The Myths Of Government’s Managing The Economy

`The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.”- Ludwig von Mises Human Action

Overheard from a recent social gathering: “We need a president that can run the economy like a corporation!”

My impression is that the alluded corporation is one of a privately run enterprise.

Nevertheless this has been a popular myth advanced by government loving liberal experts, politicians and their media adherents which have likewise been widely espoused by the public.

We cite 5 reasons why this thinking is seriously flawed.

First, it misses the fundamental nuances in the contribution of private enterprises and government to society.

A private enterprise generates revenues by producing goods and services that consumers need or want with which they pay for. In other words, the success or the failure of a private enterprise is entirely dependent on consumers voting with their money, this is known as capitalism or an economic system that thrives on profit and loss.

On the other hand, government as an institution survives mainly by taxation. It coercively takes from the pocket of Juan and gives to Pedro and keeps a share of it to finance the bureaucracy.

Essentially the government does not produce anything but consumes the nation’s resources which are funded by such taxes.

At a certain point, after the provision of basic public goods, such as police and military services, the safeguarding property rights and enforcing the sanctity of contracts, government becomes a net consumer of capital. The rate of taxation (Laffer’s Curve) which finances such increased social consumption eventually squeezes out productivity and further exacts a toll on the nation’s resources.

So if a government does not produce, and is a drain on the resources of the economy and is net consumer of capital, how can it possibly contribute by “managing” the economy?

Second, it’s all about incentives.

A private enterprise is incentivized to generate wealth by efficiently allocating scarce resources or by economizing in order to profit.

On the other hand, the government’s incentive is to theoretically find “optimal” ways to redistribute wealth.

However, redistribution of wealth is a political issue, simply because it chooses which sectors or interests groups that would both benefit from such privilege.

Meanwhile on the opposite end, the government ascertains the interest groups and sectors that would pay for such task. In short, it plays the analogical role of God in determining who survives or not.

Say for example, because of the popularity of OFWs as our economic saviors, policymakers decide to tweak the Peso lower by printing money.

While the families of the OFWs will have additional spending power because of a lower Peso, which may also partly buttress the export sector, on the other hand the unseen costs from inflating the system is to lower the amount of goods and services (due to price increases) that could be acquired by a depreciated peso. In other words, the benefits will be temporary for a certain segment of the society but at a greater cost to the whole over the long term.

Moreover because governments are politically oriented they don’t normally operate under the economic pressures, hence the proclivity to overspend.

As the illustrious economist Milton Friedman once said, ``There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.”

Furthermore, when government decides to spend money say, for example on “stimulus” packages or the highly popular “pump priming”, not only does it spends on things that the market does not see viable or necessary, it risks spending on inefficient projects which again consumes capital.

Also such expenditure could compete with private sector for resources resulting to the crowding out effect and a loss of productivity.

Worst, government spending increases the risks of bureaucratic corruption.

So how does politicization of the allocation of resources, wastefulness, deadweight loss (inefficient allocation of resources), and corruption contribute to the meaningful managing of the economy?

Third it’s also about accountability.

A private enterprise that fails to please the consumers, because of fatally wrong decisions, ends up losing money, filing for bankruptcy and or closing shop.

Reckless policies pursued by a political leader could lead to economic devastation yet the perpetrator’s political career can remain unaffected, Robert Mugabe of Zimbabwe could serve as an example.

Moreover a political leader may keep a big segment of the voting population happy by mass redistribution of wealth (tyrannical socialism, fascism, dictatorship) by extorting the most productive sectors or by buying off voters by benefiting from crony capitalism or corruption and may yet retain his/her career on election day.

So how can a self serving politician be responsible for managing the economy when his/her interest is to remain in power by political maneuvering?

Fourth is the dearth of economic calculation.

A private enterprise is guided by market pricing signals which determines the relationship of price and costs expressed in money terms and the coordination and allocation of resources in accordance to profit and loss statements.

A government which is not a profit seeking enterprise cannot make use of any economic calculation wrote Mr. Ludwig von Mises.

For instance, to quote Ludwig von Mises anew, the ``success or failure of a police department's activities cannot be ascertained according to the arithmetical procedures of profit-seeking business. No accountant can establish whether or not a police department or one of its subdivisions has succeeded. It is precisely when a manager is rewarded by a share of the profits that he becomes foolhardy because he does not share in the losses too”. (emphasis added)

In other words, the cost of delivering most public goods by the government cannot be accounted for in money terms.

So if government cannot account for its services then how can it ascertain how to manage the economy?

Fifth is the lack of local knowledge.

A private enterprise, operating under the market process and is directed by pricing signals, needs to acquire or get updated with the local knowledge of the market, one is serving or intends to cater to, for them to be able to operate profitably.

A central authority plagued with a lack of economic calculation is likewise handicapped by deficient local knowledge. The underlying response will be to rely on inaccurate statistics which may lead to inaccurate analysis and policy blunders.

As Friedrich A. Hayek described in "The Use of Knowledge in Society" ``The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot." (bold emphasis mine)

Since regulatory policies are always imposed based on “social” motives, the economic viability of such motive needs to be established. Otherwise, such policies may lead to serious distortions in the marketplace which may result to adverse unintended consequences.

As Professor Art Carden eloquently wrote, ``Any social policy must be economically possible before it can be considered morally desirable.”

So if central planners don’t have the right information to make the strategic decisions on important aspects of the “local” economy, how can they manage?

In the 80s, as Japan went into a bubble, I recalled the much ballyhooed Japan Inc...

It was a moniker describing the relationship of Japan’s public-private sector partnership that luxuriated in the glory of easy money policies.

In looking at Investopedia.com we saw a short narrative on its miserable ending as follows, ``The high degree of collusion between Japan's corporate and political sectors led to corruption throughout the system and contributed to the downfall of the overvalued Nikkei.”