The Economics of a Compulsory Government - Part 3

In the free market the price system allocates limited resources so that they go to the people who are willing to pay the highest price for them and have the knowledge to employ them productively at those prices. Government, however, since it can collect as much money as it wishes (in theory) with its legislative power to tax, is not very sensitive to the price signals. The prices are much less a matter of concern to an entity that can simply increase taxes when it runs out of funds. Whenever funds are scarce, the answer is simple – higher taxes. There is no room for thrift and economy when you have the power to confiscate when in need. This means that the bigger the government gets, the more money it collects and spends, the more resources it commands which in turn are not distributed in society according to where they would be most productively used, but are rather funneled into unproductive use by the government.

As is obvious, I assert here that every and all government activities are wasteful, since the only way it could avoid this predicament is, working outside the profit/loss system, which is a yardstick for productiveness, to employ them all in a productive manner by pure chance. And given the number of activities governments find themselves entangled in these days, those chances are less than great. And even if, as if by some miracle, the government managed to succeed in that, since we know that resources tend to be commanded in the private sector by individuals who can most productively employ them and are therefore willing to pay the highest price, this would only mean that government is taking away resources from the private sector and preventing it to do the things that then in turn the government does anyway. One would have to turn a blind eye not to question the reasoning behind this. Even if this scenario were to happen, it would still be more productive to just let the private sector do these things by itself instead of having to finance a middleman in between in the form of a coercive government. On the basis of this we can see how government is, even in its best theoretical position, a net loss to society.

Furthermore, government has a severe lack of competition, to put it mildly. Most of what governments do are monopolized activities where the formation of competition is prohibited. And as we know from the theory of free markets and competition, a lack thereof results in lesser quality at a higher price. Two of the most obvious, and perhaps in essence the only really important monopolies the government holds are the monopoly of taxation and the monopoly of final decision making in all conflicts on its territory. Since the latter also applies to conflicts where government itself is involved, this composition enables it, for instance, to raise taxes and then decide that this is indeed a just and justified or even necessary thing to do. It is no coincidence that under such circumstances taxes will continually rise and conflicts in society will continually be decided in favor of bigger and stronger government.

It is often the case that people, especially the economically illiterate, will support government intervention in the economy despite all these obvious economic distortions that necessarily ensue. This is at first glance hard to understand, but not all that difficult to fathom once you come to realize the relationship between short term and long term effects or apparent and hidden results of a certain policy. An instance of the former would be precisely the credit expansion and the accompanying artificial boom described earlier. The boom period will quickly be ascribed to the expansionary policy and since it is apparent and immediate, it is not hard to make this connection. Also, since there is the illusion of a hike in the general welfare, people will naturally support such a policy. When the inevitable recession and/or inflation period arrives at a later time, the causes are harder to understand and this connection is not made by the public, which is why there is always an unfleeting reservoir of other causes to point the finger to, such as the "wicked" free market and capitalism. The same goes for the minimum wage. At first, a raise in the minimum wage will create a short term illusion that the public is now better off due to higher wages and such a policy will thus attract many proponents. But this effect can only be carried out to the detriment of the future welfare. If the labor market is relatively unregulated, it will of course eventually lead to higher unemployment, less production and a fall in the standard of living. If, however, the labor is heavily protected and the laying off process hampered, these wages must come from entrepreneurial profits. This will reduce investment into capital goods, which will in turn reduce labor productivity and again cause a slump in wages and general welfare at a later time. But since there is a time lag between the cause and effect, it will be hard for the general public to understand the connection. As for the apparent versus hidden results of government intervention, the most obvious example would be government job creation. Since government has no funds of its own, it must first appropriate them through taxation of the public. This means that in order for the government to create one unproductive job, it must first expropriate the resources away from the productive private sector. Knowing that in shifting resources from the productive private to the unproductive public sector there is always a net loss, one new job in the government could mean a loss of two productive jobs in the private sector. The public will only see the one job created by government, it will not see the two jobs that would have been created, had the money to pay this job not been confiscated from the private sector. To an individual who is untrained in economics, which is most of the public, the gain in the government created job will be apparent, while the loss in the private sector job creation will go unnoticed.

Given all of the above, we can be sure to say that the more resources are funneled to the government, the worse off the society and its people are. Any increase in government will therefore impair the economy and every decrease will make it function more productively. The worst government is a socialist kind that envelopes most of the economy and the best kind is the one that taxes no man and spends no man’s money.