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In his own words,
“Little else is requisite

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to carry a state to the highest
degree of opulence

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from the lowest barbarism

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but peace, easy taxes, and
a tolerable administration of justice.”

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Was Smith right that a limited
government that keeps the peace

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and administers justice is
all we need for prosperity?

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How would we know?

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The "Economic Freedom
of the World” report

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measures how a country’s
policies are consistent with

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personal choice, private property,
and voluntary exchange -

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the economic system
that Adam Smith advocated.

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We can use these measures

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to rank a country’s economic freedom

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and then see how freedom
is related to growth.

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Let’s take these rankings and separate
the counties into 4 groups,

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from the least free to the most free.

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The countries with
the lowest economic freedom

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have the lowest GDP per capita,
but the freest countries

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enjoy a standard of living
over 8 times higher.

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If you think that these
results are skewed

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by factors like geography or culture,

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let’s look at the Korean peninsula.

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North and South Korea have similar

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culture, geography,
and natural resources.

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Now, let’s look at the peninsula
at night. What happened?

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In 1953, Korea separated.

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The South chose greater
economic freedom

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while the North eliminated nearly
every form of individual liberty.

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Sixty years later, the average
income in South Korea

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is 10 times higher than in the North.

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Now, let’s look
a little closer to home.

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Maryland versus West Virginia.

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According to the report “The Economic
Freedom of North America,”

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Maryland is the 18th freest state,
while West Virginia is 40th. Why?

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The West Virginia tax code

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makes it difficult for
businesses to operate.

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For example, the buildings
you see in this photo,

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on the Maryland side,
those belong to a company

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that was originally
founded in West Virginia.

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It moved across the border so its
taxes and costs would be lower,

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allowing it to grow, create
more jobs, and increase prosperity.

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This happens all over the state,

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and these differences
in prosperity are measurable.

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The result is that per-capita incomes

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are over $10,000 higher in Maryland
than in West Virginia.

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Clearly, they should have
followed Adam Smith’s advice.

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He got it right.

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Individual freedom in economic life
leads to economic progress.

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So if you care about
growth and prosperity,

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you can’t ignore the importance
of economic freedom.