The nonsense behind state intervention

state intervention

Alasdair Macleod – 10 June 2013

Both Keynesians and monetarists believe that increased government spending, or more money injected into the economy, is sometimes necessary. The intervention is in the form of unfunded government spending, artificially low interest rates to boost demand for money and bank credit, or a drive to make the currency “competitive” by lowering it. These methods have been tried unsuccessfully time and again, and they must be denounced if we are to understand our true economic condition.

The reason they don’t work can be summarised as both an oversight and a fallacy. The oversight is to look at only one side of a government spending proposal: a new bridge, hospital or school is a visible benefit. What is easily ignored is the cost, which is spread between many individuals’ savings and earnings. If these resources were not redirected, they would be available to consumers to spend as they see fit. This is important, because it is consumer demand that drives innovation and economic progress, not government redistribution.

The basic fallacy is to subscribe to ideas that are consistent with the cost of production, or the labour theory of value, and to try to shoe-horn it into the reality of consumer price subjectivity. The list of economists who have made this mistake is far longer than those that understand the error, including Thomas Aquinas, Adam Smith, David Ricardo, John Stuart Mill and Karl Marx. It is the bedrock of socialist thought, which divides us pejoratively into the exploited and capitalist classes. The truth is very different: the consumer through his choices decides prices and what is made, and any producer that fails to respond goes out of business.

The nub of the problem is mainstream economists do not understand prices. They draw supply and demand curves that illustrate, other things being equal, lower prices stimulate demand. Putting to one side the fact that other things are never equal, that is a reasonable starting point. This is then contradicted by macro-economists who believe that falling prices defer and suppress demand, and moderately rising prices stimulate demand.

Therefore the contradictions start from the most basic level, and from there the errors multiply. Instead of abandoning cost-of-production theories, mainstream economists seek to subsidise producers, either directly or by monetary means. It amounts to a subsidy for businesses that would otherwise fail. Furthermore successful businesses are encouraged to seek subsidies and discouraged from redeploying their capital into genuinely profitable investment.

Through relentless government propaganda nearly everyone today believes that state intervention is a force for good, but the truth is very different. Government intervention amounts to reducing wages and destroying savings through monetary inflation, while putting prices up. Admittedly, there can be a short-term artificial boost from lower interest rates and monetary expansion, but this is quickly reversed when prices start to rise.

A reasoned analysis of the true effects of government intervention reveals the truth: it comes at considerable economic cost, disrupting economic progress and leaving us all worse off as a result. Is it any surprise that reflation has now finally ceased to even generate short-term benefits?

Published by

FinanceAndEconomics

Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

7 thoughts on “The nonsense behind state intervention”

  1. Thank you for your good work.

    I wonder if you comment and help me clear up a difficulty I am having with the example you cite (below). While I understand that “printed money” does not equate to wealth, it seems to me that as long as there is confidence in the monetary unit, “fiat capital” as it were, can be created ex nihilo and directed to purchase goods and services (e.g., the bridge and hospital in your example below). The Austrian objection, that this is diverting real savings, is unclear to me since there were no savings used but simply “new capital”. Perhaps the answer is that this fiat capital generates inflation and thereby deprives savers of savings? Thank you

    The reason they don’t work can be summarised as both an oversight and a fallacy. The oversight is to look at only one side of a government spending proposal: a new bridge, hospital or school is a visible benefit. What is easily ignored is the cost, which is spread between many individuals’ savings and earnings. If these resources were not redirected, they would be available to consumers to spend as they see fit.

    1. Savings are debased as a result of prices rising, in turn the result of that extra currency bidding up prices. Also, by depressing interest rates below where they would otherwise be the saver is deprived of income.

  2. Say you have 10 thousand dollars saved, If i print a milllion extra dollars i dont have to touch your savings directly but your saving will have been diluted and made to be worth a bit less. Now say i print a trillion or 30 trillion dollars, Your savings will be worth even less, again without me directly touching your money. At the same time say i give you 1 percent interest rate or less on your savings but inflatuon is 5 percent. By directly manipulating the interest rate low, I am in effect stealing from you at least twice, one by counterfeiting or diluting the money supply, Two by reducing your savings interest rate of return to below real inflation.

  3. Caught you on max keisers show,  good stuff.

    I wish to take issue with your conclusions from this post ….

    “A reasoned analysis of the true effects of government intervention reveals the truth: it comes at considerable economic cost,”. Very true agreed.  In particular the addiction to debt and the cost of servicing the interest payments on this debt.

    ” disrupting economic progress”. I would argue that it is disrupting the economic “process” can be seen as neutral,   It can be both positive and negative to do so.    Economics is not just progress.    exacerbating or alleviating  the boom bust cycle may be beneficial at some point for some people.

    ” and leaving us all worse off as a result.” some people get very rich from all this interferance.   If done correctly government investment can help towards economic recovery.  If its just borrowing printed money to throw at people leaving us with huge debt then maybe,  so ” leaving most of us worst off as a result” is probably a stonger statement.

    ” Is it any surprise that reflation has now finally ceased to even generate short-term benefits?”. I dont really know what you mean by this, there is no plan b, if central governments hadnt done what they have done our western economies could be all over the place.

    I am a believer in state intervention just not the crony corporatism of the west.

    If you look at the buyers of gold,  Russia and china both have heavy state intervention.  They are by no means models of the society i want to live in.

    However some of the direct stimulus measures china took in infrastructure capital  investement in a time of global downturn seem to be helpful.

    The key to state intervention and stimulus is towards intelligent infrastructure capital projects that have some sort of return,  such as new power plants, better roads and rail links.   

    However there is potential for all or nothing white elephants such as high speed rail when in reality upgrading the whole rail infrastructure might be more helpful.   In china their white elephant was their monorail.   

    Politicians want to do showy projects that are relatively cheaper than boring fundamental projects.

    1. The point you miss is that government intervention provides things people would not generally spend their own money on. This is not to say that government spending is all bad; more often than not there is some benefit for someone, though through redistribution not the people that ultimately pay for it. Furthermore governments are usually spending to satisfy political and not economic priorities.

      Also you have to account for the bureaucratic cost.

  4. Keynesianism is popular with people in power because it provides a rationale for what they want to do, which is spend money, repay debt with devalued currency, and ignore the need for adult responsibility which true economics requires. Keynes was a crafter of words, a maker of rationales. That is why he rose to prominence. By fashioning denials of true economic dynamics, and replacing them with verbal constructs which made it seem that easy methods are better than difficult but necessary ones, his false ideas were made easy for politicians to grasp, and made it seem that the same idiocy that gets a nation into an economic mess is what is required to get it out of one. When humanity grows up, if it ever does, Keynesianism will be thrown out onto the trash pile, where it belongs.

  5. Doesn’t all this basically boil down to that most governments are bankrupt? And the only way out of this is via inflation and/or a combination of real growth? Therefore no matter what BS comes out of the central banks mouth it is really QE to infinity until debts can be repaid with worthless paper because growth is nowhere to be seen.

Leave a Reply

Your email address will not be published. Required fields are marked *