Ten Elements of Clear Thinking
About Economic Progress and the
Role of Government
Common Sense Economics
James Gwartney, Richard L. Stroup,
and Dwight R. Lee
Economic Freedom, Per Capita GDP
Growth Rate
of Per Capita
GDP Per
GDP 1990Capita 2007
2007 PPP
PPP (constant (percent,
2005
constant 2005
EFW Rating, 1990- international international
2007
$)
$)
The countries
with the
highest
levels of
economic
freedom
have the
highest per
capita GDP
and growth
rates.
10 Highest Rated
Countries, 1990-2007
Hong Kong
Singapore
New Zealand
United States
Switzerland
United Kingdom
Canada
Ireland
Australia
Netherlands
Average
8.8
8.6
8.2
8.2
8.1
8.0
7.9
7.8
7.7
7.7
8.1
$39,958
$47,497
$25,282
$43,102
$37,581
$33,717
$36,260
$41,036
$32,735
$36,956
$37,412
3.1%
4.1%
1.9%
1.8%
0.7%
2.1%
1.8%
5.1%
2.0%
2.0%
2.5%
10 Lowest Rated
Countries, 1990-2007
Niger
Burundi
Venezuela
Syria
Central Afr. Rep.
Congo, Rep. Of
Algeria
Zimbabwe*
Congo, Dem. Rep.
Guinea-Bissau
Average
5.0
5.0
4.9
4.9
4.8
4.8
4.7
4.4
4.2
4.2
3.9
$597
$349
$11,480
$4,038
$674
$3,517
$7,317
$450
$288
$495
$2,920
-0.7%
-1.9%
1.1%
1.9%
-1.0%
0.1%
1.0%
-1.6%
-4.3%
-2.1%
-0.8%
Source: Derived from World Bank, World Development Indicators and James Gwartney and Robert Lawson, Economic Freedom of the World: 2009 Annual Report.
Overall Economic Freedom Index:
Top Ten (2010)
Hong Kong
Singapore
New Zealand
Switzerland
Chile
United States
Canada
Australia
Mauritius
United Kingdom
0
2
4
6
Score (out of 10)
Source: The Fraser
Institute.
8
10
Overall Economic Freedom Index:
Bottom Ten (2010)
Algeria
Congo, Dem. R.
Burundi
Guinea-Bissau
Central Afr. Rep.
Congo, Rep. Of
Venezuela
Angola
Myanmar
Zimbabwe
0
2
4
6
Score (out of 10)
Source: The Fraser
Institute.
8
10
Per Capita Income and Economic
Freedom Quartile
GDP Per Capita
(ppp), 2008
$35,000
$32,744
$30,000
$25,000
$20,000
$15,000
$14,659
$10,000
$5,000
$3,858
$7,188
$0
Least Free
Quartile
3rd Quartile
2nd Quartile
Most Free
Quartile
Least Free ………………... Most Free
Sources: The Fraser Institute; The World Bank,
World Development Indicators, 2010.
Clear Thinking Proposition #1
Government promotes
economic progress by
protecting the rights of
individuals and
supplying goods that are
difficult to provide
through markets.
An Auction: The Rules
• Bidding starts at $.50
• Bids must be divisible by $.05
• The auction ends when no one is willing to
raise the bid
• The individual with the highest bid at the
end of the auction wins the Dollar
• Both the first and second highest bidders
must pay their bids
The Role of Government
The Debate
• Not about Command vs.
Market anymore.
• Now it is about how much
government should be
involved in the economy.
What do you think the role
of government should be?
A few examples to get you thinking
What do you think the role of
Government should be?
• Should the government provide an army?
What do you think the role of
Government should be?
• Should the government provide schools?
What do you think the role of
Government should be?
• Should the government provide sport
stadiums?
Then what should
Government do?
1. Enforce General Set of Rules
What Role for Government?
“A wise and frugal government, which shall
restrain men from injuring one another,
which shall leave them otherwise free to
regulate their own pursuits of industry and
improvements, and shall not take from the
mouth of labor the bread it has earned. This
is the sum of good government.”
-Thomas Jefferson
“Little else is
requisite to carry a
state to the highest
degree of opulence
from the lowest
barbarism, but
peace, easy taxes,
and a tolerable
administration of
justice.”
-Adam Smith, The
Wealth of Nations
“A modern market
economy cannot exist
in a vacuum. Market
transactions take
place within a
framework of rules
and require someone
with the authority to
enforce those
rules…”
-Thomas Sowell
Framework of Rules
Courts (Judiciary)
Enforce Contracts
Adjudicate Accidents (torts)
Define Rights and Duties
Resolve Disputes
Agencies (Executive)
SEC
FTC
FDA
EPA
Government’s Protective
Function
Government’s protective
function includes the
maintenance of a framework for
security and order.
• Protect people and their property
against aggressors through force if
necessary.
• Enforce contracts.
• Help avoid restrictions, regulations
and discriminatory taxes.
"If men were angels, no
government would be
necessary.”
James Madison
Federalist Paper No. 51
1788
Then what should
Government do?
1. Enforce General Set of Rules
2. Provide Public Goods
Government’s Productive Function
• Government’s productive function
includes the provision of public
goods – goods that cannot be
provided easily in private markets.
• Public goods
– Are available to others once provided to
an individual.
– Are difficult to provide only to paying
customers.
Examples of Public Goods
Flood Control
Military
Lighthouse
Fireworks
What do these things have in
common?
Public Goods
• A public good is a good that everyone can
use, whether or not they pay. Thus, a
public good is said to be Non Excludable.
• A public good is also such that one person
using the good does not affect another
person using that same good. Thus, a
public good is said to be Non Rival
Rivalry and Excludability
• A plate of brownies behind a deli display
case
• A plate of brownies “up for grabs” in front
of a table of 5 year olds
• Cable TV
– (natural monopoly)
• Broadcast TV (via antenna)
Rivalry and Excludability
• National Defense
• Public Schools
• Sports Stadium
What are some examples of
public goods?
Remember, public goods are both Non
Rival and Non Excludable
Do all public goods have to be provided
by the government?
Determining the Value of a Public
Good
How much do you
value having
national defense?
Determining the Value of a Public
Good
If the government asked you to send in a
voluntary contribution to finance national
defense, how much would you send in?
Think about it…
 If no one but you sends in money, your money
will not be enough to support the army
 If everyone else sends in money except you,
the army will be supported even without your
contribution
 So…….
Free Rider Problem
• Whether no one else contributes, or everyone
else contributes…you are best off not
contributing!
• Everyone would reason this way, no one would
contribute, and we would have no army…
Free Rider Problem
This is why public goods are so often
provided by the government (or a
higher authority…)
If the government did not provide
the public goods then they would
not be produced even though people
want them.
Then what should
Government do?
1. Enforce General Set of Rules
2. Provide Public Goods
3. Long List of Debatable Services
The Case for Public Goods
The legitimate object of
government is to do for a
community of people whatever
they need to have done, but
cannot do, at all, or cannot, so
well do, in their separate and
individual capacities.”
~ Abraham Lincoln