From Common Sense Economics eBook: What Everyone Should Know about Wealth and Prosperity
Governments play a vitally important economic role. Governments can promote social cooperation and enhance the welfare of the citizenry through the performance of two major functions: (1) the protective function that provides people with protection for their lives, liberties, and properties; and (2) the productive function that supplies a few select goods that have unusual characteristics that make them difficult to provide through markets.
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. Governments are granted a 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 maintains an infrastructure of rules that allow people to interact with one another cooperatively and harmoniously. A legal system that protects individuals and their property from aggressors, enforces contracts in an unbiased manner, and provides equal treatment under the law (see Part 2, Element 1) forms the core of the protective function of government.
The protective function is crucially important for the smooth operation of markets. When the government clearly defines and enforces property rights, market prices will reflect the opportunity cost of resources, and producers will be directed toward production of the goods and services that are most highly valued by consumers compared to their cost. Moreover, if contracts are enforced in a way that is efficient and without favoritism, transaction costs will be low and the volume of trade enlarged. In turn, the incentive structure will encourage people to develop resources, engage in mutually advantageous trade, and undertake wealth-creating projects.
It is difficult to overstate the importance of the government’s protective function. When this function is performed well, citizens 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 itself. 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 result.
In contrast, when the protective function is performed poorly, problems will abound. Opportunities to get ahead through deception, fraud, theft, and political favoritism rather than through production and trade will emerge. Earnings and wealth will be insecure, and market prices will fail to register the true cost of supplying goods and services. Incentives to develop resources will be weak, and economic growth will stagnate. Unfortunately, this is precisely the situation in many poor, less-developed countries.
- In what ways does living under laws protect your ability to live your life as you please (pursue your happiness)?
- Do you see laws more as limiting your freedom? Or in enabling it?
- Have you or someone you know ever experienced corruption in a government official (including the police)? How does that make you feel?
This reading is an excerpt from Certell’s Common Sense Economics eBook. Certell offers curriculum materials and eBooks free of charge for students and teachers. Click Here to download the Common Sense Economics Materials.
20, April 2018, The Rule of Law [Digital image]. Retrieved from <google.com>.