Institute for Advanced Study
Abstract：This paper delves into the theoretical underpinnings of how freedom, grounded in the rule of law and property rights, shapes wealth accumulation and economic growth. By integrating liberty into the neoclassical growth model, we introduce the innovative concepts of “liberty consumption” and “liberty capital” and define utility and production functions on them. Through theoretical analysis and simulations, we ascertain that a robust preference for liberty nurtures sustained prosperity and heightened productivity. However, in scenarios where the costs associated with liberty consumption are substantial and liberty capital depreciates rapidly—indicating an environment inhospitable or constraining to liberty—it adversely affects economic output and overall wellbeing. These insights underscore the significance of examining liberty dynamics in economic growth and development. Without the presence of liberty, property rights, and the rule of law within utility and production functions, society faces the peril of descending into either a Hobbesian state of “war of all against all” or a totalitarian state ruled by a singular authority. In either case, life becomes solitary, poor, nasty, brutish, and potentially short.
Key Words: Liberty consumption; Liberty capital; Economic growth.
