James d. Gwartney

— Thomas Jefferson, First Inaugural Address, March 4, 1801
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.
Video:
Limited Government
The protective function
(?)
encompasses the government’s maintenance of a framework
ELEMENT 3.1
Government promotes economic progress by protecting the rights of individuals and
supplying a few goods and services that are difficult to provide through markets.

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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.

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