The Economics of a Compulsory Government - Part 1

As F.A. Hayek put it in one of his TV interviews, one of the fallacies of socialism and central planning is the assumption that all the available knowledge can be used by a single central authority. It does not recognize that the modern society (which he calls the extended order, where we work for people whom we do not know and we are supported by people whom we do not know), is based on the utilization of widely dispersed knowledge. Once you are aware that we can achieve great utilization of available resources only because we utilize the knowledge of millions of people, it becomes clear that the assumption of socialism that a central authority can command all this knowledge is just not correct. The objection against production for profit is an objection precisely against the instrument that makes this extended order possible. Production for use would only be possible if we knew all the facts. Profit is the signal that guides us and tells us what we must produce for people whom we do not know. We also have to refute a just distribution by a central authority with the same arguments. In order to achieve just distribution, the central authority would have to know all the facts, which is of course impossible. The standard of living we enjoy today is due precisely to the spontaneous process in which we are able to make use of infinitely more information than any central authority possesses.

Perhaps the greatest difference between the private sector and the government is the profit/loss system that exists in the private sector in contrast to the lack thereof in the public sector. In the free market system we can make profits when we are efficient in satisfying consumer demands and we suffer losses when our activities are not producing anything of value to the public. The tragedy is that in a compulsory government no such system exists, since it receives its revenues not from sales of products and services to voluntary buyers, but through taxation. There is hence no way of knowing whether the government is satisfying anyone's wants and demands, whether it is producing anything of value or wasting resources. The voluntary purchase in a free market is a manifestation that someone is producing a product that is the best alternative to the buyer at the time and place of the purchase. Taxation, on the other hand, is a manifestation only of force and extortion. We also do not know how productive the government's employees are. On the basis of this, the only thing we can conclude is that any given compulsory government confiscates money from one individual and gives it to another to perform a certain task. 

In a typical western democracy half of people's incomes are taken away by the government and thrown into the dark, so to speak. Since we cannot calculate what happens with it afterwards, there is no way of knowing if anything productive is happening. All human beings have their self-interests and the beauty of the free market private sector is that the only way you can satisfy them is by satisfying the demands of your customers, which is, simplified, to make better products and cheaper. In the so-called public sector, there is no such incentive or connection. The interests of government employees are the same as everyone else’s (to maximize income and minimize the effort), while it cannot be argued that they are achieved through the satisfaction of the demands of the public. Absent the profit/loss system, this cannot and is therefore never established.

When analyzing every single private enterprise you can easily see how productive they are by looking at their profit and comparing it against the number of employees, the value of their capital etc., and calculate the productiveness. You can see if they are utilizing resources to produce new value and how successful they are at it. The more successful they are, the more capital they can attract. This is, no doubt, a desirable effect. On the other hand, while analyzing the government, it would be an oxymoron to even ask the question, for instance, how productive is the Ministry of Interior. There is no answering this question. And since there is no way of determining this, how do we know that it is productive at all? How do we know it is a benefit to society, that it is producing anything of value whatsoever? Since the government and it’s employees are not motivated by the profit/loss system, and all their revenues come from compulsory taxation, they are not compelled to satisfy anyone’s demands except their own.