Free-Market, Perfect Market and Welfare State Perspectives on “Good” Markets: an Empirical Test

This study explores the relationship between human development and market institutions and tests the performance of three alternative economic perspectives that each assign a different role to governments. In the free-market perspective, the principal task of the government is to protect property rights. In the perfect-market perspective, the government has the additional responsibility of correcting market failures. The welfare-state perspective posits that the state must actively adopt welfare-state policies across a broad range of fields. Based on a sample of 34 OECD countries plus Russia across a time frame spanning 1990 to 2018, the results demonstrate that economic freedom and small size of government do not significantly affect human development as measured by the Human Development Index. Hence, we find no support for the free-market ideal. Conversely, it is found that human development is positively related to governmental interventions that aim to reduce externalities (public expenditure on education and environmental regulation). These results support the perfect-market perspective. With respect to the welfare-state perspective, the findings are mixed. On the one hand, we found that (some) labor market regulations (particularly hiring and firing regulations, hours regulations and mandated cost of worker dismissal) have a negative impact upon human development. On the other hand, human development is shown to be positively affected by governmental intervention seeking to reduce gender stratification in the labor market.