Over two centuries ago economists, led by Adam Smith, answered an age-old question at the heart of economics. How should we organize an economy so that individuals will combine resources in the most efficient way possible to produce things that other people want? Classical economists believed that individuals would combine resources in the most efficient way possible to produce things that other people want so long as they had the right environment. That environment consists of making sure people have just four things—low tax rates, free markets, protection of property rights and a stable currency.
These four classical principles formed the basis for the establishment of the US economy. Guided by these principles, the US went on to become the most productive, most powerful economy in the world. In the early 1980s Chinese leader Deng Xiaoping made sure that all of China’s policymakers were thoroughly familiar with the ideas of the classical economists. He said that by following the classical principles China would become the most powerful economy in the world. Twelve years ago, China passed Japan to become the second most powerful economy. Given current trajectories, China will pass the US and fulfill their former leader’s vision within the next five years.
Classical economic principles are universal. They have widespread popular support. In any country, at any point in time, when policymakers have moved policies in the direction of these principles there has been an improvement in economic conditions. In contrast, whenever policies moved away from these principles, there have been disappointing outcomes. As the election approaches, it’s important to understand how the Presidential candidates view classical principles and the extent to which they are likely to rely on them in setting policy.