Can the State Produce Wealth?

Posted by Wealth Wire - Tuesday, June 19th, 2012

In his latest speaking gaffe, President Obama once again demonstrated his ignorance on all things economics when he declared at a White House press conference that the “private sector is doing fine.” Obama, who once remarked on how automated teller machines are putting people out of work, blamed the stagnating economy on public sector layoffs at the state and local level:

Where we are seeing weaknesses in our economy, had to do with state and local government, often times cuts initiated by governors or mayors who are not getting the kind of help that they have in the past from the federal Government, and who don’t have the same flexibility as the federal government in dealing with fewer revenues coming in.
To those laid off government workers, let me be the first to proudly declare good riddance! . Every public sector layoff means a relaxing of the burden every taxpayer faces by being coerced into supporting such nefarious leeches. That may sound heartless but not when we analyze what the creation of wealth actually means.

According to the champion of compassionate liberalism himself, Paul Krugman, if state and local governments had not cut their employment rolls:

The unemployment rate would be much lower than it is — something like 7.3 percent instead of 8.2 percent. It sure looks as if cutting government when the economy is deeply depressed hurts rather than helps the American people.

Going by what Krugman contends, it would appear that jobs are good indicator of economic health. But does every job signify wealth creation? As long as someone is being paid for something, doesn’t their spending add to productivity?

When looking at what productivity really entails, it’s obvious that, contrary to Krugman’s logic, not all jobs are created equal. In fact, it will become clear that the state’s necessarily violent nature results in the consumption of built up capital rather than the adding to or replacing of it.

First, by taking the idea that paying people an extraordinary amount for relatively useless tasks to its extreme logical conclusion, one can arguereduction ad absurdum that all that’s needed to jumpstart the economy is to employ people to dig ditches and fill them up. Yet only a complete economic ignoramus would argue that such a policy actually creates any type of wealth. The money squandered from the private sector to pay for make-work jobs like ditch digging is essentially wasted.

The process in producing something of value can be both simple and infinitely complex. People can produce for their own consumables or to sell their wares to other producers. Human demand is literally infinite. The problem is that the world is dominated by ever-present scarcity. To quote economist Thomas Sowell, “there is never enough of anything to satisfy all those who want it.”

In today’s modern economy of large retail stores and grocers, many have fallen victim to the error in thinking known as putting the cart in front of the horse. In economic terms, they put consumption in front of production.   But logic tells us what hasn’t at first been produced can’t be consumed. People weren’t able to purchase iPods without Apple producing them. What is usually called Say’s Law of the markets is that the act of supplying allowing for demand. Or as Professor Steven Horwitz puts it:

Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption.

When it comes to buying and selling that contributes to the satisfying of wants, exchange must be mutually beneficial. That is, both parties don’t see their transaction as an equal exchange but as gaining something they value more than what they are offering as remuneration. The volunteerism that the free market represents is what makes the act of economization necessary. Limited resources compel prudence.

The state doesn’t operate under these limits. Though it is still beholden to the fact that resources are scarce; it doesn’t rely on voluntary payment for income. The state is funded solely by acts of aggression. Whether it is through legalized robbery (taxation), the promise of future theft (borrowing), or fraudulent counterfeiting (inflation), those in the confined within the bureaucracies of the state need not worry to the extent that the private individual must in regards to obtaining resource to utilize. Politicians and tax collectors are only limited in their ability to plunder by how productive the citizenry under their control are.

The money spenders in government not only have the threat of force at their disposal to acquire funds, but also have no incentive to spend the income they happily pilfer in a cost effective way. As economist Mark Thornton writes, “government spending does not have its value tested with consumers in the market.” The only way to determine if something is of value is for it to be voluntary purchased. Whenever consumers make a purchase they are telling producers that they are willing to give up other purchasing opportunities for the price charged. When consumers abstain from making purchases, they are telling producers that the price offered is too high and they value the gains of their productivity being spent elsewhere.  Producers get the message to either drop their price by adopting new methods of production to become more cost efficient or enter into a new industry.  In short, only consumers ultimately decide what is of value through their purchases.  Since government is not beholden to such rigorous standards, it’s practically impossible to judge whether or not its expenditures actually produce anything of worth.

There are countless examples demonstrative of this truth.  From the failedsolar power company Solyndra to the State Department paying $6,600 for Amazon Kindle e-readers, politicization has proven to be the biggest driver of government spending. Because government produces nothing that can be determined valuable by peaceful means, this reinforces Mises’ claim that “the total complex of the financial policies of the Federal Government, the States, and the municipalities tends toward capital consumption.” It’s why the services provided by the state are almost always inferior to what could be provided by a competitive market. The operation of the state is a net loss for society.

If the reader needs any more evidence of this conclusion, perhaps a visit to their local Department of Motor Vehicles is in order. 

*Post courtesy of James E. Miller at Miller's Genuine Draft. He is an editor and contributor to the Ludwig von Mises Institute.

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