Economic freedom vs. egalitarianism: An empirical test of weak & strong sustainability, 1970-2017

Many argue that free markets drive climate change and harm environmental sustainability. They suggest that democratic controls over profligate capital and unregulated markets better secure economic wellbeing and environmental objectives. Eco-modernists, contrarily, argue that economic freedoms generate entrepreneurial technological change for reducing poverty and increasing environmental quality since people's demands for cleaner consumption are likely to be met by markets, and free markets are less likely to be affected by rent-seeking. Moreover, democratic publics also demand higher consumption and the protection of jobs in dirty industry, which would work against environmental causes. This study contrasts the effects of economic freedom and egalitarian democracy on environmental sustainability and atmospheric pollution, assessed as both weak and strong sustainability. The results show that economies that are friendlier to free markets increase physical capital (wealth) with lower damage to total environmental sustainability, measured as depletion of physical, human, and natural capital, including atmospheric pollution. Egalitarian democracy consistently reduces economic sustainability and increases atmospheric pollution. There is some evidence for an inverted-U shape relationship between egalitarianism and CO2 emissions independently of economic freedom and the level of development. The results are robust to a battery of testing procedures, alternative models and data, different sample sizes, a barrage of relevant diagnostic tests of robustness, and potential endogeneity.