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Economic Thought

Property rights and free markets are an integral component of what it means to be free. Here are three must-reads and some basic Q&As to get a handle on economics. When you're ready for more, explore economic thought in greater depth.

Frequently Asked Questions

What are property rights?

The right to property is the natural right to acquire, own, and use property. Property rights form not only the basis for a free market economy, but also for republican self-government, deeply intertwined as they are with human liberty. To be free is to exert one's talents in the pursuit of happiness, and property rights are a fundamental requirement for securing the just rewards of one's labor. According to the Founders, property rights also formed the cornerstone of a commercial republic: When a man has a bit of property—a home, a piece of land, his own source of food and security—he can be independent, and therefore free.

To grasp the full breadth of the concept of property rights, property must be seen less as a static possession and more as the dynamic source of opportunity for all—the engine that allows liberty, prosperity, and civil society to flourish. When property rights are secure and markets operate freely, economics is not a zero-sum game where people make a dollar by taking it from someone else, but rather a formidable way to create wealth and raise the standard of living of all.

For a more detailed discussion of property rights, see Edward J. Erler's First Principles Essay "The Decline and Fall of the Right to Property: Government as Universal Landlord."

What is "economic freedom"? Why does it matter?

Economic freedom is the liberty to make full use of one's property rights in open and free markets. It protects the right to freely produce, exchange, distribute, and consume goods and services without coercion or constraint beyond what is necessary to protect and maintain liberty.

At home, economic freedom protects the free movement of labor, the right to enjoy the fruit of one's labors, and the right to acquire, own, use, and sell property as one chooses. Governments have a duty to protect these rights with settled, known laws, impartial judges, and enforcement mechanisms.

In dealing with the rest of the world, economic freedom translates into free trade—an extension of the principle of free exchange at home. While it may sometimes be necessary to place tariffs on imports, they should be lowered or removed whenever possible.

Economic freedom has several practical benefits, the most important of which is an overall increase in the standard of living of a society. The poor, in particular, benefit most from a free economy. Over the past decade, countries that increased economic freedom saw poverty levels fall almost twice as much as countries that lost freedom.

For more on the subject, see the Understanding America booklet "Why Does Economic Freedom Matter?" by Kim R. Holmes and Matthew Spalding, as well as the Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal.

Is economic freedom sufficient for liberty?

Of course not. It would be foolish to say that citizens have liberty in a society where there are free markets but other freedoms are neglected. For instance, economic freedom without religious liberty would not be true freedom at all. 

Economic freedom is necessary for the protection of liberty. Liberty without economic freedom is not true liberty and will inevitably become tyranny. As Friedrich Hayek once observed: "To be controlled in our economic pursuits means to be controlled in everything." If government controls a citizen's basic economic decisions—where to work, what to buy, how much to sell for—it controls, as a practical matter, most aspects of a citizen's life.

Did the Founders support free-market capitalism?

Although the term "capitalism" was scarcely in use at the time of the Founding, the Founders supported the principle of economic liberty underlying it. The Founders understood that property rights and free markets were constitutive elements of what it means to be free. They therefore believed government had a responsibility to protect the rights of all to participate in the economy by upholding contracts, lifting artificial trade barriers, and protecting the right to acquire, possess, and freely use property. 

The Founders did not, however, advocate a completely "laissez-faire" economic policy since they understood that the government had a role to play—a limited role—in regulating the economy. For example, at the time of the Founding, the government inspected goods that were imported into the United States and created licensing systems for certain professions—like doctors—that were essential to public health and safety. Such regulations strengthen a free-market economy by protecting consumers from fraud and by expanding the opportunity for all to participate in the market by ensuring the reliability of goods and services. The Founders' defense of limited regulations enacted by elected representatives is a far cry from the Progressive embrace of far-reaching regulations made by unelected and unaccountable bureaucrats.

For more on the subject, see Thomas G. West's First Principles essay "The Economic Principles of America's Founders: Property Rights, Free Markets, and Sound Money."

Do tax cuts stimulate the economy?

