“Common Sense Economics” by Gwartney

Introduction

The book Common Sense Economics: What Everyone Should Know About Wealth and Prosperity by Gwartney et al. discusses some basic principles that constitute and support modern economics. In the first part, key elements are considered, while the next two parts talk about economic progress and the role that government can play in a country’s prosperity. The book addresses these ideas using many hypothetical examples and historical events, showing why some of the authors’ claims are valid. This is a review of the book which analyzes its contents and employs them to several current public policy issues.

Summary

In Part 1 of the book, Gwartney et al. describe twelve main principles of economics that can explain people’s decisions and the progression of capitalism over time. First, the authors explain the importance of incentives for individuals and companies, showing that personal benefits are the driving force behind all actions. Next, they put much attention on the concept of “opportunity cost” – a loss of potential benefits provided by other options when an alternative to them is selected.¹ The authors note that a “free lunch” cannot exist due to the scarcity of resources. For this reason, people make decisions based on the marginal benefit of the alternatives. In this chapter, the authors also argue that trade is the primary driver for economic progress, businesses make choices based on profits, and the “invisible hand” of the market determines prices and regulates general welfare.²

In the next part, scholars concentrate on sources of economic progress. They point out that the legal system should protect private property and contracts, while not restraining competition or imposing on people’s trade with regulations, high tax rates, and limited international trade.³ Thus, the role of the government is to create and support a mechanism for capital channeling, but the market should be free to balance the prices, supply, and demand, and companies’ decisions to work with other countries. Notably, the researchers argue that low tax rates promote productivity as people are encouraged to perform better when they can keep a more substantial part of their earnings or goods. In contrast, high tax rates are found to reduce the efficiency of performance.⁴ Marginal taxes are also critiqued in the book, as the authors believe that they influence how people spend money, encouraging high consumption of tax-deductible goods, which leads to some less beneficial financial decisions.

In Part 3, the authors look at the role of the government in economics in more detail than previously. As noted above, the researchers firmly believe in the limited power of the legal system over the free market. Therefore, the primary function of this institution lies in the protection of individual rights and the provision of goods that cannot be delivered through the market.⁵ Otherwise, the government’s power can be misused by special interest groups to influence the market and people’s commercial success. Constitutional rules are necessary to limit these powers and protect the market from restraints and outside forces. The authors explain that competition determines the success of the government in a similar way to markets; on the other hand, central planning is deemed ineffective as it does not have the same incentive to drive profits and ensure growth.

Evaluation

The majority of the statements that Gwartney et al. make in their book seems to align with the findings of the contemporary economists researching the capitalist framework. The belief that incentives are highly crucial for all activities is challenging to disprove, and this particular topic has been researched extensively in most parts of the economic study. For instance, the concept of opportunity cost is introduced by the authors as one of the main factors that should influence people’s financial decisions.⁶ Other studies support this statement and find that the use of opportunity cost is broad, applying it to such problems as income, employment, environmental issues, and so on.⁷ Moreover, one research finds that people from different backgrounds and classes neglect opportunity costs in equal measure, implying people’s overall lack of knowledge in regards to this idea.⁸

The evidence from research on taxation from different countries supports the statements made by Gwartney et al. For instance, Gemmel et al. look at small European firms, comparing their productivity growth in relation to the level of the corporate tax rates. The scholars find that the productivity falls with higher tax rates, confirming the ideas discussed by Gwartney et al.⁹ Nonetheless, as the article focuses on small companies, one cannot apply the same conclusion to the productivity of large corporations which may be less burdened by the same corporate tax rate. Another study discovers that high tax rates drive people away to low-tax areas, which leads to the change in people’s incomes in the region due to the imbalance of high-performing individuals in the region.¹⁰

The point about the government’s involvement in economics is highly debated in most economic works. The beliefs of Gwartney et al. are similar to the Neo-Keynesian macroeconomic model that puts the focus on price- and wage-setting relations to create an equilibrium in the markets.¹¹ It also poses that competition is vital for the economy to thrive, implying that government control impedes progress. This is consistent with the principles laid out in the book that considers the intrusion of the legal system into the free markets a risk to their balance. Finally, the statements listed by Gwartney et al. appear to adhere to Christian principles. For example, the idea of competition can be viewed using the Bible, according to which those who work hard are rewarded, while those who do not are seen as lazy and undeserving of prosperity.¹² However, the Bible also considers the need to share to uphold the common good.¹³

Current Public Policy Problems

The readings from the book offer some insight that can be used to discuss current public policy conversations. Many issues are considered in the sphere of economics today, including such topics as minimum wage, monopolization, universal basic income, taxation, and affordable medical care. One can see the ideas proposed by Gwartney et al. in regards to some of these questions transparently. The authors view tax as limiting the free market, along with international regulations that put an additional burden on trade.

