Monday, March 15, 2010

Why no government is best. No, really.

Little theorem on no government.
Government is bad. We will proceed to demonstrate this: Consider a purely market economy. It consists of different sectors, with different functions, each contributing to the economy. Each sector buys from all the other sectors, and each sector sells to all the other sectors. (This assumption need not be so strong. The sectors just have to be 'well connected.' They don't all have to be connected all to each other.) Let us start with the economy in equilibrium, each sector at some appropriate size so that its supply and demand is in balance. To simplify, consider consumption and production each proportionate to the size of the sector. (They need only be in the same direction, larger size implies larger production and consumption. Smaller size implies smaller production and consumption.)
Now let's say some sector grows larger compared to all the others. Its production also increases. In the market, however, this will drive the price of its product down. Its income will decrease, so it will shrink back to where it was at equilibrium.
Now let's say some sector shrinks compared to all the others. Its production also shrinks. In the market, however, this will drive the price of its product up. Its consumption will decrease, driving the price of its inputs down. Its income will increase, so it will expand back to equilibrium.
Thus the economy will stay in equilibrium, each sector in fixed relative size to the others.
Each sector will grow (or shrink) in fixed relative size to all the others. The economy as a whole will grow with each of its sectors staying in the same proportion.
Anyway, let's introduce government to this happy state of affairs. Let us suppose the sectors each have influence with government, and these influences are not equal. Then each sector will seek to use its influence to become larger, and inflated by subsidy. But only those sectors with the greater influence can gain subsidy by influence. By the conservation of the whole, the subsidies have to come from somewhere. Other sectors must pay this subsidy. These sectors must be taxed. Taxed, they will not grow as fast as the subsidized sectors, and may even shrink. The larger sectors, therefore, will become disproportionately large compared to the less influential sectors, and these sectors will become disproportionately small. (Further, the sectors with greater influence will use that influence to acquire even more influence with the government, and the influence of the other sectors will decrease, and they will receive proportionately less, so the situation becomes increasingly aggravated. )
Now those sectors which receive inputs from disfavored sectors will develop shortages. But all sectors require inputs from the disfavored sectors, either directly or indirectly, and so all will experience shortages, bottlenecks in production, and production will be slowed. Growth will be slowed, halted, or there may even be decline. Thus the economy will become increasingly 'unbalanced,' in a way which will become clear if we look at a concrete case, such as the US economy.

Some sectors do clearly have more influence with government than others, and we would expect these to become larger in proportion to their influence, and others with less influence to become smaller, in their ability to compete in the government for resources. It's easiest to see this by pairs. For instance, suppose manufacturing has less influence than traders. Then this would lead to free trade and a trade imbalance, and erosion of our manufacturing position in the world, and considerable international debt.( Note, however, that imports would become increasingly necessary to maintain the economy, as shrunken sectors no longer able to keep up the necessary production to maintain the other, sometimes bloated sectors.) Suppose the motorist/highway lobby has more influence than rail. What would we see. Below real cost gasoline prices, a surplus of roads and vehicles. Desultory efforts at passenger rail. Deferred maintenance of rail. Sprawl. Inefficient use of resources and space. If the financial sector has more influence than the public, then this would lead to a bloated financial sector, making it a disproportionate burden on the rest of society, high interest rates to the public, and a government looking after finance's interests despite the sector's manifest peculation. If labor has less influence than management, then we would expect a stagnation of wages and disproportionate remuneration of executives. An increasing flow of wealth to the top. If the health care industry has disproportionate influence with government, we would expect increasing costs and decreasing quality of care for many, and ineffectual efforts at reform, and slowing and arresting of growth of the economy as a whole. I'm sure the reader can come up with many other if-then pairs.
Then the wealthy seize control of government, the wealthy cannot help but destroy the society which supports them. Wealth and income will become ever more concentrated, until they can no longer be supported by the rest of society.
In the short term it is in their separate interests to corrupt the system to their benefit. They will cooperate to do this, and secure advantage over the people. They may even engage some of the people, making them temporary allies, though they will be discarded, must be discarded, later. Securing advantage, they will plunder the wealth of the people. But then they will compete, they must compete, to secure advantage over each other, and further advantage over the people. Those who do not compete will be at competitive disadvantage. Thus all are forced to compete. They will compete to cause the government to pursue purposes to their own separate ends, the very definition of corruption. These interests, the benefit of the wealthy, harm the system, and the people, necessarily, by the law of externality: Those costs which can be externalized, will be. Thus the costs of the benefits to the wealthy will be laid upon the people, until the wealth of the people is exhausted. But the welfare of the people is essential to their own welfare, and where it is compromised, so is their own. If they destroy the income flow of the people, they destroy their own income flow as well.

In the long term, an uncorrupted government serves their interests better. A government can only remain uncorrupted to such degree as their influence is limited.

For wealthy (also) read people.
A small government, if corrupt, is relatively harmless. Relatively useless, too.
Well...In securing their separate interests, they will cooperate with the exchange of gaining favors, (trading for votes) which is not 'zero sum' as regular trade is, but both gain, and both their influence on, and burden on, government will expand. That is, through the instrument of government, they both acquire disproportionate size. And since all resources are competed for, other (sectors) are at a disadvantage.

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