Tax cuts stimulate the economy when they reduce tax distortions to economic decision-making. For example, long-term marginal tax rate reductions improve the incentives to work, save, invest, and start new businesses. Additionally, these tax rate reductions decrease tax impediments to productive activity. Reductions in the tax barriers to investment likewise improve incentives and thus provide economic stimulus.

By contrast, many of the tax cuts enacted in recent years have had little or no stimulative effect because they do not improve long-term incentives. One-time tax rebates and tax holidays provide tax relief to those affected, but they generally do not affect long-term economic incentives and thus do not stimulate the economy.

What should government do to "stimulate the economy" in a recession?

It depends on what caused the recession. During a recession centering on the financial markets, like the most recent one, government's first response must be to stabilize financial markets through monetary policy and other means. Otherwise, the guiding philosophy is that the government cannot stimulate the economy—it can only reduce government-created impediments to private-sector growth by lowering tax rates, suspending new regulations, lowering trade barriers, etc.

Government can also avoid creating new debilitating uncertainties through ad hoc, one-off policies like the first-time homebuyers credit. In the end these ad hoc policies merely disrupt and thereby lengthen the recovery process.

The favored Washington prescription of additional deficit spending cannot stimulate the economy because it only shifts purchasing power away from the private sector. Such stimulative policies actually slow the recovery by adding to the uncertainty while increasing the national debt.

Does government spending in a recession lead to economic growth?

Government spending must always be financed, generally either through growth-depleting taxes or by borrowing funds that are then not available to the private sector. Thus, contrary to conventional wisdom, deficit spending in the face of a recession cannot stimulate growth because the extra dollar borrowed to finance an additional dollar of government spending must first be subtracted from the saving that would otherwise be employed by private consumers and investors.

Some forms of government spending, like defense spending, are necessary for economic growth because they are essential to personal and economic security. Most government spending, however, is not an investment and thus cannot lead to growth. Even the government spending that does add to the nation's capital stock typically yields a return well below what an equivalent amount of private investment would generate

Does free trade harm workers?

The history of the United States clearly shows that free trade helps workers, and everyone else. Tariffs, quotas, and other barriers to free trade are nothing more than government interventions in the economy that restrict economic liberty. At home, tariffs are called "taxes" and quotas are called "rationing." No one argues that rationing goods and raising taxes help workers. Americans have always believed, and history proves, that everyone is better off when they can make their own economic choices—not when the government decides for them. Free trade is about people being able to make their own choices. That is just as true for trade between Idaho and Iowa, as for trade between Idaho and Italy.

For more on the benefits of free trade, see the opinion piece by Bryan Riley and Ambassador Terry Miller "Free Trade Fights Wealth Concentration."

More Resources

Economic Thought

Common Sense Economics: What Everyone Should Know about Wealth and Prosperity
James Gwartney, Richard L. Stroup, Dwight R. Lee, and Tawni Hunt Ferrarini (St. Martin’s Press, 2005)
This non-technical book is a highly readable introduction to basic economics and finance. The authors break the book into four parts: “Ten Key Elements of Economic Theory,” “Seven Major Sources of Economic Progress,” “Ten Elements of Clear Thinking About Economic Progress and the Role of Government,” and “Twelve Key Elements of Practical Personal Finance.”

Basic Economics: A Common Sense Guide to the Economy
Thomas Sowell (Basic Books, 4th edition, 2010)
Sowell’s book is the rare introduction to economics that is both clearly-written and free of graphs and tables, making it both a good introduction to economics and the antidote for most introductory economics courses. He emphasizes the impossibility of effective central planning and the unintended consequences of government intervention.

Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem
Jay W. Richards (HarperOne, 2009)
In the wake of the 2008 financial crisis and associated recession, Richards argues that not only is capitalism actually consistent with Christianity, it is the best way to fulfill certain Christian responsibilities. A biblical defense of capitalist economics.

Financial Founding Fathers
Robert E. Wright and David J. Cowen (University of Chicago Press, 2006)
This non-technical book looks at the role of finance in antebellum America, focusing on nine Americans who shaped the system: Alexander Hamilton, Tench Coxe, William Duer, Albert Gallatin, Thomas Willing, Robert Morris, Stephen Girard, Andrew Jackson, and Nicholas Biddle. Wright and Cowen conclude that most early Americans understood the role that finance played in their prosperity.

