Society can either rely on private or public sector decision-making to allocateresources. The chapters of this book have described the benefits of capitalism, or privatesector decision-making. This chapter addresses the most direct way government can directresources, by taxing and spending. Economists have documented the benefits of limiting thesize and scope of government, and we begin by reviewing the evidence on how largegovernment slows growth. Despite the cost of large government, public choice analysisreveals that the interactions of self-interested politicians, bureaucrats, citizens, and interestgroups result in excessive spending, or more spending than desired by the average citizen. Weexamine three ways to counter the spending bias of representative democracy and benefitSouth Carolina: fiscal decentralization and competition between local governments;separation of powers; and tax and expenditure limits. Along the way we specifically examinethe performance of South Carolina. South Carolina scores about average overall on theeconomic freedom index of institutional quality, but South Carolina’s poor record ongovernment spending substantially lowers its ranking. South Carolina ranks below thenational average on several measures of entrepreneurship, the mechanism through whicheconomic freedom translates into growth. Reducing the size of state and local governmentwill be important in unleashing capitalism in South Carolina.
Adam Smith, the founder of economics, was an early proponent of the role of institutions in generating wealth for nations. The last several decades have witnessed anexplosion of research examining the link between institutions, and specifically the institutionsof the market economy, to economic growth, both across nations and within nations. Humans