Jumpstart the Economy!
by John B. Taylor (George P. Shultz Senior Fellow in Economics; Chair, Working Group on Economic Policy; and member of the Task Force on Energy Policy)

Return to first principles: limited government, markets, incentives, rule of law, and predictability.
The best way to understand the problems confronting the American economy is to go back to the first principles of economic freedom upon which the country was founded. As these principles developed over the years, we can see periods when careful attention was paid to them and alternating periods when they were neglected. And we can draw clear conclusions from this history: When policymakers stuck to the principles, economic performance was good. When they ignored or compromised on the principles, economic performance deteriorated.

Our problem now is that we are paying too little attention to these principles, and even worse, we are moving in the wrong direction. The good news is that if we begin to apply these principles to our current circumstances, we can restore America’s prosperity and our confidence in the future.

At its most basic level, economic freedom means that families, individuals, and entrepreneurs are free to decide what to produce, what to consume, what to buy and sell, and how to help others. The American vision was that those decisions would be made within a predictable government policy framework based on the rule of law with strong incentives derived from the market system and with a clearly limited role for government.

The principles of economic freedom are naturally intertwined with political freedom—speech, press, assembly, religion. Excessive government interventions and economic controls will tend to constrain people’s freedom to speak out or take public political positions for fear of retribution through more interventions and controls. The loss of political freedom can in turn reduce economic freedom further.

One of the most amazing things about these defining principles of economic freedom . . .

—predictable policy framework

—rule of law

—strong incentives

—reliance on markets

—clearly limited role for government

. . . is that they also constitute a set of principles for economic success. Economic theory and experience show that they lead to superior economic outcomes, including strong economic growth and rising prosperity. The principles of liberty that Thomas Jefferson and the other founding fathers first delineated in the Declaration of Independence in 1776 are remarkably similar to the principles of economics that Adam Smith first heralded in the Wealth of Nations in the same year, and that remain central to economics today.

Markets, incentives, and a carefully delineated role for government are the main pillars of basic economics courses and texts, including the introductory course I’ve taught college students for years and my textbook Principles of Economics. In a market economy, most decisions about what to produce, how to produce it, and for whom it is produced are made by individuals, firms, and organizations interacting in markets. Prices in those markets signal what goods and services people want, and the prices create incentives to produce those goods and services.

http://www.hoover.org/publications/defining-ideas/article/119336

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