No one believes more than I do in the universality and permanence of the basic laws of economics.
If, say, Smith's cost of mowing his own lawn rises, Smith will reduce the frequency with which he mows his own lawn. If the personal benefits that Jones expects to reap from getting a college degree falls, Jones will be less likely to pursue a college degree.
These economic truths hold for everyone, everywhere, and at all times. Understanding only these truths, though, leads to terribly mistaken conclusions.
Economics tells us that each individual responds to incentives and in what direction he or she responds. Economics, however, does not tell us what underlying tastes, values and cultural norms create an individual's preferences in the first place.
We know, for example, that if the price of pears rises, consumers will buy fewer pears and, likely, more apples. But economics cannot explain why people like pears and apples to begin with. Nor can economics offer any specific predictions about just how many fewer pears — or just how many more apples — will be bought when the price of pears goes up.
To understand the limits of economics is to avoid the error of assuming that economic success requires only that monetary incentives — prices, wages, profits, rates of return — be correct. Tariffs, minimum wages and other government interventions that distort monetary incentives do indeed make economic performance worse than it would be otherwise. But the success of even the freest market requires that people respect each other's property rights, that people keep their promises and that people behave responsibly toward their family, friends and own future selves.
A society dominated by adults who never look beyond today will never become wealthy, no matter how free the market might be.
If the culture says “Live only for today!” then too few people will reduce their pursuit of immediate pleasure; too few people will have the discipline to sacrifice today's certain pleasures for the always-uncertain prospects of a brighter future.
Markets that are at least reasonably free are a necessary condition for prosperity. But free markets are not a sufficient condition. This fact is why deregulation alone or free trade alone or tax-cutting alone should not be expected to spark and sustain widespread economic growth.
The case for free markets presumes the existence of a culture that encourages people to care about their families and their futures and that discourages people from looking with scorn upon entrepreneurs and merchants. Under these cultural pre-conditions, prosperity will indeed occur if markets are free.
Without these cultural pre-conditions, however, the economic situation is hopeless. People whose cultural norms prevent economic growth from occurring through markets will prevent economic growth from occurring through governments — even if, by some miracle, politicians possessed enough knowledge to successfully “grow” an economy.