What is the proper role of the government within society? What should the government do in the economy? All these are normative questions that one must sort through some time in order to make informed decisions in the voting booth. Ultimately, these questions will be answered by what people think, or feel they know, a.k.a their opinion. Opinions are subjective and are usually not open to debate because the person has an emotional attachment to them; people do not like to be proven wrong because then they would have to deal with the psychological effects of recognizing their intellectual shortcomings pertaining to a certain topic. They would have to admit they were wrong and uninformed, a thing most people aren’t willing to do because of the prospect of negative psychological fallout. We are not going to examine the nature and end of government in this column, mostly because I’ve already attempted elsewhere (see “The End of Government”). In this column we are going to examine the effects of government intervention into the private sphere of the economy. Intervention also goes by the more euphemistically positive name “regulation”, so as not to evoke a negative reaction among commoner who is unfamiliar with economics. If we can know and understand the effects of government intervention into the economy, we can come to the correct conclusion about the proper role of the government within the economic sphere.
If we are going to examine the effects of government intervention (“regulation”, same thing) into the economy it would first be a good idea to define and sketch a rough outline of what the economy actually is, and how it really works. Unlike the quasi-socialist narrative most people are spoon-fed and led to believe from T.V and school in which the economy is where people just “get” jobs to make a living and rich fat cats use their position of “power” to “exploit” the common worker, the economy and its workings are almost the complete opposite of this simpleton economic interpretation.
Let’s start from the beginning; people, since they are mortal (they have human bodies), need certain materials to survive or else they and their families will quickly die of starvation, thirst, or exposure to the elements. This being said, people, in order to survive, take it upon themselves to provide the goods they need by using some of their time to produce consumer goods. This is called labor. It is using some of the limited amount of time you have here on this earth and delegating it aside as a means to continue existing, usually at the highest standard achievable. People’s time here is limited, they cannot plan to live and work for eternity because they will not live for eternity here. Since one’s time here is limited, man cannot produce all the goods he needs or wishes to have by himself because man’s needs and wants are seemingly infinite whereas his means to acquiring them (time/labor, natural resources) are finite, they’re limited. In order to meet as many needs and wants as possible in the shortest amount of time man devised what is called the division of labor; where one person or group of people specialize in making a certain good while another person or group specializes in making another good. These two sides then meet and exchange the surplus they produced for the each other’s goods at a given rate of exchange (price). For example; Group A produces corn and Group B produces axes. After production each group meets and exchanges corn for axes at a price, say 10 pounds of corn per axe. The modern exchange economy was began by two people exchanging something they had for something they valued more in terms of each other (price).
Generally speaking, in our semi-free market economy, the prices of everything we see at the store and online are set by the aggregated demand schedules of all the individuals participating in exchange for that specific good, which in turn dictates the supply producers will make. People have it in their heads how much they will be willing to pay (exchange) for a certain item, so if a store were to sell an item for well over a reasonable price, it would not sell a lot of these items and would have to lower the price in order to make some money on it or else the item just sits there and collects dust and not money. Likewise with goods that are priced too low in the opinions of most people. If a store were to sell a good for well below the price that most people are willing to exchange for then they would sell out of the item and not be able to sell anymore of these. So, in order to make money, the store raises the price until those people who really want the good are the only ones buying it and those who don’t value the good as highly leave that market. This intersection between supply and demand is called the equilibrium price or market price; it is the price you see at the store. It matches the demands of the consumer with the capability of the producer to make the demanded good at just the right amount so no goods sit idly on the shelves or are habitually sold out all the time. The main point to take away from this is that is it you, the private consumer, and all other private consumers, who dictate the price of a certain good by signaling to a producer through your demand schedules (money votes) what he should and shouldn’t produce.
The free market is in essence an arena where private individuals come together for the sake of peaceful, and therefore free or voluntary exchange. If there is someone or some force physically making you act against your will regarding economic exchange then there is an absence of freedom from that sector and it is therefore not free. This is where our discussion about the government comes in. Up until now we have assumed that there is no government and that people are free to enter into or not enter into economic exchanges with other people. There is an absence of violence from the economy since no one is being made to act contrary to their own volition with the property they have used their own time to produce. The government is, more or less, legalized violence. It is a necessary evil that man has had to live with for thousands of years due to man’s flawed and sinful nature. Unfortunately, not everyone will be virtuous and allow peaceful and free exchange to flourish in a free market. There are those who will, since they are short-sighted, desperate, greedy, or just evil people, want to acquire everything they need and want in as short of time as possible. They will resort to violence by robbing, extorting, assault, and even murder to gain what they personally want. So man, to continue to be able to exchange peacefully so they can attempt to raise their standard of living to as high a level as possible, created an institution whose sole purpose was to use violence against those who would disrupt the free market and people’s livelihoods. The government’s sole role was to be the force that protects peaceful people by subduing violent people through the use of force or violence. At its very nature, government is a violent institution, nothing else.
