Introduction
At the turn of the 21st century the application of certain classical principles in China and India has helped to lift hundreds of millions of people from conditions of abject poverty… the greatest antipoverty program in history. At the same time, developed nations have abandoned some of these same principles. This has contributed to pockets of poverty and economic hardship in the midst of plenty.
It has been more than two and a half centuries since Adam Smith wrote The Wealth of Nations. Smith’s objective was straightforward: identify and explain ideas and principles that would produce the highest living standards for the greatest number of people. He and those who followed in his wake provided a prescription for creating widespread prosperity. The prescription involves key classical principles… principles that are as relevant today as ever before.
Classical principles stem from a belief that each individual has God-given rights to liberty and freedom. These rights mean that so long as their actions do not harm others individuals must be free to pursue their own self-interests, without interference from an oppressive authority. Under such conditions, not only do individuals benefit from their own decisions, but those decisions benefit others, as well.
The history of the past two centuries provides conclusive proof of the power of classical principles. Time and again these principles have served as the keys to unlocking the wealth of nations.
Classical economists established a logical explanation regarding the creation of wealth. They presented evidence to support their views and made predictions based on the evidence.
Adam Smith used this approach to make seemingly astonishing forecasts. He predicted free market policies in the American colonies would eventually lead to greater wealth and prosperity than existed in England. He also predicted higher taxes and an oppressive government would prevent Spain’s colonies in South America from developing as rapidly as the American colonies. Although he was ridiculed for such predictions, they proved to be accurate.
Others who followed classical principles have made equally astonishing predictions. The greatest economic success story of our time is China. In the late 1970s China was a poor country, unable to feed its people. Since then, the country’s growth has been extraordinary. During the first decade of the 21st century China surpassed Japan to become the second largest economy in the world. At its recent rate of growth, by 2020 China will replace the US as the world’s largest economy.
In the early 1980s, my good friend, mentor and fellow classical economist, Beryl Sprinkel visited China in his capacity as President Reagan’s Under Secretary of the Treasury. When he returned he was bursting with optimism over what he had encountered.
“Bob, you won’t believe what I saw there,” he told me excitedly. “Upon entering the offices of every key Chinese official, I noticed their bookshelves were lined with classical economics textbooks. And when I met China’s leader, Deng Xiaoping, he pointed to those books and told me, ‘These guys got it right. These are the policies we will adopt. It will take time, but China will become the most powerful economy in the world.’”
In a single generation, Deng Xiaoping’s prediction is about to be validated. While China still has a long way to go in implementing classical principles, its progress since the late 1970s has been extraordinary. China’s experience is simply one small piece of evidence of the potential power associated with these principles.
It might seem that a topic as important as the creation of wealth should be fairly straightforward. It isn’t. Every economic issue is steeped in controversy. The more significant the issue happens to be, the greater the controversy that surrounds it. There are reasons for this. Anyone interested in understanding economic issues and the accompanying controversies should be aware of these reasons.
To begin with, economics isn’t the type of discipline that lends itself to absolute proof of a particular concept. To some extent, each economic experience is unique.
Time and again we might observe freer markets, lower tax rates and less government spending being followed by periods of strong growth and widespread prosperity. In contrast, we might witness that increases in government spending, regulations and higher taxes are followed by disappointing economic conditions.
In spite of what may appear to be an obvious conclusion, we can’t have absolute proof that either set of policies caused the subsequent events. Such proof would involve turning back the clock and running the same conditions over with different policies. Since we can’t do this, anyone can claim the conditions that followed certain policy changes were not related to those policies.
Such claims are inevitable because economics involves important, emotional topics. Economics deals not only with the creation of income and wealth; it deals with how income and wealth are distributed. Every change in economic policy has implications for how much income and wealth will be created and for how it is distributed among individuals, groups and businesses.
All living things instinctively react when threatened. In the same manner, individuals, businesses and groups react to defend their interests. This natural defense mechanism, along with the impossibility of proving anything, provides fertile ground for disagreements over the causes and effects of every economic policy regardless of the evidence.
We can’t prove that the classical principles that so captured Deng Xiaoping’s imagination caused China’s growth anymore than we can prove that the accuracy of Adam Smith’s predictions was due to the validity of his principles.
Economists who disagree with the classical view can always respond, “Just because the Chinese had classical textbooks doesn’t mean they read them. After all, we have the same books and we haven’t read them.”
Proof is illusive. In economics, we can only reason and observe. Since absolute proof is impossible, we must do the next best thing and look to the weight of the evidence. I maintain the evidence is so overwhelming it should lead most reasonable people to conclude that classical principles represent the keys to creating both wealthy individuals and wealthy nations.
Regardless of how pervasive the evidence is, there are those who will reject it. Those who believe that certain policies threaten their intellectual or financial interests will continue to defend those interests. It is their right to do so. However, others should recognize their opposition for what it is—a barrier to advancing the material well-being of mankind.
Economists have spent more than two centuries unraveling the mysteries behind the basic forces at work in the economy. For most key issues, appropriate explanations have been clearly and effectively presented. The underlying principles presented here are neither new nor unique. They draw on the work of many brilliant thinkers who labored extensively to hone and refine the ideas behind the creation of wealth.
Economic success and failure are two sides of the same coin. The game is rigged. We control the outcome. Pursuing classical principles promotes success. Rejecting them promotes failure.
The objective of this book is to provide a clear explanation of classical principles and the logic and reasoning underlying these principles. Subsequent books will show how following the classical path leads to economic success while failing to follow it leads to economic failure.
Classical economists provided a successful formula for creating the greatest wealth for the greatest number of people. Understanding their concepts and adopting their vision remains essential to fulfilling their primary objective—enhancing the wealth of nations by advancing the material wellbeing of individuals throughout the world.
Origins of Classical
