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The Economy Isn’t a Machine or a Factory

I’m honored to be a co-author with Alberto Mingardi on this essay in City Journal. A slice:

Microeconomists understand that no one can engineer these details. If the economy’s institutional environment is sound—based on secure property and contract rights, rule of law, and free and open markets—market prices, profits, and losses will lead producers and consumers to act in ways that create prosperity. But for continuing prosperity, the market process must work freely. Entrepreneurs must be able to offer new products, workers empowered to accept and to reject job offers, consumers free to spend their incomes as they wish. And prices and wages must be free of government control and allowed to rise and fall as market conditions require.

Even if government control of aggregate demand is necessary for an economy to function even tolerably well—and we aren’t sure that it is—such control is clearly not sufficient. If entrepreneurs can’t introduce new products, if businesses are denied access to low-cost supplies, and if prices are prevented from changing, the market process falters. It produces fewer of the goods and services that are the stuff of our prosperity. The same conclusion pertains if workers are prevented from showing up at farms, factories, and offices, in which case no amount of extra aggregate demand will cause markets to produce more. To stop people on the ground from producing is to stop the process by which people, cooperating in markets, generate prosperity.