Seven Major Sources of Economic Progress

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Seven Major Sources of Economic Progress
Common Sense Economics James Gwartney, Richard L.
Stroup, and Dwight R. Lee CommonSenseEconomics.com
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Questions to Consider

• Why do political results so often differ from
  what was promised?
• Why do all governments seem to have a tendency to
  expand?
• What are the secondary effects of government
  policy?

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Source 1

• Legal System
• The foundation for economic progress is a legal
  system that protects privately owned property and
  enforces contracts in an even-handed manner.

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The Foundation for Economic Progress

• Protection of private property rights
• Clear property rights provide incentives for care
  and conservation by allowing owners to decide how
  to use their property and holding them
  accountable for their actions.
• Enforcement of contracts
• Evenhanded enforcement of agreements reduces the
  uncertainties of trade, helping increase the
  volume of trade and promote economic progress.

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Property Rights

• Private ownership encourages wise stewardship.
• Property rights encourage people to use their
  property productively.
• Property owners have an incentive to develop
  things that they own in ways beneficial to
  others.
• Property rights promote the wise development and
  conservation of resources for the future.

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Will Doomsday Arrive?

• Forecasts from Malthus to the Club of Rome have
  all been wrongWhy?
• When the scarcity of a privately owned resource
  increases, markets take over and the resources
  price will rise.
• This provides producers AND consumers with
  incentives to
• Conserve the resource
• Search for substitutes
• Develop new methods of production/extraction

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Source 2

• Competitive Markets
• Competition promotes the efficient use of
  resources and provides a continuous stimulus for
  innovative improvements.

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Consumers Rule!

• Competition places pressure on producers to
  operate efficiently and cater to the preferences
  of their customers based on their willlingness to
  pay.
• Who makes sure producers dont raise prices too
  much or produce inferior products?
• WE DO!!!

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Source 3

• Limits on Government Regulation
• Regulatory policies that reduce trade also retard
  economic progress.

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Governments Can Stifle Trade

• Limiting entry into various businesses and
  occupations
• License requirements, graft, etc.
• Substituting political authority for rule of law
  and freedom of contract
• Imprecise laws are invitations for bribery and
  lobbying efforts.
• Imposing price controls
• Price floors and ceilings result in inefficient
  prices and levels of production.

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Source 4

• An Efficient Capital Market
• To realize its potential, a nation must have a
  mechanism that channels capital into
  wealth-creating projects.

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The Importance of Capital Investment

• Capital investment is needed to enable an economy
  to produce more in the future.
• Investment requires savings, so mechanisms must
  exist to channel savings into productive
  investments.
• Saving today requires sacrificing consumption
  today for increases in the future.
• Interest rates at artificially high or low levels
  both stifle productive investment by encouraging
  risky projects or resulting in capital flight,
  respectively.

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Source 5

• Monetary Stability
• Inflationary monetary policies distort price
  signals, undermining a market economy.

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The Dangers of Inflation

• Money is to an economy what language is to
  communication.
• When the value of money is unstable, the risks of
  exchange increase and beneficial exchanges may
  not be made.
• Inflation results when the supply of money
  expands rapidly compared to the supply of goods
  and services.
• When governments print too much currency or
  borrow too heavily from their central bank,
  inflation results.

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Inflations Uncertainty

• Inflation undermines prosperity by making
  investment projects riskier.
• Difficult to forge long-range plans when you
  cannot predict the value of money
• Inflation undermines the credibility of
  government.
• Confidence in other government protections
  declines when citizens cannot trust the value of
  their countrys currency.

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Achieving Sound Money

• Central banks can be held accountable for the
  rate of inflation via their control of the
  nations money supply.
• Currency boards establish fixed exchange rates
  between the domestic currency and a selected
  foreign currency.
• Adopting another nations currency (commonly the
  U.S.) can provide stability.

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Source 6

• Low Tax Rates
• People will produce more when they are permitted
  to keep more of what they earn.

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Tax Disincentives

• High tax rates discourage work effort and reduce
  the productivity of labor.
• High tax rates will reduce both the level and
  efficiency of capital formation.
• High tax rates encourage individuals to consume
  tax-deductible goods when nondeductible goods may
  actually be more desirable.

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Source 7

• Free Trade
• A nation progresses by selling goods and services
  that it can produce at a relatively low cost and
  buying those that would be costly to produce.

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Barriers to Trade

• Trade barriers take many forms (tariffs and
  quotas, for example).
• It is production that really matters, not jobs.
• Barriers to trade simultaneously reduce the
  ability of foreigners to buy domestically-produced
  products.
• Barriers reallocate jobs, but do NOT protect
  domestic jobs.

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World Peace?

• More than any other single action, unilateral
  removal of our trade restrictions would establish
  the environment for a more peaceful and
  prosperous world.

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The Benefits of Trade

• Goods can be acquired more cheaply through trade
  than through domestic production.
• Trade allows both consumers and producers to
  benefit from economies of scale.
• Trade results in a wider array of products at
  lower prices.