From remarks before the Western Economic Association, in the September AEI Economist. The basic fact is that the US economy works very well by all historical standards. There are, in my opinion, two reasons that this is so despite the limitations of economists and politicians. The first is that ... policy is the outcome of a group process in which there are checks and balances and a continuous opportunity for revision. The checks and balances are a restraint against extreme changes of policy to which the economy cannot adapt. Moreover, if there are such changes, there is a strong tendency for subsequent moderation. Thus we had a radical change of policy between 1933 and 1940, but some of that change was discarded early, some was subsequently revised, and some we just grew up to or grew around between 1940 and 1960. The Nixon price and wage controls were a radical change, but they did not constitute a step toward permanent controls; instead they disappeared without a trace. The 1981 tax cuts were ... extreme, but we have since been undoing some of the revenue effects of those cuts and will probably undo more.
Our follies have been remediable. In fact, it is hard for me to think of an error that would not be remediable except failure to provide adequately for the national defense.
The more important reason for the nation's economic success is that economics and economic policy are not as important as many of us, at least many of us Washington economists, think. A few weeks ago I had a revelation and told my secretary that I could give him the synthesis of forty-six years of living with economic policy. It is the following: ''Economic policy is random with respect to the performance of the American economy, but, thank God, there isn't much of it.'' What makes the economy function well is that a hundred million people get up every morning and go to work, doing the best for themselves that they can. As long as that happens, the economy will be strong enough to resist policy errors, within a considerable range, and provide time for corrections.
The key is to preserve the freedom of those hundred million people to get up every morning and do their own thing. Economists deserve some credit for that preservation, which is probably the main thing for which they deserve credit.