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  • Writer's pictureGerminal G. Van

On the Nature of Economic Policy

The proper functioning of any civilized society is based on rules and laws. Rules and laws determine the parameters within which individuals act in order to improve their well-being. Economic policy is concerned with the laws and rules that determine the parameters of production, distribution, and consumption of goods and services. The market, as a social institution, is governed by rules and laws just like other realms of society. However, these rules and laws do not have a legislative origin but rather an organic origin because the economy in itself is a system based on the decentralization of the organization of society.

In this essay, we argue that if the economy is a fundamentally decentralized system, then the laws that determine the parameters of production, distribution, and consumption must be permissive rather than restrictive. In other words, we maintain that the essence of economic policy is permissive in nature rather than restrictive because the laws that govern a society’s economic policy must be designed to allow individuals to maximize their welfare and this maximization of their welfare should be based on the minimization of rules that grant individuals access to economic resources.

An Understanding of Economics to Understand Economic Policy

Economics has a fundamentally decentralized approach to the coordination of society. This decentralized approach to societal coordination is based on individual choices and preferences. In economics, individual choices and preferences are an essential part of the resource allocation process. A human being is an animal endowed with reason. Each action taken by a person is determined by a specific goal to be achieved. And it is based on the objective that needs to be achieved that the individual tries to allocate his resources as efficiently as possible in order to maximize his welfare.

It is interesting to observe that since economics emphasizes individual choices and preferences to coordinate the organization of society, then this emphasis gives a permissive dimension to the individual in order to maximize his well-being. In other words, economics focuses on what people can do rather than what they cannot do. The individual choices and preferences we exert daily are based on our knowledge and experiences. These two factors (knowledge and experience) are inherently decentralized because no external entity can truly control what an individual knows and experiences.

Economics is the field that focuses on the decentralization of the coordination of the organization of society and the economy is the system that reflects this decentralization. The economy is a system that functions in the form of a market where individuals buy and sell goods and services; they exchange what they possess in order to maximize the utility of the resources they acquire during that exchange. This exchange of property is done through the knowledge and experience of individuals without any specific coordination planned by an external force that is foreign to the market forces.

How Economic Policy Should be Implemented?

The implementation of economic policy must be approached from a perspective that enacts permission rather than restriction. Government is generally ineffective at allocating resources efficiently for one reason only: it uses political reasoning to solve economic shortcomings. Political reasoning focuses on restrictions and interdictions because legislation is inherently punitive and coercive whereas the economy is characteristically a permissive system that fosters people’s individual choices and preferences and how they use their choices and preferences to allocate their resources. It is a fundamental mistake to address economic problems from a political perspective because the political perspective is based on centralization while economic problems are decentralized in nature.

Legislation concentrates on what individuals cannot do. This is the essence of politics. Politics deals with restrictions, interdictions, and coercion. It exerts a negative power on society while economics exerts a positive power on society. The economy is a decentralized system in nature and, therefore, the way to solve economic problems is to approach these problems from a decentralized perspective. When the economy encounters allocative and coordinative shortcomings, most economists suggest that the state shall intervene to regulate it in order to tame the shortcoming. A large majority of state interventions in the economy are failures because political institutions address economic conundrums from a centralized viewpoint rather than a decentralized one. In other words, when political institutions intervene in the economy to regulate its spillovers, they implement laws of punitive (legislation) rather than permissive nature that aim at restricting the production of businesses as well as the resources of the haves. The application of punitive state laws leads to the distortion of mechanisms of the economy; mechanisms that are intrinsically decentralized because the economy functions on market forces, the forces of supply and demand. The forces of supply and demand are based on the choices and preferences of individuals. Hence, when political institutions interfere in the economy, they attempt to control the natural process of these forces which then prevents individuals from exercising their choices and preferences and allocating their resources accordingly. This, consequently, highlights the decentralized nature of an economy.

A centralized-oriented approach cannot be used to solve problems of decentralized nature. Such an approach cannot produce sustainable outcomes because the economy is a decentralized and therefore a permissive system. When the legislation enforced failed to achieve the outcome intended, political institutions then attempt to pass a new set of legislation that will replace the ones that failed. This new set of legislation produces the same results as the previous ones because political institutions apply methods that enhance more centralization on problems that need to be addressed strictly from a decentralized standpoint.

Political reasoning treats the collective as an organic entity completely separated from individuals. But the collective is not an organic entity separated from individuals. The collective is simply an aggregation of individuals. Each individual in the collective has their choices and preferences and allocates their resources accordingly. Therefore, it is not possible to expect a positive outcome by using political reasoning when addressing economic issues. And political institutions fail to recognize this basic yet preponderant element when they implement legislation to regulate the economy, and that is why political institutions are very inefficient at allocating resources to improve the economy no matter how many legislations they enforce.


Since the economy is naturally a decentralized system, economic policy should then foster decentralization and anything that fosters what people can do rather than what they cannot do. So long as political reasoning will be used to solve economic problems, these problems will never be solved because the methods to solve these problems are contradictory to the nature of the problem itself. Economic problems can only be solved through solutions that promulgate decentralization methods.

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