A CRITIQUE OF “COMMON SENSE ECONOMICS: What Everyone Should Know About Wealth and Prosperity”

AN EXPOSÉ ON FREE MARKETS, PROSPERITY, AND INDIVIDUAL LIBERTY

Matt White

November 4, 2013

Liberty University PPOG 502 – Economics and Public Policy

Common Sense Economics, a collaboration of economists and professors James D. Gwartney, Richard L. Stroup, Dwight R. Lee, and Tawni H. Ferrarini, is a clear and concise introduction to the basic principles of free-market economics. The book is intended to introduce the lay-person, the non-professional economist, to the common sense fundamental principles of market driven, non-interventionist economics along the empirical libertarian line of thought in the spirit of Adam Smith. Regardless of one’s level of knowledge regarding economic principles, the economy, in broad terms, affects the standard of living of all. This is true for both a national economy and a personal economy, inexorably intertwined. Common Sense Economics can be divided into two major themes, economics and public policy, and personal finance.  The primary goal of this book is to spell out logical economic principles to the general population and dispel popular misconceptions, in order for us all to make good judgments when at the voting booth, running a business, or managing our own personal accounts.  For, “People who do not understand the sources of economic prosperity are susceptible to schemes that undermine both their own prosperity and that of their country.”[1]

            The authors lay out their “Twelve Key Elements of Economics,”[2] the core principles of the foundation of the logical assumptions and conclusions laid out in the remainder of the book. The authors sum up their keystone theme up front: “All of economics rests on one simple principle: Changes in incentives influence human behavior in predictable ways.”[3] Nothing is free. For every decision we make, there is an opportunity cost, one of the key elements elaborated upon.[4] The opportunity cost of either purchasing a product or the time spent performing an activity is the sacrifice of the alternatives.

The concept of marginal cost and benefit is also elaborated upon as one of the key economic elements.[5] For every additional dollar one earns, there is a diminishing value of the return of benefit. To a person with $5, an additional $5 could mean two meals in a day instead of one. To a high salaried executive, an additional $5 in profit is worth the same in absolute terms but has insignificant intrinsic value. Diminishing marginal benefits are also a risk that could harm the economy when contemplating policy such as progressive taxation, by reducing the reward for moving into the higher tax brackets.

Common Sense Economics goes into detail on the public policy and legal framework required in order to best allow prosperity to flourish, as well as describing policy and regulations that only serve to stifle growth.[6] “Sound institutions – the legal rules and customs, both formal and informal, that guide behavior – and sound government policies are the central elements of the growth process.”[7] To maximize prosperity, a nation needs a legal system that protects private property and fairly enforces contracts. Free competition in the marketplace, limited government regulation, monetary stability, low tax rates, and free trade, all serve to foster prosperity. The authors place a strong emphasis on the efficiency of the “Invisible Hand” in determining prices, letting unadulterated supply and demand take course, and in placing no barrier to free trade, either domestic or international.[8]

One central principle that is heavily emphasized in Common Sense Economics is that an individual prospers when they produce goods and services that other people value.[9] Successful entrepreneurs are those that are able to help the most people meet customer’s wants and needs. In doing so, mutually beneficial market exchanges occur that are in the self-interest of both the buyer and the seller.

Democracy is an institution, the authors argue, that when left unchecked, can actually cause harm to the market. “The power to tax and regulate makes it possible for the majority to coerce the minority.”[10] They argue that driven by the same market fundamentals, politicians may find it personally advantageous to support policies that benefit the majority, for their votes, no matter the harm caused to the minority. Additionally, free market principles tend to drive corrupt politicians to side with special interest groups.[11] In order to put a check on unrestrained democracy, the authors propose a new amendment to the US Constitution that would curb spending, limit federal regulatory and taxation power, and maintain a stable economy.[12]

            The book concludes with sound economic advice for the individual managing their own personal finances.[13] Some of it should be common sense, such as not treating available credit on a credit card as cash in hand. They do offer sound advice when it comes to investing, and investing early so as to take advantage of compound interest over long timeframes.  But one is always better off when they find their comparative advantage, that which they are able to do best, and to stick with that.

            The information and advice given in Common Sense Economics is essential for all to read and understand. When it comes to economic policy and decisions in general, one theme is emphasized all throughout the book: people fail to grasp the secondary effects. Too many economic misconceptions are widely believed, and when affected at the voting booth, that ignorance can do actual economic damage. There are two main areas of public policy to evaluate and critique in this regard, social welfare programs, and free trade.

