Liberal Ideas Capital and Asset Pricing: A Political Economy of Risk, Return, and Freedom

Wei Liang and Heng-Fu Zou ()

No 779, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: We develop a new theory of asset pricing based on the concept of liberal ideas capital-a stock of intangible, ideational resources rooted in human dignity, individual liberty, free speech, constitutional democracy, property rights, and the rule of law. Building upon the philosophical foundations of John Locke, Thomas Jefferson, Alexis de Tocqueville, Lord Acton, Lud- wig von Mises, Friedrich Hayek, and Milton Friedman, and integrating recent contributions by McCloskey, Phelps, and Heng-Fu Zou, we construct a dynamic general equilibrium model in which liberal ideas capital plays a central role in driving productivity, institutional stability, and investor confidence. In this framework, countries that invest in and accu mulate liberal ideas capital experience lower transaction costs, more secure property rights, higher innovation, and thus, superior asset returns and lower volatility over time. Empirically, we assemble cross-country data on liberalism-related indices-freedom of speech, property rights, rule of law, press freedom, and democratic governance-and demonstrate that nations with higher levels of liberal ideas capital exhibit systematically higher long-term equity returns and stronger economic performance. In contrast, countries dominated by authoritarian ideas capital exhibit per sistent institutional fragility, lower risk-adjusted returns, and weaker in vestor protection. Our findings challenge conventional asset pricing mod els by revealing the deep ideational foundations of market behavior. We argue that liberal ideas form the cognitive and institutional prerequisite for asset pricing itself, making price discovery and risk assessment possible. This elevates the intergenerational transmission of these norms-a process of "soulcraft" - to the most critical form of capital investment for ensuring long-run financial stability and prosperity. The paper thus offers a unified theory of political economy, ideology, and fnance, concluding that a society's most valuable asset is the shared belief in liberty.

Pages: 31 pages
Date: 2025-08-08
New Economics Papers: this item is included in nep-fdg, nep-hpe and nep-rmg
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