Similarly, the authors argue that an increase in a minimum wage cannot bring benefits to the economy or to the employees who work in positions with minimum wage. As Gwartney et al. find, this policy does not connect to the problem of unemployment, and the increase in the minimum wage also leads to the changes in prices for some essential goods.¹⁴ Thus, according to the scholars, this suggestion does not eliminate the financial challenges that some people experience.

Furthermore, the introduction of universal basic income (UBI) would likely be regarded negatively by the authors. To begin with, UBI implies the participation of the government in the financial position of all people and support regardless of their input in the economy. Moreover, it can be argued that UBI lowers one’s incentive to compete, thus disrupting economic growth and innovation in the free markets. Hoynes and Rothstein find that current options of using UBI in developed countries do not help the groups with the lowest income or people who are unable to work due to age or disability.¹⁵

Programs that would accommodate all groups and not help only those who already possess sufficient funds are extremely expensive and impossible for most world economies. This finding aligns with the idea expressed by Gwartney et al. – the marketplace is too complicated for central planning.¹⁶ The creation of a statewide program that provides resources for every citizen without considering opportunity costs or long-term effects of this decision cannot reach success. Gwartney et al. also argue that the provision of some public policies urges people to act in ways that do not promote economic growth or support economic efficiency.¹⁷

Conclusion

In their book, Common Sense Economics: What Everyone Should Know About Wealth and Prosperity, Gwartney et al. consider the main principles of economics that should be known by everyone to understand the way markets operate. The ideas expressed in the first three parts of the text align with the traditional understanding of the market economy as well as recent findings. The foundational views expressed in the book are the role of competitiveness and opportunity cost, the need to control the government’s involvement in the economy, and the great benefit of private property and high incentive.

Bibliography

Chodorow-Reich, Gabriel, and Loukas Karabarbounis. “The Cyclicality of the Opportunity Cost of Employment.” Journal of Political Economy 124, no. 6 (2016): 1563-1618.

Coen-Pirani, Daniele, and Holger Sieg. “The Impact of the Tax Cut and Jobs Act on the Spatial Distribution of High Productivity Households and Economic Welfare.” Journal of Monetary Economics 105 (2019): 44-71.

Fischer, Karin, and Alfred Stiglbauer. “Structural Reforms for Higher Productivity and Growth.” Monetary Policy and the Economy Q 2 (2018): 132-152.

Gemmell, Norman, Richard Kneller, Danny McGowan, Ismael Sanz, and José F. Sanz‐Sanz. “Corporate Taxation and Productivity Catch‐Up: Evidence from European Firms.” The Scandinavian Journal of Economics 120, no. 2 (2018): 372-399.

Gwartney, James D., Richard L. Stroup, Dwight R. Lee, Tawni H. Ferrarini, and Joseph P. Calhoun. Common Sense Economics: What Everyone Should Know About Wealth and Prosperity. 3rd ed. New York: Saint Martin’s Press, 2016.

Hoynes, Hilary, and Jesse Rothstein. “Universal Basic Income in the United States and Advanced Countries.” Annual Review of Economics 11 (2019): 929-958.

Plantinga, Arnoud, Job MT Krijnen, Marcel Zeelenberg, and Seger M. Breugelmans. “Evidence for Opportunity Cost Neglect in the Poor.” Journal of Behavioral Decision Making 31, no. 1 (2018): 65-73.

Footnotes

1. James D. Gwartney et al., Common Sense Economics: What Everyone Should Know About Wealth and Prosperity, 3rd ed. (New York: Saint Martin’s Press, 2016), 9.
2. Gwartney et al., 9.
3. Gwartney et al., 47.
4. Gwartney et al., 78.
5. Gwartney et al., 97.
6. Gwartney et al., 22.
7. Gabriel Chodorow-Reich and Loukas Karabarbounis, “The Cyclicality of the Opportunity Cost of Employment,” Journal of Political Economy 124, no. 6 (2016): 1563.
8. Arnoud Plantinga et al., “Evidence for Opportunity Cost Neglect in the Poor,” Journal of Behavioral Decision Making 31, no. 1 (2018): 65.
9. Norman Gemmell et al., “Corporate Taxation and Productivity Catch‐Up: Evidence from European Firms,” The Scandinavian Journal of Economics 120, no. 2 (2018): 372.
10. Daniele Coen-Pirani and Holger Sieg, “The Impact of the Tax Cut and Jobs Act on the Spatial Distribution of High Productivity Households and Economic Welfare,” Journal of Monetary Economics 105 (2019): 65.
11. Karin Fischer and Alfred Stiglbauer, “Structural Reforms for Higher Productivity and Growth,” Monetary Policy and the Economy Q 2 (2018): 136.
12. Eph 4:28 (NIV)
13. Acts 2:44
14. Gwartney et al., 62-64.
15. Hilary Hoynes and Jesse Rothstein, “Universal Basic Income in the United States and Advanced Countries,” Annual Review of Economics 11 (2019): 929.
16. Gwartney et al., 98.
17. Gwartney et al., 98.