It is the argument of this book that there is a simple framework by which one can evaluate public policy. Every policy involves transferring resources from one activity and to another. As a consequence, every policy has winners and losers. The framework presented here provides a means by which one can organize and--under the right circumstances--measure, the resulting gains and losses. Good policy, as we define it, is policy for which the gains of the winners are larger than the losses of the losers.

A major insight gained from our analysis is that when there are no significant market imperfections, profit-seeking firms will tend to direct resources towards their highest valued use. In this case, government interventions (price controls, subsidies, taxes, quotas, and mandates) can only decrease society's happiness. In contrast, when market imperfections are present, government interventions can--but may not--increase society's happiness. Thus, A MAJOR IMPLICATION OF OUR FRAMEWORK IS THAT CITIZENS--and that includes you, dear reader--SHOULD EXPECT PROPONENTS OF GOVERNMENT ACTIVISM TO IDENTIFY A SIGNIFICANT MARKET IMPERFECTION BEFORE INTERVENING IN MARKETS. For example, in the public debate over health care policy, or education, or regulation of industry, the first step should consist of identifying the market imperfection which causes private markets to misallocate society's resources.

Unfortunately, even when a market imperfection is identified, there will be many instances where our simple framework will be unable to determine the desirability of a given public policy. As we have seen, this determination will oftentimes depend on factors that are unknown and unknowable (e.g., the size of the negative externality associated with pollution, the effect of special interests on regulatory boards, the willingness to pay of consumers for a public good, etc.). Thus two individuals, both using the same framework for analyzing public policy, might justifiably come to opposite conclusions. But if that is the case, how useful can our framework be?

Remarkably, just THE MERE RECOGNITION THAT RESOURCES HAVE ALTERNATIVE USES WOULD REPRESENT SIGNIFICANT PROGRESS IN MANY PUBLIC DEBATES OVER POLICY. City, state, and federal governments commonly pass legislation that guarantees basic rights or services to selected groups without debating, or even acknowledging, that these laws have the potential of lowering society's happiness. Indeed, resistance to the idea that public policies should consider costs as well as benefits runs deep.

When environmental advocates argue that we should preserve an endangered species "no matter what;" when health advocates argue that everyone is entitled to the "best medical care available;" when legal aid champions argue that every citizen--no matter what their race, sex, age, religion, sexual orientation, etc.--is entitled to "fair treatment" on the job; it should always be remembered that these policies withdraw resources from other activities. These may be good policies. These may be desirable policies. But they are certainly costly policies. Wishing they weren't costly doesn't make it so. Indeed, one of the great services of prices in a market economy is that they force us to confront the fact that resources have alternative uses, even when we prefer to close our eyes to this fact.

But what are we to do when, having acknowledged the costs of policies, our framework still leaves us unsure about the desirability of government intervention? Is there any guide, any rule of thumb, that can guide us as we confront difficult policy issues? We wish to close this book by suggesting that the twentieth century contains a vitally important lesson in this regard.

In the 1940s and 1950s an intense debate raged among economists about the merits of socialism. Previously, most economists had focused on the incentives of economic agents to produce under socialism. That is, if firms weren't allowed to keep their profits, and individuals weren't allowed to keep their earnings, then how could society motivate its members to make their resources available for the public good? In the midst of this debate came a number of free-market economists who said that this controversy was centered around the wrong question. The most important question with respect to maximizing society's happiness is not, how can we get people to use their resources for the public good? Rather, the most important question with respect to maximizing society's happiness is, how can we know what the public good is?

This debate came to be known as the Socialist Calculation Debate. It proved to be the intellectual deathknell for socialism. It was eventually recognized that socialism could provide no alternative to the informational role of prices in a free-market/capitalistic system of resource allocation. In the end, socialism had no intellectually credible answer for how the state could identify the public good. The fundamental problem of economics--lack of information--had to be acknowledged.

Half a century later, the superiority of a market-based system of resource allocation over socialism is no longer confined to mere intellectual argument. It has been demonstrated in the great laboratory of the world's economies. Indeed, nowadays it is commonly asserted that socialism is dead. THE GREAT ECONOMIC LESSON OF THE TWENTIETH CENTURY IS THAT PUBLIC SECTOR CONTROL OF THE ECONOMY--PRECISELY BECAUSE IT HAS NO WAY OF DETERMINING THE HIGHEST VALUED USE OF RESOURCES--IMPOVERISHES ITS PEOPLE.

What should citizens do when our framework leaves the desirability of government intervention uncertain? While each individual must decide for himself, we recommend a presumption in favor of unregulated private markets, and against government intervention in the economy. The theory of how private markets tend to increase society's happiness provides an explanation for the great success of the wealthiest economies in the world. It teaches us that it is no accident that the most prosperous economies in the world are those economies that have generally favored private over public control of the allocation of resources.

At the very least, citizens who favor greater reliance on public sector direction of the economy should be keenly aware of what they leave behind. The system of prices directing resources in unregulated private markets yields a number of invaluable benefits for society. It is a system that generates information vital for knowing how best to employ society's resources. It is a system that channels the self-interest of man and directs it in favor of the public good. It is a system that minimizes social conflict over the use of resources. And it is a system that has produced the wealthiest societies in the history of mankind. These are extraordinary accomplishments. The great economic lesson of the twentieth century should teach us not to dismiss them lightly.