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First Principles of Economic Policy

Posted By William Beach On July 19, 2010 @ 3:00 pm In Economics,First Principles | Comments Disabled

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There simply is no way to avoid thinking and, perhaps, even starting the analysis of economic policy except from a set of principles.  Whether it be labor, investment, trade, or a host of other pieces of our national economic policy; analysts only will be able to understand policy change if they have a foundation of guiding principles. No one would see a physician who was untrained in the mechanics and chemistry of the human body. It would be somewhat disconcerting if physicians were surprised by the presence of body temperature each time we saw them.

Of course, the principles an analyst chooses in studying policy change make all the difference in the analytical conclusions they draw. Two analysts can look at the same facts…say, growth in the overall profitability of businesses…and see two different processes at work. One analyst who believes that profits are extracted from the wages of workers will see worker exploitation and class warfare. Another who believes profits stem from successfully meeting the needs of consumers will see the growth of social well being and expanding wealth of all.

Clearly, both analysts cannot be right; and, the truth rarely lies in the middle between two such divergent positions. Moreover, it is the job of policy analysts to advance policy change that improves well being rather than change that serves an ideological viewpoint. Thus, choosing the right principles…ones that have been validated by long practice or that connect in other ways to the ground truth of economic life…is an absolutely key, fundamental aspect of economic policy work.

Heritage analysts approach economic policy from a set of principles that enjoy this strong empirical and logical validation. The evidence simply is overwhelming that economic freedom works and its opposite does not. Indeed, the 20th Century largely was a laboratory for testing whether free enterprise produced greater good than socialism, and none but the most ideological among us would conclude that socialism won. The record of socialist economic policy is one of populations with poor health, inferior living standards, slow income growth, and technological inferiority. Every major socialist government ultimately abandoned their economic experiments in favor of some form of free enterprise, since the alternative was ultimate economic and political ruin.

We can trace many of our basic economic principles back to the Founding of the United States for the simple reason that the Founders also were guided by the twin tests of empirical and logical validation. Rather than announce that they were throwing up an economic idea and seeing if it worked, the Founders built initial economic policy around private property and free enterprise because they knew from history that it would re-enforce political freedoms in elegant ways while also producing the good life for most early Americans. As soon as these economic freedoms were extended to all Americans, the U.S. began growing at rates that now make the average American enormously richer than any of his or her ancestors at any time in human history. With higher per capita wealth comes better health, longer lives, better education, greater peace, and better beginnings for our children.

Thus, when we argue that increasing taxes or regulations diminish the economic potential of the economy, we do so from principles that time has tested. Or, when economic policy analysts support the rule of law and growth in equality before the law, they do so because these principles support the expansion of private property in contracts and other legal instruments, which history and logic show is crucial to a growing economic.

Government is necessary, but the evidence of two hundred years points to the equally important truth that government can destroy what it is intended to protect and nurture. That’s why getting economic policy right is so important. That’s why starting from economic principles that we know today as our Founders knew 234 years ago is so absolutely fundamental to securing the best life we can for all of us.


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