Debates about economic policy have taken a paradoxical turn in past months. Many on the right, who often extol the virtues of the free market, have cheered protectionist tariffs that impose taxes on economic transactions, while progressives, who often advocate government regulations on what can be purchased for what price, have decried tariffs.
It is necessary to go back to first principles and ask the fundamental question — what is the proper role of the government in the economy of a free society? Particularly, what should free and independent individuals be permitted to do when they believe that it is in their own best economic interest?
The general principle, with which most people would agree in the abstract, is that individuals should be free to pursue their interests, as long as doing so does not infringe upon the rights of others. As Adam Smith recognized centuries ago, the practical economic consequences of respecting individual liberty also maximize the welfare of society. In “The Wealth of Nations”, Smith advocated for a system of “natural liberty,” where “every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man.”
Smith recognized that when individuals seek to pursue their own economic interests, they naturally put their skills and resources to the best uses of society, for the individual’s interests cannot be satisfied without producing or performing something valuable for society, for which society rewards the individual.
Consequently, respecting individual liberty allows the “invisible hand” of economic progress to work its magic. As Smith wrote, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.”
But governments back then, like governments now, often have ideas and goals for the direction of the economy and society that do not conform with the natural tide of the economy. When government seeks to artificially impose such objectives, it ends up resulting in restrictions on individual liberty and impediments to natural economic progress. As Smith recognized, “All governments which thwart this natural course, and which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”
We see these problems today. Tariffs are aimed at promoting the domestic manufacture of products that are produced less expensively abroad, and the result of trying to promote something that the economy does not naturally support is a restriction, in the form of a tax, on the freedom of individuals to buy and sell products at prices that are mutually advantageous. Likewise, minimum wage laws, that seek to artificially raise the price of labor beyond what it is naturally worth in the current state of the market, restrict the freedom of individuals to enter into contracts with each other on terms that are reciprocally beneficial. Similarly taxation, when it is too high, interferes with the price with which individuals mutually agree for goods and services.
Smith recognized that such economic problems stem from the idea that regulations “can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard.” Centralized government economic planning fails to consider that “in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”
Economic regulations frequently interfere with the ability of individuals to make economic decisions they believe are in their own best interest. Such regulations often do not obtain their desired aims because they cannot take into account all of the different circumstances and desires individuals consider when making economic decisions. As the economist Friedrich Hayek astutely recognized in his essay, “The Use of Knowledge in Society,” when crafting economic regulations “the knowledge of the circumstances of which we must make use never exists in concentrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all separate individuals possess.”
For example, an individual may determine that it is in their own best interest to work for an amount that is lower than the minimum required by law because they wish to gain experience in a field where they do not yet possess enough knowledge or skill for their labor to produce enough value to meet what is required by minimum wage. But the law does not take such decisions into account by mandating an amount throughout society.
Similarly, when the government bans certain products, like gasoline-powered car sales, it regulates the market before allowing innovation and forces the economy in a direction it is not yet prepared to go.
The solution, as Smith knew, is to leave individuals to their natural liberty to allow the economy to proceed along its natural course.