Economics is basically a simple subject. The main challenge of economics is to find a way to produce the things that people want in the most efficient way possible. Fortunately, economists solved this challenge over 200 years ago. At that time, the classical economists argued that people will naturally produce the things that others want, in the most efficient way possible, so long as they have the right environment. That environment consists of only four things—low taxes, free markets, protection of private property and a stable price environment.
These four classical principles have withstood the test of time. Over the past two centuries, whenever economic policies in any country have moved in the direction of lower taxes, freer markets, greater protection of private property and lower inflation, people have prospered. Whenever policies have moved away from these principles, economic trends have been disappointing.
During the past half century, the wisdom of the classical economists has become obvious to any who take the time to look at the evidence. A movement away from classical economic policies led to inefficiencies, shortages and a sharp drop in living standards in the during the 1970s. In the early 1980s, the Reagan tax cuts and a return to classical policies produced the most dramatic turnaround in economic performance in the nation’s history. Inflation and interest rates plummeted while productivity and living standards improved dramatically.
Politicians with their own agenda (and with little understanding of economics), often point to the large federal budget deficits that appeared in the wake of the Reagan tax cuts as an indication of a failed policy. These politicians ignore the improvement in the economy in the 1980s and the sharp increases in government spending that accompanied the tax cuts.
For some brief lessons in two topics of classical principles see The Nonexistent Liquidity Trap and The Myth of Fiscal Stimulus.
Those interested in finding out more about classical economic principles should read my book, Taking the Voodoo Out of Economics and Jude Wanniski’s pathbreaking book, The Way the World Works.