The latest issue of Forbes magazine features Steve Forbes‘ rebuttal of a dangerous misconception about the way an economy works.
ONE OF THE MOST pernicious ideas polluting economic understanding–and policymaking–is that an economy is a mechanism, like an automobile, a train or a power plant. Commentary is littered with such phrases as the economy “is overheating” or “needs to cool off” or “is tired” or “needs a jolt” or “could use some stimulus.”
These aren’t harmless metaphors. They epitomize how economists have taught us to see an economy–as something that can be manipulated, guided or driven. They believe the steering is to be done by government, making sure an economy “hums” along at an even speed, going neither too fast (hot) nor too slow (cold).
It’s all preposterous. The result is interventionist government policies that do harm–the only question is, how much? Economies aren’t machines. As Forbes.com colleague John Tamny–author of this year’s groundbreaking book Popular Economics (Regnery)–and other enlightened observers never tire of explaining, economies are a collection of individuals, working singly or in organizations. You can add up–or at least try to–what they turn out, in terms of products and services. But that hardly means you can control what all these people–billions of them!–are going to do.
What gets overlooked or underplayed in economics is the extraordinary “churn” in the activities of a free market. New businesses open while others close, constantly. In the U.S. during normal times a half-million or more jobs are created each week, while another half-million are cut. Entrepreneurs continually roll out new products and services, most of which flop. But those that succeed can mightily improve our quality of life.
What government can–and should–do is influence the environment in which this hum of activity takes place. The key variables: taxation, monetary policy, government spending and regulation. In almost all instances the best prescription for economic health is “less is more.”
