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The encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.

The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.

Isn't a fair social system the one that we would pick if we didn't know ahead of time what our role will be?

When governance has the texture of service it calls for a like response from those governed.

Â…companies were not designed to be engines of social good. Rather, it was the competition among companies that was designed to be an engine of social goodÂ… companies contribute to democratic solutions by remaining capable of creating the wealth shareholders and governments appropriate, not by taking on the responsibilities of governments.

What, then, can be done about chronically unemployable people? What can businesses do? My answer would not be a new social compact, but a determination to remember the old one more precisely and live up to it more intelligently.

The old compact had always assumed that companies would self-interestedly support certain government actions to enforce the rules of the competitive game. Government would police property rights, establish the courts to punish criminals and settle judicial disputes, build roads and bridges, defend borders. Read "The Wealth of Nations." The mutual obli-gations of companies and governments were specified from the start, and haven't really changed. Though Adam Smith opposed anything like labor unions, one could find a rationale for most New Deal regulations, even collective bargaining, in what Smith had to say about government's obligation to protect competition from the dangers of private monopolies.

But in one crucial respect, the old compact clearly needs an amendment, the part that has to do with education. The old compact assumed that government would educate children to be qualified for work, and that businesses would go along willingly. But to be qualified for a factory job, all that was necessary was bare literacy.

But none of this means businesses can themselves become responsible for education. Our companies invest more and more in training, but we cannot make our employees trainable. Businesses are more like specialized graduate schools than elementary schools; we need people to present themselves for work ready to learn and practice our marketing, design and production strategies, ready to learn our high technologies and quality systems. We cannot teach the basics.

Milton Friedman used to remind us that a long-term tax cut isn't a long-term tax cut at all unless it's accompanied by a long-term spending cut. It's essentially a deferred tax, a tax increase on the future.

Governments should be concerned with creating the type of investment climate (rule of law, healthy and well-educated people, good physical infrastructure, favorable tax structure, respect for private property, and so on), that leads to private investment. Organizations such as the World Bank and the United Nations should limit their activities to assisting governments in this area, rather than attempt to become economic players themselves. When they do intervene in the economy as players, all they really succeed in doing is "crowding out" other, more efficient and more qualified investors and economic agents.

Subsidy delays adjustment and innovation rather than promoting it. . . . Ongoing subsidies dull incentives and create an attitude of dependence. Government support makes it difficult to get industry to invest and take risk without it. Attention is focused on renewing subsidies rather than [on] creating true competitive advantage. One subsidized industry propagates its noncompetitiveness to others. Once started, subsidy is difficult to stop. What is worse, subsidies to one ailing industry encourage others to seek them.

It was the fatal conceit of socialism, in Hayek's famous phrase, that wise government bureaucrats could guide society to a better future. Substituting red aspirations with green ones does not change the undertaking's essential nature-or its likelihood of success.

What do self-respecting entrepreneurs do when subjected to new regulations? They learn the regulations backward and forward and then vow never to start another business that falls within the scope of those regulations. And so off the entrepreneur goes to find a new way.

The new entrepreneur often seeks ways to innovate outside the scope of the newly established regulations. In the beginning, all that works out fine. We have innovations, we love the people who created them, they’re great heroes, the returns are strong, everybody says, “I’m going to be one of those guys.” Eventually, all the truly good guys who are going to get into that business have done so. The opportunity starts drawing less savory figures—charlatans who overmarket, cut corners, establish usurious contracts, and do other clever things to generate profit for themselves. They end up bringing the system down. Then guess what happens? At the end of that period, after the equity premium has soared and collapsed again, the government steps in and regulates the systems, this time focusing on the last wave of abuse. And then we start over.

You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.

An economy doesn’t operate by market forces alone—it’s dependent on actions of business and consumers and government. There is a clear role for government in creating an environment in which business gets new opportunities. Yes, government should get out of spaces where it doesn’t have to be and let business do its thing. But government needs to be where there are so-called external effects, which means that additional positive value gets created from investments that businesses don’t make on their own. For example, spending on basic research is often not done by many businesses because they cannot internalize all the benefits from the investment.