            The term “social welfare” can be somewhat misleading. Instead, the authors choose to refer to government handout programs as “government transfers” as in, they transfer money from the marketplace, where it can be useful in creating goods and services people value. It ends up, from the taxpayer by way of government, as a reward for non-productivity. The visible effect of subsidies to the poor, programs such as welfare and food stamps makes them highly popular. It is the secondary effects that are not always obvious, but cause more harm than the original good intentions.[14]An increase of government transfers reduces the incentive to work by slashing the marginal benefit of working. They may also encourage destructive lifestyles, because, “1) They make the consequences of the adversity less severe, and 2) they reduce the incentive of potential recipients to take steps to avoid the adversity.”[15]

            This cynical view of anti-poverty measures is against the Christian worldview that we are to care for those in need, that, “Those who give to the poor will lack nothing, but those who close their eyes to them receive many curses.”[16] The belief in the free market alone is in opposition to the fuller Christian perspective put forward by Claar and Klay, that …”markets are often providentially used to accomplish what no amount of Christian charity or political activism alone could achieve. We also affirm that God’s ways of meeting the needs and desires of his people include concerted efforts by churches…”[17] Claar and Klay include government in the triumvirate of tools that an all-powerful God can use for the benefit of providing us our daily bread.

            Secondary effects, additionally, are seldom noticed with regards to trade restrictions such as tariffs. The public tends to only see the benefits to the specific tariff-protected industry, benefits that are concentrated in that specific area. But the net losses in economic production, across all other economic areas, are far greater than the net benefit.[18] The secondary effects are seldom seen, due to the fact that they are too spread thin. A common emphasis throughout this book is that trade is beneficial to all those involved, if affordable goods can be imported cheaper than it would take to produce domestically. In a striking set of examples[19], international trade is compared with the constitutionally protected free trade across the states in the U.S. Each state possesses certain strengths, geographically and industrially, that it is in their advantage to exploit to the full potential. It is taking stock of their own comparative advantage. Perhaps it’s possible to raise beef cattle in Rhode Island, but it would be far more costly than importing steak from Texas. Perhaps it’s possible to cultivate a domestic lettuce crop in Alaska. But even transportation costs are far beyond offset by buying it cheaply from California.

            The proposed amendment to the US Constitution[20] deserves special attention, scrutiny, and for some parts, serious consideration. The proposed bill starts off with a clause that would ban federal, state, and local governments, from using “regulatory powers to take private property, either partially or in its entirety, for public use without paying the owner the full market value of the claimed property.” This clause reemphasizes the importance of private property, a sound legal structure, and minimal government regulation required for a prosperous economy. Two clauses would constitutionally prohibit restrictions on free trade in the marketplace or internationally, and would promote competition. These clauses to the proposed amendment deserve serious consideration.

The authors also propose two intriguing and somewhat entertaining clauses. One would require the resignations of all governors of the Federal Reserve if they fail to maintain stable currency values. The other would “Integrate a form into the federal personal income tax that would allow the votes of those paying the tax to determine whether federal spending during the upcoming fiscal year should be reduced, remain the same, or expanded” in order to prevent a democratically elected plunder of the treasury. In all fairness, those who actually fund the treasury, opposed to the roughly half of Americans why pay no federal income tax, should have the right to decide how that money is spent. But in granting one party the right to vote and not others in this case, the Fifteenth, Sixteenth and the Nineteenth Amendments to the United States Constitution[21] would have to be overturned, and this notion cannot be given serious consideration.

The remaining clauses that the authors propose are to be scrutinized and evaluated in light of recent political events. They are presented as parts e, f, and g, as follows: “e) A ¾ approval of both Houses of Congress shall be required for all expenditure programs of the federal government. At least 2/3 approval of the legislative branches of state government shall be required for the approval of expenditures by state governments. f) A ¾ approval of both Houses of Congress shall be required for the federal government to run an annual budget deficit or raise the overall limit on the national debt. g) A ¾ approval of both Houses of Congress shall be required for the federal government to mandate any expenditures by either state governments or private business firms.”[22] If implemented, these clauses would guarantee a permanently nonfunctioning and unfunded federal government. The recent government shutdown, from October 1^st to October 17^th, 2013, over the failure to pass a budget by the deadline and agreed upon by both houses, is empirical proof that any attempts to make passing a budget any more difficult than it currently is would cause the Federal Government to cease functioning entirely.

Common Sense Economics is not without flaws, however, so many myths and misguided popular economic notions are dispelled throughout the book, which makes Common Sense Economics a must-read for all, whether for managing personal finances or heading to the polls. Too many of these tenets are just plain common sense, lacking in the general population.

References:

Victor V. Claar and Robin J. Klay. Economics in Christian Perspective: Theory, Policy, and Life Choices. Downers Grove: IVP Academic, 2007.

James D. Gwartney, Richard L. Stroup, Dwight R. Lee, and Tawni H. Ferrarini. Common Sense Economics: What Everyone Should Know About Wealth and Prosperity. Revised edition. New York: St. Martin’s Press, 2010.