Monday, December 27, 2010

Economics: Productive vs Destructive

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Too often our citizens call for the government to create jobs, but there's fallacy in this thinking, because the government does not create jobs, it destroys them.

If we can understand the purpose of government and of law then we can better find the balance of taxation, and how little taxes we truly need in order to create an atmosphere of innovation and productivity. *I* believe the purpose of government is to provide liberty & protection of private property, NOT to provide prosperity, the latter is on our own heads to produce. In trying to postpone political dialogue for another day (it'll be a long discussion of theory and history) I'll focus on the economic side of why government spending is destructive and economically unwise. (Side note: *some* things government spends on is necessary to provide for liberty, but it would still economically fall in the category of unproductivity.)

The open market is used for buying and selling of goods & services. If someone creates a business that doesn't provide a valuable good or service then the market chooses to not allocate any resources to that business, therefore it fails. This is essentially what's known as the "profit motive", to provide something of value so that you may attain more resources for yourself and in turn provide even more things of value to the market so that you can attain even more resources. Thus there's motivation to be productive.

What happens when government spends? In my open letter to my congressman I brought up the wasted resources of the IRS, but let's be more concrete and discuss building a bridge. If a governor decides that his citizens need work perhaps he'll decide to have a bridge built or rebuilt, so he sets in motion some taxes that allows him to buy the materials and hire the workers to build a bridge. Hooray, there's a boom in employment for a select few citizens, they're able to provide food for their families and earn an honest day's wages.

This is where Henry Hazlitt has originated the thought process of identifying the "seen" versus the "unseen". What we do see is that there's now a bridge where perhaps there wasn't one. However, what we do NOT see is the jobs that were lost because of this project. We don't see where the taxes were extracted from the private sector, where businesses had to forgo finances that would've been used to expand their operation, perhaps they had to lay off a worker, or perhaps they did NOT get to hire a worker. We don't see where the physical resources were taken from, the concrete and steel that may have been used for another building or warehouse. You see, when the government buys it takes away resources from the open market and drives prices up, the law of supply & demand at work, so now we also have supplies that are more expensive to the private sector. Yet, despite having this thing that can be "seen", all we have is a bridge that the market apparently did not need; we have people who are now unemployed again, actually we have even more people unemployed because resources were taken from the private sector.

The government saw a problem, and only made it worse. Government spending seems to always be destructive, when the military goes to war it kills citizens (workers/resources), it builds bombs and literally destroys resources in the bomb itself and if a miracle happens and it manages to hit a building it destroys even more resources. "Ah", you say, "but a building destroyed is now a new project that can provide employment!" Never mind that we just covered that, instead let me introduce you to Frederic Bastiat's "Broken Window Fallacy".

Bastiat is a Frenchman from the 1800s who wrote some seething satirical articles and highly enlightened books about economics and philosophy. One of his most renowned analogies is that of the "Broken Window Fallacy". Suppose a boy picked up a rock and smashed out a baker's window, well under the false thinking then the boy is now responsible for the glass maker's new-found job, he's a hero! This would seem obviously false, if it were true then we would break all windows, bomb all cities and pray for natural disasters. Instead, imagine had the boy not broken the window and the baker had used the money to buy a new suit, now we have a window AND a new suit. Two things instead of one.

Government has the unfortunate capacity that it never has to worry about a profit motive, because when it needs money it simply increases taxation (or in our modern times it simply prints the money, a different form of taxation, a hidden tax). This is one of the reasons why it's a good idea for the government to stick to its core reasons for being and not infiltrate on the private sector, or become friends with it. With competing in the private sector it can offer wages that private businesses cannot compete with, so it taxes us to pay even more to have XYZ (mail, Amtrak, whatever) done in an inefficient manner. Realistically, 1 Federal government job costs us 2 in the private sector. And those 2 jobs are a real cost to productivity, something that would've gone towards a real good or service instead of a job building a bomb that is only meant for destruction. Sometimes, the "bomb" is simply IRS agents, TSA screeners, or actual bombs destroying lives in countries afar which result in the government asking for more bombs to kill the lives that weren't happy with the destruction of the first set of lives, but that's a topic I've covered already.

So, what happens when the government makes friends in the private sector? This is "Crony Capitalism", it's what we have now, and it's up for discussion next.
A View of Economics
Week 1: The Coming Disaster
Week 2: What is currency?
Week 3: Inflation
Week 4: Hyperinflation
Week 5: Deflation
Week 6: Money Represents Production
Week 7: Bubbles pt 1 - Housing Bubble
Week 8: Bubbles pt 2 - Pure Credit Expansion
Week 9: Bubbles pt 3 - The Bust is a Good Thing
Week 10: Productive vs Destructive


RoddyG said...

i'm late - i know you've had this posted for a while, but I'm tweeting!

Wes Hemings said...

Thanks Rod! Never too late to rejoin the party!

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