We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle
– Winston Churchill
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Samizdata quote of the dayJune 19th, 2011 |
 20 comments to Samizdata quote of the day |
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If we start with a certain amount of money being available in a country, there’s no reason why it can’t produce as much prosperity when spent by government as when spent by individuals. It never happens, of course, because private spending has feedback mechanisms that promote efficiency, while government’s feedback mechanisms promote the misuse of funds. But the fact is that all wealth generation involves lifting-by-the-bootstraps; private enterprise just does it better.
And even so, sometimes it doesn’t do it at all well. The market doesn’t guarantee prosperity, it guarantees consequences.
I agree, except for this:
there’s no reason why it can’t produce as much prosperity when spent by government as when spent by individuals.
Resources are directed at perceived benefits by individuals. True, they don’t always succeed, but the resources are applied directly.
Government introduces an extra layer, the inefficiency isn’t incidental, it is intrinsic. If you and I shared a road and split the cost of having it paved, 100% of our money goes to paving the road. If we pay taxes to pave it, we have to pay the governmental overhead. There is no way of overcoming this and it makes a complete lie of the idea of a “positive multiplier”.
A further indication that this is the case, is that you and I may voluntarily agree to pave that road and the guy who does the paving may voluntarily agree to pave it. But, governmental involvement always *requires* coercion to function. Why? Because otherwise no one would ever undertake the added inefficiency.
i will admit that there are cases where government is necessary and we just have to eat those inefficiencies. That doesn’t mean they don’t exist.
No, simply untrue, there is most certainly a reason. It is not that ‘private industry does it better’ so much as the very nature of government by design is a negation of market processes.
Private industry and government are not alternative ways of doing the same thing, they are in truth trying to do very different things once you look past the simple function (say, rubbish collection or medical care) and look at the reasons these things are done by some states: it is to satisfy political derived needs (i.e. the use of the means of intermediated collective coercion), not several exchange based market derived needs.
I agree with what Perry said, to which I would add that government doesn’t create the wealth it spends. The private sector creates wealth and the government must first suck the wealth out of the productive economy before it can spend it. Add those layers of inefficiency created by the government and you have a net loss of wealth. I believe the economists call this “dead-weight loss.”
I am, of course, speaking of Infinitely Wise Government, which is sometimes not achieved. (!) But my point is just that ‘by his bootstraps’ applies to any economic growth, however realized, and therefore provides no basis for objecting to high taxes – spent as investments – as a source of growth.
Granted. taxes almost inevitably get frittered away and produce little actual growth, but that’s a different objection.
At the risk of being accused of piling on, I would encourage PFP to read (or, hopefully, re-read) Frédéric Bastiat’s classic essay “What is Seen and What is Not Seen”, notably the Broken Window Fallacy.
It is not even theoretically possible for government to be as economically efficient as private actors.
Oh government can create wealth. If the Spanish government makes it illegal for the private sector to build something with obvious economic benefits like a motorway from Madrid to Barcelona and then builds the motorway itself, it is still creating wealth. (A private company could certainly build the road better and for less money, but the wealth is still being created when the government builds it).
The problem comes from the total lack of sane incentives by which government ever does anything. Unnecessary motorways are built and necessary ones go unbuilt for all kinds of corrupt and ignorant reasons. And always for far too much money.
PFP:
One may speak of “infinitely wise government” for the sake of argument and illustration, in much the same way an engineer or physicist may speak of “on a frictionless surface in a vacuum” but in this case, as Laird says, it isn’t even theoretically possible. It doesn’t help your point, and it doesn’t simplify the math.
Perhaps I’m misunderstanding what you mean by “bootstrapping” and/or perhaps you’re misunderstanding what Churchill was saying.
In the typical bootstrapping scenario, the gains from a small improvement are used to create a larger one, which in turn are used to generate a larger one still. In the case of computers, a very small bit of information is used to set off a cascade of increasingly larger and more complex programs until finally (seconds later) the computer is “booted” and ready to run. But, at each step the program becomes larger and more complex.
In the case of a small business, a small amount of capital is used to create value which is then reinvested to create still more value. Let us say a man finds a coin in the gutter. He uses it to buy two apples, he carries them across town to a construction site and sells them for a coin each to hungry workers with no time to get to the market. He goes back the next day and buys 4 apples, the following week he’s up to a case, in six months he’s bought a hand truck, and 5 years later he’s running a produce distribution and retailing business with 20 employees. That is bootstrapping in the sense I understand it.
