Intervention is the Death of Productivity
“Intervention” by government means to forcefully come between a person and the voluntary act he wishes to do. Intervention imposes costs on peaceful and honest human action. Such interference hampers the market process by skewing prices and profits, thereby misallocating and wasting resources.
by Fred E. Foldvary, Senior Editor
Government can be market enhancing when it protects property rights and acts as an agent for the people to obtain compensation for the use of common property such as the atmosphere. Laws penalizing theft, trespass, and fraud help establish a free market by preventing private coercion. Pollution charges help establish a market economy by preventing the imposition of the social cost of pollution when it is not feasible for the private parties to achieve compensation. Such market helpers do not necessarily require a government, but if government only does that, then its agents are not intervening but rather enforcing the ethical basis of a free society.
A pure free market economy provides the greatest possible productivity, and there is absolutely nothing that government can do to make the outcome better in any objective sense. In a truly free market, competitive profit maximization results in minimizing social costs and maximizing the benefits consumers obtain from goods. This is recognized in economic theory as the “first fundamental theorem of welfare economics,” which even though usually put forth under limited assumptions, applies generally also under the looser conditions of real-world economies.
In a pure free market, all activity and states of being are voluntary for all. Therefore, any intervention forces somebody to do something different from what he wanted to do. Economically, human action consists of mentally ranking one’s ends or desires, and then acting to achieve those ends with the highest extra benefit relative to extra cost. Intervention forces the person to instead do something that is less valued, either because he is not allowed to do what he most wants, or because the intervention has made it more costly.
Intervention thus can only make production more costly or reduce its benefit to the public, which amounts to the same thing. Intervention skews and distorts production, shifting resource to less wanted ends, if not wasting them entirely.
The total economic impact of intervention has not been measured, but we can get a glimpse of its devastating effect by some attempts to determine the costs. The annual deadweight loss or excess burden of taxation per family in the U.S. has been estimated at over $10,000, the costs of regulation at about $6000, and the cost of litigation at about $1200. If fully counted, the social costs of intervention would be much higher, if we count the deadly costs of war and violence and the psychic costs of not being able to fulfill peaceful desires.
Intervention is the death of productivity. Yet most people favor intervention. Many favor intervention because it provides them with benefits at the expense of others. Thus those who favor government intervention are thieves. They don’t steal directly, but hire government thugs to do the stealing for them. We get a kleptocracy, government of and by thieves, and end up with everybody stealing from everybody else - mass kleptomania.
Most folks who seek intervention do not think of themselves as evil thieves. The owner of farmland who gets a government subsidy says that this activity is legal, voted on by the representatives of the people. If he lobbied for the favor, he is playing by the democratically adopted rules. The prude who gets government to ban an exhibit of erotic paintings thinks he has done a good thing, because to him, the display is immoral. Those who vote for higher sales taxes to finance a highway improvement parrot that “taxes are the price we pay for civilization.” What, you don’t want roads? Without taxes, where will the roads come from?
The masses do not understand economics or ethics or the principles of governance. The academics who teach them also have failed to grasp the deep essentials of these fields. Why? Because conventional theory is hogtied to status-quo practice. Political science studies contemporary mass democracy. Economics studies status-quo policy like central banking. Academic ethical philosophy has failed to come to grips with natural moral law.
Most folks don’t realize that the governmental provision of money is inherently interventionist. Nobody taught them about free-market money in their econ class. Most folks don’t understand that taxes on wages and goods are unnecessary interventions, since governance can get all the revenue need for civic goods from user fees, pollution charges, and the land rent generated by civic services. Few learn this in school because the teachers didn’t learn it.
Almost all economics textbooks teach “market failure.” They say, yeah, markets tend to be productive, but they fail here and there, with external effects, public goods, monopolies, lack of complete and symmetric information, unjust distributions of income, and poverty. So, they say, government can improve on these bad market outcomes. But nowhere in the textbook do they define “free market.” They confuse the outcomes of today’s interventionist economies with what truly free markets would achieve. It’s even worse if they call the economy “capitalism.” Those who criticize “capitalism” are really saying “I don’t know what I’m talking about.”
It has been shown in studies of economic freedom that economies with more intervention have less wealth and growth. The facts fit the theory. Intervention is indeed the death of productivity.
-- Fred Foldvary
Copyright 2005 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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Confessions of a Market Fundamentalist
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