As the European economy finds itself yet again adrift in the windless doldrums of slow to no growth, the only quack remedy being discussed is still the same old spend-now-worry-later Keynesianism. Despairingly universal is the refusal even to contemplate the fact that what is holding the economy back is not a lack of spending, but rather the frustration of the will and the pre-emption of the means to increase profitably saleable production. That the best thing for the state to do is less, not more, of whatever it has been doing and to allow the people the freedom to do more of what they chose to do of their own volition is far too radical a solution to embrace for a leadership which has already forgotten that the same academics telling them to ‘keep calm and carry on’ with a failing set of curatives are the ones who all too briefly had the grace to question their core methodology in the aftermath of a Crash which, almost to a man, they failed to understand when it was in full swing, much less to predict in advance of the break.
Even if we were, arguendo, to accept that a case can be made for the state to provide certain goods and services which it is supposedly difficult, if not impossible, for the market to supply, it can hardly be maintained that there are not many more areas in which it is either sub-marginal, if not actively counter-productive, in its operation and that, hence, the reduction if not complete cessation, of such activities would convey widespread social benefits.
Looked at from another angle, it is a basic tenet of economics that in order to expand the provision of opportunities for mutually-beneficial trade and thus for enriching the bounties which tend to accrue to the greater division of labour and the more detailed specialization of capita, the transaction costs associated with each exchange should both be lowered and made more certain in their application.
Now, it is hardly to be disputed that by far the greater part of state intervention takes place via the redeployment of monies (and hence of property more generally) forcibly extracted from its citizen-subjects, monies which then shuffle from in-tray to out-tray along the gloomy corridors of a faceless apparatus of form-filling and pen-pushing, the whole being peopled with an army of soft-budget functionaries who in turn must be paid and the costs of their upkeep extracted by yet other functionaries from the pockets of their put-upon, private sector brethren. It should be apparent that this can only lead to a situation where aggravated, not lessened, transaction costs are not just endemic but wearyingly unending.
Though we will not consider them in any depth here, let us briefly list some of the greater of the evils which may attend such determined interventionism. There is firstly the scope for moral or pecuniary corruption, a vice especially prevalent where personal or political judgement is enlisted to ration scarce resources rather than the blind impartiality of the price mechanism. Then there is the lack of expedition which follows upon the sheer ennui of a bureaucracy which has no genuine involvement in the matter, no ‘skin in the game’, we might say. There are the manifold tragedies of the commons which arise when costs are widely dispersed and gains are votably concentrated. There is the unavoidable ineptitude of hidebound decision making by past-tense, prescriptive rule rather than by the exercise of specific, adaptive, up-to-the-minute, individual action. There is the deadening, disincentivizing lack of competition involved when the state becomes the great monopolist provider and concretes over out the rich bazaar of private possibilities.
In no way does the foregoing exhaust the reckoning of the abiding flaws in the model but, tempting as it is to expatiate at length on each of these, the aim here is not to engage in an ideological dispute with those who so distrust what they see as the savage jungle of the market and who, conversely, have such a touching faith in the ability of a virtuous priesthood of public ‘servants’ to avoid such all-too human failings. Here the focus is on a simple, yet crucial matter of economics: transaction costs.
In something of the spirit of the great Frenchman, Bastiat’s ‘invisible railroad’, the more layers of governmental involvement we insist must come between consumer and producer of a good, the more it becomes akin to decreeing that we can no longer have the manufacturer deliver direct to his customer’s door, but that his wares must first be loaded, inspected, packaged, collected, and warehoused in some great central repository. Next, a recipient must be identified from among the many active petitioners for the items – as well as from among those for whom it is just their turn for alms. None of these, it will be seen in passing, will be required to furnish proof of the degree of urgency of their desire for the redistributed goods by actually proffering payment for them.
Finally, the goods will be re-routed, re-inspected, re-packaged, re-loaded and delivered at last to the state’s chosen beneficiaries. Is it not obvious how dreadfully inefficient this all is, even before we stop to enquire into the underlying equity of presenting the bill for the bureaucratic burlesque to the original luckless customer, his liability for it being that he dared to dispose of too high a level of independent means? Adding insult to injury, the invoice will be accompanied by a note telling him he has just been assessed for the forcible contribution of his ‘fair share’. Should we be entirely surprised if the realisation that this will always be his lot, makes our philanthropy conscript a little less eager to make his own way in the world and a little more covetous of whatever confiscated largesse there is to be had by others with so little sweat or endeavour on their part?
With the interposition of an army of supernumerary tax assessors and dole dispensers between the A who wants a particular good or service and the B who is best placed to offer it, it can hardly fail to be the case that transaction costs are more elevated than they need be and that fewer exchanges are therefore carried out. Yet another source of loss can be identified here in that the people who presently make up this layer of stultifying intermediaries are themselves our man Bastiat’s spoilt children of the labour market, the great Thing Which is Not Seen.
As it stands today, they are allotted their livelihood out of legally-plundered funds for the sole job of making it more costly for A to buy from B and for B to sell to A – at worst, putting them off the trade altogether and, at best, materially reducing the means with which either can then fulfil their next most pressing need by buying yet other goods from C. But, though they may be horrified even to contemplate it, the public placemen could themselves be released into the marketplace, there to try to outcompete B and C in the offer of what A desires, or to outbid A for B’s and C’s goods before putting them to a better, more profitable use than that first had intended.
Beyond this comes the inescapable disadvantage that what our toiling servants of Leviathan will require from A, B or C is subject to the arbitrary whim of the elected legislative dictators in Parliament as well as to the unelected mandarins in the perpetual machinery of regulation which has sprouted up alongside it. Will the things that A and B contract to do with one another today be allowed or prohibited tomorrow? If the latter, will the schedule of penalties be imposed henceforth or retrospectively? Will the pair’s consensual dealing be encouraged or frowned upon? Will they be made mandatory rather than discretionary? Will they be taxed or subsidized? Will the state go so far as to subsume the role of either or both counterparties, thus throwing them out of business entirely?
The truth is that no-one can say. For the exigencies of the state budget, the impositions of the passing ideological prejudices of our rulers, or the commitments given out willy-nilly under treaty with other states are not in any way amenable to accurate prediction. Furthermore, there are few, if any of our current crop of cradle-to-grave career politicians who have ever known what it is like to make a real living serving the tastes of customers who have every right to shop elsewhere at whim. Thus, they have no lodestar to guide them beyond narrow, venal partisanship and above the desire to climb the greasy pole by militating noisily for this or the other act or omission, newly found to be intolerable to the present ideal of a ‘just’ society, to be instantly amended. In this way, the primaeval rain forest of the freedom of association and of voluntary contract is ever under threat from the slash-and-burn depredations of the eager young BA in Political Science.
Let us be plain, the degree of unknowability inherent in all this itself represents nothing less than another raised transaction cost, if more by way of an options premium than an outright payment. Once again, it reduces current trade and employment, it heightens the hurdle rates of return to entrepreneurship, it discourages risk taking and induces the holding of greater precautionary reserves. It therefore strangles growth and leaves innovation stillborn.
If it is granted that some small corner of that sprawling anthill of the state which occupies more and more of our precious cottage garden plot really does merit the criticism we have levied here, we can only conclude that one of the most efficacious, the least distortive, and certainly the most rapid methods of improving the common weal is to drench it mercilessly from on high with a giant pan of boiling water.
NB The foregoing is for educative and entertainment purposes only. Nothing herein should be construed as constituting investment advice. All rights reserved. ©True Sinews