The Economy — CORE Textbook
Chapter Summary: Unit 22 — Economics, Politics, and Public Policy
UNIT 22
Economics, Politics, and Public Policy — A democratic government in a capitalist economy can promote
improved living standards, with gains fairly shared. Often, though, this does not happen.
Opening: Cyril Ramaphosa and South Africa
• The unit opens with Cyril Ramaphosa — trade union leader turned billionaire turned President of
South Africa — as a lens for understanding how political power shapes economic outcomes and vice
versa.
• Under apartheid, black South Africans were excluded from voting, skilled jobs, and quality public
services. In the late 1980s per capita income of black African families was roughly 11% that of white
families — a gap frozen for at least 50 years.
• Figure 22.1 (old-age pensions by racial group, 1965–2009) shows apartheid in numbers: in 1975 a
white pension was more than seven times a black pension. Pension equalisation was achieved in early
1993, before the first democratic election, as one of apartheid's last concessions.
• After the 1994 democratic transition, blacks gained access to skilled jobs, desegregated schools, and
infrastructure — but the Gini coefficient for income rose from 0.66 (1993) to 0.70 (2008), the highest
major-economy reading in the world. Inequality within racial groups grew sharply, with a new black elite
pulling away from the rest.
• Key puzzle this unit addresses: if democratic governments can fix market failures and reduce
unfairness, why do inefficiencies and inequalities persist even in democracies?
22.1 The Government as an Economic Actor
• Governments are economic actors alongside firms and households. They tax, spend, regulate, and
provide public goods — all of which shape economic life as directly as investment or consumption
decisions.
• Governments have accomplished things markets alone cannot: near-elimination of elderly poverty in
rich countries since the 1960s; reduced business-cycle volatility through automatic stabilisers; dramatic
falls in child mortality through 19th-century sanitation and water-supply investment.
• What makes government unique among actors: it holds a monopoly on the legitimate use of force
within a territory. It can imprison people, collect taxes under threat of penalty, and override property
rights in limited, defined circumstances (e.g. 'eminent domain' in the US; 'compulsory purchase orders'
in the UK).
• Because governments hold coercive power AND must serve citizens' rights, they face a dilemma: the
same power needed to solve collective problems is the power that can be abused for private gain (e.g.
Louis XIV building Versailles; Felix Houphouet-Boigny's $7–11bn personal fortune in Ivory Coast;
Ceau■escu's gold-tiled palaces).
• Well-governed societies constrain this abuse through democratic elections (which can remove bad
governments) and institutional checks and balances / constitutional limits (which prevent governments
from acting arbitrarily even when in power).
• Figure 22.2 (UK total tax revenue as % of GDP, 1500–2021): government size rose from ~3% of GDP
before 1650 to ~40% after WWII. Key drivers: wars (Seven Years War, Napoleonic Wars, WWI, WWII),
the creation of social insurance after 1928 (universal suffrage), and the post-war welfare state.
• Government policy instruments to correct market failure and unfairness: (1) Incentives —
taxes/subsidies to alter costs-benefits of activities with externalities; (2) Regulation — direct rules on
