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Common Sense Economics
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Part 3: Ten Key Elements of Economic Thinking About Government

Elements:

  1. Protect Rights and Produce Limited Goods and Services.
  2. Regulate Monopolies.
  3. Avoid Inefficiencies and Waste.
  4. Understand Political Pressures.
  5. Adopt Rules to Limit the Influence of Special Interests.
  6. Avoid Excessive Spending and Deficits.
  7. Avoid Subsidies Not Based on Economic Logic.
  8. Limit Welfare-Reducing Transfers.
  9. Stay Away from Central Planning.
  10. Decentralization, Competition and External Anchors Are Key.

Introduction

Economists use the standard of economic efficiency to assess the operation of an economy. When resources are used efficiently, only actions that yield more benefits than costs are undertaken. No action will be undertaken that costs more than it is worth. Put simply, economic efficiency means getting the most value from the available resources.

Courses in economics generally explain why markets will fail to achieve ideal efficiency for certain categories of activity and highlight what the government might do to improve the situation. Here we follow this convention: we analyze why markets may fail and consider the potential of idealized political action, but we also apply the tools of economics to the operation of the political process.

Government expenditures now constitute a large share of national income in the much of the world. Indeed, this is true even in economies that are typically regarded as “free market” in orientation. In 2022 governments in Belgium and France spent well over half of their nation’s output, while the US, UK, Croatia and Czechia spent around 45%. Among post-Soviet countries, the Uzbek and Kyrgyz governments commanded about 35% of national income while Azeri and Georgian government spending was somewhat less than 30% of the country’s output. Given the size and scope of this political allocation, understanding how it works is vitally important.

Part 3 will use the basic principles of economics to analyze how the political process works, why it will sometimes lead to counterproductive actions, and what might be done to improve its operation. Economists use the term public choice when referring to this area of study.(75) Public choice has become an integral part of economics during the past half century.

Democratic governments often use taxes and borrowing to provide transfers, subsidies, and other forms of favoritism to some individuals and businesses. We will analyze this process and explain why the impact of these programs is different, and often substantially different, than most believe. We hope our approach challenges you to think more seriously about the potential and limitations of the political process.