The Economics of Freedom

That was true even in the eighteenth century, when the founder of market economics–indeed of modern economics–Adam Smith, explained how the Wealth of Nations was developed by the operation of a "hidden hand". He observed that it was "not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest". This insight, removing at a stroke the justification for high-minded interference in much of people's ordinary lives, has always been deeply unpopular with politicians and bureaucrats. And so, not surprisingly, the proposition has been vigorously contested. It was claimed that the free market was too unpredictable and chaotic to work unassisted; that "market failure" would obstruct desirable outcomes; above all, that only the state knew enough and cared enough for the common welfare to be entrusted with economic power. And down through the years, those of us who explained that "there is no art which one government sooner learns of another than that of draining money from the pockets of the people" we have been attacked for lacking that most nebulous of virtues–compassion.

In fact, there is (and always will be) a tendency for government to spend beyond its means. That is the inevitable counterpart of having the power to tax. But when economic profligacy becomes systematised, when politicians, bureaucrats and economists convince themselves that a beneficent state is able to suspend the laws and buck the rules which govern the behaviour of mere private individuals, something more dangerous sets in. At this point, government aims not just to influence the myriad decisions which constitute the market: it increasingly imposes a command economy in which all power resides at the centre with an all knowing, omnipotent state. Such a system can't, of course, permit economic freedom. Nor, ultimately, can it permit the other freedoms either. It runs square up against human nature and strives to change it. Homo sapiens thus becomes Homo Sovieticus.

Economists therefore have a duty, as much as the rest of us, to expose the follies and dangers of going down that path of interventionism. This is something which people like Friedrich Hayek clearly understood. Hayek combined in a powerful fashion observations based on experience and conclusions based on theory. In particular, Hayek explained how the apparently benevolent business of setting over-all social goals to be achieved by all-encompassing economic plans can't be compatible with liberty and the rule of law. Similarly, Milton Friedman, whose seminal work on the role of the money supply has transformed macro-economic policy, has always grasped the vital importance of living, breathing, free enterprise–of the "market", understood not just in an abstract but in a human sense.

The cases of Hayek and Friedman illustrate an crucial point, and one relevant to the work of this institution in Poznan: it is that although in economics the technicalities are important, they are not everything.

Yes: it is important to know how to measure the gross national product. But it is even more important to know where wealth comes from. And it "comes from" businesses satisfying customers, not from apparatchiks ratcheting up the targets in an economic plan.

Yes: it is important to ensure that sufficient is invested in the infrastructure, in education and in basic science. But it is even more important to recognise that, however worthily such money is spent, the government itself has no money –only other people's money, which it confiscates by taxation, devalues by inflation or borrows to be repaid by future generations.

Yes: it is important to investigate a country's natural resources in order to analyse its economic future. But it is still more important to recall that without the spark of invention, the flair of entrepreneurship and a climate which encourages initiative, none of that country's potential wealth will actually make its people wealthy.

Margaret Thatcher

Speech at Poznan Academy of Economics
Jul 4, 1996