That Cannot Be Provided Through Markets.
A wise and frugal government, which shall restrain men from injuring one another, which 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 gov- ernment.
— THOMAS JEFFERSON
A government can promote social cooperation and enhance its citizens’ economic welfare primarily in two ways: (1) by providing people with pro- tection for their lives, liberties, and properties (as long as the properties' liberties were acquired without force, fraud, or theft) and (2) by supplying a few select goods that have unusual characteristic that make them difficult to get through markets. Nobel laureate James Buchanan refers to these functions, respectively, as the protective and productive function of the government.
The protective function encompasses the government’s maintenance of a framework of security and order, including the enforcement of rules against theft, fraud, and violence. The government has monopoly on the
legitimate use of force in order to protect citizens from each other and from outsiders. Thus the protective state seeks to prevent individuals from harming one another and to maintain an infrastructure of rules that allow people to interact with one another harmoniously. The curriculum ingre- dients of this infrastructure include the protection of the people and their property against aggressors. Enforcement of contracts; and the evidence of restrictions, regulations, and discriminatory taxes.
When a government performs its protective function well, individuals can have confidence that they will not be cheated and that the wealth they create will not be taken from them — by either selfish intruders or by the government through high taxes, excessive regulation, or the ravages of inflation. This protection provides citizens with assurance that if they sow they will be permitted to reap. When this is true, people will sow and reap abundantly, and economic progress will be the result.
Problems arise when a government performs its protection functions poorly. If private ownership rights are not clearly defined and enforced, some parties will engage in harmful actions towards others. They will take property that does not belong to them and use sources without paying for them. When people are allowed to impose such costs on others without compensation, markets do not accurately register the true cost of pro- ducing goods. So when property rights to resources are poorly defined and enforced, the resources tend to be over-used and under-protected. Not surprisingly, we have excessive pollution of the atmosphere and water- ways, because these resources are not as easily owned and exchanged as private properties.
The second function of the government, the productive function, involves the provision of what economists call public goods. Such goods have two distinguishing characteristics: (1) supplying them to one individual simultaneously makes them available to others, and (2) it is difficult, if not impossible, to restrict their consumption to paying customers only. A few goods — national defence, flood-control projects, and mosquito
abatement program, for example — have these public good character- istics.
It is extremely difficult for private businesses to produce and market public goods. The nature of a public good makes it impossible for a private business to establish a one-to-one link between payment and receipt of goods. This gives the customer little incentive to buy the good or service. After all, if others buy the good, you can consume it without paying for it. If a firm builds a dam to control flooding, for example, it will be difficult, if not impossible, to provide the flood control only to paying the customers and to withhold it from those who don’t pay.
Recognising this difficulty, the potential beneficiaries are generally unwill- ing to help cover the costs of the project. Everybody has an incentive to let “the other guy” pay. When this happens, however, the project may not be undertaken even though it is worth more than its cost.
In most cases, however, it is easy to establish a link between payment and receipt. If you do not pay for a gallon of ice cream, an automobile, television set, DVD player, and literally thousands of other items, suppliers will not provide them to you and you cannot freely benefit from the others that have paid for. Thus, there are very few public goods. But when the nature of the good makes it difficult to link payment and receipt, citizens may be able to gain from government actions. In essence, government provision of public goods is what Abraham Lincoln had in mind when he stated: “The legitimate object of the government is to do for a community of people whatever they need to have done, but cannot do, at all, or can- not, so well do, in their separate and individual capacities.”
Americans have had an on-off love affair with government. The US Con- stitution enumerated limited functions for the federal government and, for more than a century, kept the government pretty much within the pro- tective and productive boundaries outlined here. Even though the great depression was largely the result of government mismanagement (for ex- ample, a sharp reduction in the money supply, a huge increase in tariffs
What Everyone Should Know About Wealth and Prosperity
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in 1930, and a huge tax increase in 1932), it greatly expanded the role of government. In the 1960s’ Americans thought that government could do almost anything. Income transfers were going to greatly reduce, if not eliminate, poverty. Medicare and Medicaid were going to provide “free” health care to the elderly and the poor. And budget deficits were going to stimulate economic activity and reduce the rate of unemployment. Government moved well beyond its protective and productive functions, but the results were far less impressive than the promises. By 1980 the ineffectiveness and adverse side effects of the 1960s’ policies cooled the love affair.
But people have short memories, and when government yields disap- pointing results there is a tendency to think that it is because the wrong guys are in power. If the “other guys” are elected, things will be better. Once again, passion for government appears to be on the upswing. Eco- nomics has a great deal to say about the operation of the government — about how it really works, why the result will often be disappointing, and what might be done to improve its effectiveness. As it applies to the government, economics replaces naïve romanticism with realistic expec- tations. The later may not be as much fun, but lead to more understanding and less disappointment.