The critical thing in both cases is that each loop has to add value to the one before it. Governmental involvement reminds me of the old saw about losing money on each item and making it up on volume. It is simply not possible.
Churchill, in my view, is pointing out that you can’t add up losses into a gain, no matter how many you pile on.
Are you understanding boot strapping to mean something else, or is it a superficial resemblance between the two ideas that is causing confusion?
Sorry, Michael, but that’s not correct. It is merely diverting wealth, not creating it. The inefficiency of government destroys wealth, not creates it.
Laird is correct.
What is wealth? It’s not money, (which is only the medium of exchange of wealth).
Wealth is goods and services. Food, houses, clothes, computers, trucks, transport, doctors . .
Government can (inefficiently) supply some services, but basically it is a consumer of wealth. It is more or less a parasite.
We are stuck with it for now, and sure, there needs to be stability, but the faster it gets smaller, the better for everyone.
Spending money does not cause prosperity, making goods and services does.
Excuse me gentlemen, but the term ‘booting’ a computer is derived humorously from the notion of a man lifting himself by his bootstraps.
Lifting yourself by your bootstraps, or lifting a bucket by the handle while standing in it, are phrases which are intended to be metaphors for something that is impossible, not descriptions of an actual process.
Laird: It will usually (but even then not always – private projects can be screwed up too, just not on my dime) be the case that private capital doing the same thing will generate more wealth than a government doing it, but I said that. However, build something that generates more economic value than the money put into it, and you have created wealth. This is still fundamentally different from a situation where the outcome is less economic value than the capital invested, which is what government does most of the time.
The problem is not that government never does this, but that it so seldom does, and that on aggregate it does indeed destroy vast amounts of wealth.
Claiming that no government has ever done anything that has ever created wealth, ever, is much too strong a thing to claim. Absurdly so.
Roue le Jour: indeed and I am a little surprised you even needed to point that out to our illustrious commentariat, but sadly it would seem so.
This would be the same Winston Churchill, a bust of whom the current president had removed from the Oval Office?
Michael, I refer you to the Bastiat link in my first post.
It is, I suppose, theoretically possible (however unlikely) that a government could “build something that generates more economic value than the money put into it.” Even if so, however, that calculus leaves out of the equation the economic value which would have created had the capital been left in private hands. If a government has to do something, it means that private individuals have not done it, which means that its perceived economic utility is less than other competing projects, which means that the by its action the government has reduced the overall potential wealth of society. In other words, it has destroyed wealth, not created it. QED.
In the long history of human affairs it is certainly possible that some government, somewhere, sometime, did something which actually created wealth. (Probably before there were functioning international capital markets, so the governmental distortion merely offset market inefficiencies.) I’m not historian enough to make a blanket statement to the contrary, and anyway, you know as well as I that it’s impossible to prove a negative. But such instances would be rare indeed; I can’t cite you an example.
I stand by my proposition.
Laird, I think you are straying into dangerous territory with your “If you don’t make as much as you could have, you’ve made a loss”. Almost in the same area as calling a smaller increase than originally budgeted a “cut”.
I think it’s somewhat silly to claim government cannot create wealth ever. It immediately sets you up to be proven wrong and thereby damages other arguments. Much better to explain why they’re so crap at it and generally shouldn’t be attempting it in the first place.
Richard, I was very careful not to claim that “government cannot create wealth ever”. I admitted the theoretical possibility, however remote. But the general proposition that governmental action destroys, rather that creates, wealth remains sound. By definition, governmental diversion of resources into an activity which the private market has eschewed is a sub-optimal use of those resources, and hence is destructive of wealth. That is not the same as incurring a loss; that’s an “income/loss” concept, not a “wealth” one.
Laird, I can’t disagree with that. Though I can imagine there may be a case or two where the government can use its monopoly of force to make economical something that the private sector would find too costly otherwise. Though that’s antithetical to liberty, of course. I think we must always be wary of visiting utilitarian arguments.
“…..the government can use its monopoly of force to make economical something that the private sector would find too costly otherwise.”
Richard, perhaps you have some example in mind but what you are talking about here sounds a lot to me like artificially fixing the price of a good or service. That isn’t the same as making it more economical. The cost of the good or service is the same but it is shifted to someone else, either the taxpayer or the service provider. So while it may make the good or service “more economical” to a particular consumer it isn’t really more economical in the big picture. Either way wealth is dimnished.
I was thinking more of eminent domain where the government can steal from someone something that the private sector could only but at large or insurmountable cost. True, you can claim that the person stolen from has footed the bill.