Government creates nothing
June 23, 2012 1 Comment
Government creates nothing. Government creates nothing that the private sector would not have created absent tax. Government is only a transfer agent. Government merely transfers wealth from one group to another group.
The above statement is counterintuitive. That is, it would seem that government does produce something–that roads, bridges, law enforcement, fire protection, education, welfare, food stamps, etc. are created by government.
“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”
- What Is Seen and What Is Not Seen, Frédéric Bastiat, 1848
Consider a private-sector economy, tax and government. The private sector economy produces wealth, tax is levied, and a transfer of wealth occurs to create and fund the entity known as government. Hence government has produced nothing; it merely has come into being through a transfer from the productive element known as the private sector.
‘A tax levied on corporate profit reduces the care and effort owners put into its operation, since part of the return that would have been received by owners will go to the state. De facto, private owners of the corporation are saddled with a shirking partner, the state, which takes part of the revenue and provides none of the effort to improve the firm’s return. Consequently the greater is the corporate tax rate, the greater the incentive for corporate owners and management to pursue the “quiet life”.’
- Harold Demsetz, From Economic Man to Economic System, Chapter 10, page 158
If private sector economy P existed in a world without tax then private sector economy P would produce a basket of goods and services which can be designated PGS. If private sector economy P exists in a world of tax, then private sector economy P would produce a basket of goods and services equal to PGS – tax. Hence the tax is forgone production in the private sector and a transfer (tax) goes to create government G. The new basket of goods and services produced equals PGS- tax + G which is exactly equal to PGS.
The two baskets of goods and services are exactly equal; merely the content of the baskets differ. Therefore we conclude that government creates nothing the private sector would not have created absent tax.
What about the economic fallacy that government does in fact produce something? What about G as fallaciously depicted as a creator?
Robert Nozick in his book Anarchy, State and Utopia argues that government came into existence as an extension of what was once known as the protective society (small groups of citizens, of which many groups existed, that formed protectorates of sorts). Once government came into existence, as F.A. Hayek observed, government levied a tax that was used to fund very limited collective endeavors e.g. protective services such as police and fire. However, as Hayek observes, nothing is written in stone on how these services, once a fund was established through tax, where to be delivered. Stated alternatively, once tax is levied and the fund established, how does one deliver the service? The two avenues available are private delivery and public delivery.
Hence in basket PGS – tax + G we find that the vast amount of G is delivered through the public sector delivery system. Why? Hayek argues that the only reason public delivery was elected as the delivery system is that a public delivery system yielded political power to the particular politicos in power. A public delivery system expanded the powers of the politico.
G is delivered, in the main, through a public delivery system with politicos being the power purveyors. Therefore, the two baskets (PGS and PGS – tax + G) are equal in size, different in content, and the transfer agent dynamic of content G is the realm of the political power purveyor. The political power purveyor is also the purveyor of the economic fallacy that government does in fact produce something. That is, the politico desperately wants James and Jane Goodfellow to believe that, as the political power purveyor over G, the politico is actually “creating” something. Sorry, the politico is merely transferring something [your “something,” i.e. taxpayer dollars] and desperately trying to persuade you that “your something” is a creation.
Bill Heasley, a local economist, writes an occasional column for the Guardian.