The Road to Serfdom
F. A. Hayek (University of Chicago Press, 1944)
Described by The New York Times as “one of the most important books of our generation,” Hayek’s “little book” was the first defining philosophical work of the modern American conservative movement. Hayek describes the disturbing signs of collectivism all around him and proposes a different road—the road of individualism and classical liberalism.

Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics
Henry Hazlitt (Harper and Brothers, 1946)
It is not too much to claim that this little book may be the most influential overview of economics published since World War II, and the book’s theme is as relevant today as when it was first published: government’s economic actions frequently have long-term consequences that are the opposite of what policy-makers intended.

Liberalism: A Socio-Economic Exposition
Ludwig von Mises, translated by Ralph Raico (Sheed Andrews and McMeel, 1978 edition)
Ludwig von Mises was one of the greatest “liberals” of the 20th century and led the opposition to big government and the welfare state. Liberalism is a comprehensive exposition of the whole tree of liberty, from the philosophical roots of the free society to the branches of public policy that give our world its social and economic shape.

Capitalism and Freedom
Milton Friedman (University of Chicago, 1962)
Milton Friedmanwho, in the words of The Economist, was “the greatest economist of the 20th century”—launched his ardent defense of liberty in Capitalism and Freedom. In this work, Friedman proposes that “we take freedom of the individual, or perhaps of the family, as our ultimate goal in judging social arrangements.”

A Humane Economy: The Social Framework of the Free Market
Wilhelm Roepke (Regnery, 1960)
In A Humane Economy, German economist Wilhelm Roepke denounces the fundamental immorality of all planned economies and challenged those who insisted that socialist regimes were the wave of the future. He sets forth clearly and cogently the case for free-market capitalism as he rejects socialism as “a philosophy which … places too little emphasis on man, his nature, and his personality.”

Wealth and Poverty
George Gilder (Basic Books, 1981)
In Wealth and Poverty, Gilder illuminates the social, political, and economic grounding of the Keynesian school of economic thought. The true source of wealth, Gilder argues, is not natu­ral resources or industrial production but “non-material forces” such as creativity, new technology, and the willingness to explore new territory.

The Seven Fat Years: And How to Do It Again
Robert L. Bartley (Free Press, 1992)
In The Seven Fat Years, Robert L. Bartley, the late, great edi­tor of The Wall Street Journal, skillfully shows how the severe eco­nomic crisis of the 1970s was overcome by policies put into place by President Ronald Reagan over the strong protests and dire warnings of a liberal establishment wed to Keynesian eco­nomics.

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
Hernando de Soto (Basic Books, 2000)
Hernando de Soto, the noted Peruvian economist, argues in The Mystery of Capital that most poor countries do not have a structure of law that guarantees private property and encourages enterprise. Without such a legal foundation, they are unable to leverage property into wealth and create healthy free markets.

The Spirit of Democratic Capitalism
Michael Novak (Simon & Schuster, 1982)
In the 1980s, Novak, long one of America’s most prominent socialists, broke publicly with his leftist colleagues, declaring that socialism makes no sense as an economic theory and had resulted in tyranny and poverty in almost all of the countries in which it had been tried. He com­pounded his “heresy” by embracing capitalism, which alone recognizes that “the cause of the wealth of nations is the creativity of the human person.”

Hayek’s Challenge: An Intellectual Biography of F.A. Hayek
Bruce Caldwell (University of Chicago Press, 2005)
Caldwell, the editor of The Collected Works of F.A. Hayek, explores early influences on Hayek, surveys the Austrian’s unique opinions on economics and other disciplines, and offers an assessment of Hayek’s thought and legacy.

Economic Thought: Online Resources

Index of Economic Freedom
www.heritage.org/Index
The Heritage Foundation and The Wall Street Journal’s annual ranking of 183 countries based on economic freedom (trade freedom, business freedom, investment freedom, and property rights).

Library of Economics and Liberty
www.econlib.org/index.html
A searchable online encyclopedia of economics, covering both basic and advanced topics. Particularly helpful are the guides to getting started.