Washington’s meddling in economy is growing. No matter the benefit, we’ll be worse off

When a team is struggling at the start of the season, the coach will often say, “We’re going to get back to fundamentals.” It will help if our policy makers in Washington do the same.

Congress and the president are considering new and expanded interventions in the economy. For example, the Biden administration is proposing more “relief”, government transfer payments that reduce the incentives households have to save for the future. Additionally, new subsidies are being considered for various industries, which have the effect of crowding out private investment.

No matter the potential benefit, basic economic principles show the costs can be substantial.

The fundamental principles of economics can be found in Adam Smith’s seminal work, “An Inquiry in to the Nature and Causes of the Wealth of Nations.” In the first three chapters, he teaches that the wealth of any society grows when the people pursue their self-interests, divide up the labor so as to increase productivity, and expand the opportunities to trade.

Pursuing self-interest simply means that we make choices that matter to us. We all face tradeoffs and must therefore choose various means to meet our personal goals.

Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.” By this we know that incentives matter, and any government policy that alters incentives will limit or possibly destroy wealth.

The second principle is that we are all more productive when we divide up tasks. Smith wrote that “the division of labour occasions, in every art, a proportional increase of the productive powers of labour.” We participate in society by doing different things and exchanging the results of our specialties with others. Nations become more productive, and increase wealth, as people further specialize.

Finally, the benefits of this specialization are limited by the extent to which we can trade our goods and services. Smith wrote, “As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market.” Therefore, when markets are free and open, the extent of trade is as large as possible, and the creation of wealth ensues.

So here we have the fundamental lessons of economics. When people are allowed to pursue their own interests, find their own special areas of service, and trade the results of this work freely, the standard of living for any nation or group will increase.

Limitation or interference with these principles will have the opposite effect. Interference from Washington is growing, and we are going to pay a price for it. We best get back to the fundamentals.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa, Idaho. prcrabb@nnu.edu

This story was originally published April 12, 2021 at 11:29 AM.