What happens when the people who instituted the government in order to ensure peaceful exchange request it to interfere into (or “regulate”) the exchange sphere (or economy)? Since we know that the government is more or less institutionalized and regulated violence, we know that its actions within the economy can be no different due to its nature. It will not engage in the economy as private individuals do (peacefully and freely), it will exhibit violent and coercive actions against whatever individuals or groups of individuals it chooses to. Private individuals engage in the free market by exchanging one good or service (most of us sell our labor, which is a service, for a certain rate) for another good or service (a T.V, a meal, gas etc). The government does not do this. To be able to exchange it first has to acquire a good of value being used in the market to exchange for the task it has been commanded to complete. The most valuable good in the economy is the good that facilitates exchanges, also known as money. Money is used in our modern economy in every exchange; it is one of the two goods exchanged in every economic transaction. We exchange money for gas, clothes, food, homes, phones etc. Since this is a valuable means of exchange the government will set out to get as much of this good as it can from the private individuals who generate it through their exchange actions. The most popular method of acquiring money is called taxation and is fundamentally structured as so; “we are the government, and since we have a lot of force at our disposal we can take from you whatever we please regardless of whether the property is yours or what your wishes are. If you don’t comply with us we will use force on you to make sure we get what we seek after.”, talk about being a bully. This is how the government acquires its revenue; by force or threat of force.
More specifically, economically speaking, these are the effects of government interference into the economy. Since it is a fundamentally violent institution, its actions into the economic sphere will be of a similar nature. After the government confiscates private property from the private citizen through taxation (force), it comes to the table as a consumer in the sense that it now has money to exchange with producers for their goods and services. It then exchanges the money it has expropriated from the private individual with a producer for their good or service. Is that the end of the story? No. What happens is this. We know that the supply of goods and services in the free market are dictated by individual’s personal demand schedules, but now, in place of those individual demand schedules, we have the government now dominating the data producers are receiving to plan their supply. The thing about government supply curves is that they tend to be inelastic; they’re very hard to change once they’ve been set. It is no secret that some people will benefit (in the short run) through government intervention and these people will tend to support this action through means of voting. Once a certain good or service has been demanded by some voters, expropriated by the government, and supplied to people (all through means of taxation), it is very hard to take this good or service away because those who benefit become used to getting something for what they believe is nothing, or relatively little cost.
Producers know this, they know that once the government demands something it is usually obligated to continue providing it or else it may offend a large constituent of voters and risk losing some political power. Taking this into account, producers raise the price on their good or service because they know the government will have to raise taxes, borrow money, or inflate the money supply in order to meet their requested price. This of course incenses the people, how dare these companies raise their prices when everyone wants their goods or services? This leads the people to think that more of the problem is the solution, they vote in more people who claim that the only way to fix this problem is to impose price controls on these profiteers through force of government. Only then will we be able to have low prices and abundant goods simultaneously. This only makes matters worse. If a maximum price is imposed on a producer telling him he cannot sell his good over X amount of dollars, he will only hold most of this good off the market and wait for the price control to be removed because the cost of storing the good to wait is less than the loss he would take if he were to sell his good for the government determined price. This results in a shortage of the good or service which leads to rationing or people simply going without it, even if they have the money to buy it.
Then the final nail in the coffin is struck. The people are frustrated that the private owners and producers of all these goods and services they want for free or a low price would react in such a manner, even though they are just protecting their property and livelihood. They demand that the government use force and take the over permanent production of the specific good and service in order to have it for a cheap price and in abundance. The government agrees to and passes a law saying that they now have the monopoly to produce X good and anyone who acts or thinks otherwise will be arrested at gunpoint and jailed for lawbreaking. Now the government produces the good or service, but remember, the government doesn’t produce anything on its own, it only consumes. The only way it can “produce” is if it forcefully takes more from the people that actually produce and use this revenue to “produce.
When the government owns the means of production in the society of a certain good, or all of them, it is called socialism. And socialism has one fatal error that ultimately results in the ruin of the economy if its idea is pursued to it conclusion, it can’t rationally plan because it doesn’t have a way to allow prices to arise; there are no supply and demand schedules. The only thing that is produced is what the government says should be produced, and what the government says should be produced is usually determined by the amount of revenue they have at their disposal. If the people at the top making decisions don’t know how much they should produce for the rest of the “incapable” masses, resources aren’t allocated efficiently and are used to make things no one has a demand for, they sit and collect dust or are worth less than it took to produce them. If this misallocation continues, people’s standard of living declines slowly until the government wastes so much resources and does not produce things of value the people decide to take things into their own hands and revert back to rudimentary production methods in order to produce the things they really want, and then barter for those they can’t produce. This causes the final breakdown of the monetary exchange economy, the price system, and the division of labor, all of which greatly facilitate prosperity and high living standards. All this, just because the government, the social manifestation of force, decided to interfere into the economy. This is the downward spiral.
Most calls for government interference are put forth with good intentions; some people honestly believe the government can bring about prosperity through brute show of force over the private individual(s). But they are of course wrong, violence is almost never an efficient means of achieving long term economic prosperity, only the freely agreed upon, moral, and peaceful decisions and actions of everyone participating in the division of labor working towards achieving a higher living standard can bring about prosperity. We, and everyone around us, need to either learn this lesson or practice the speech we will have to give to our children about why things deteriorated the way they did, about why they don’t have as high of a living standard we did, when we’re older.