This is now a trilogy.
Perhaps quite a rude trilogy now, but it appears I’m not making much headway.
However, I think perhaps I might have secured a toehold [if you need to be brought up to date please follow the footnote 1].
Charlotte Gore believes that the Government, by its very nature, has no means of creating wealth itself. This is the reason she is worried about the deficit.
This is wrong, and as yet, she has provided no evidence to support her position. She has, in fact, provided evidence which contradicts her position, although I’m not sure she realises it.
The evidence contradicting her position, provided by Charlotte, is provided below.
The things that help generate wealth – courts (and the police), roads, rail, national grid.. these are all things that the private sector WOULD provide if they needed to, if building a motorway was a way to get goods from A to B in the most efficient way possible, thus helping them make money, then they’d do it.
I am now going to summarise this argument so its easier to understand.
- X is currently done by the state and creates no wealth.
- X is a necessary service.
- Because it is necessary, if the state did not do X then the private sector would do X.
- The private sector only does things which produce wealth, because it only survives by doing so.
- Therefore when X is done by the private sector it creates wealth.
As I hope my more astute readers have observed this makes no sense.
In fact what Charlotte Gore has demonstrated is that certain things currently done by the state produce wealth.
This conclusion was reached solely using the assumptions presented in the three missives delivered to the internet on the subject from Charlotte’s own keyboard and their logical conclusions.
Therefore, I repeat, the state under certain circumstances can produce wealth.
But wait. There is more.
Charlotte: Anything [the state] does aids wealth generation by the private sector incidentally and indirectly only, and never as efficiently or successfully as the private sector would, which by its nature only does things from which it can make money.
This is a statement of empirical fact provided in absence of evidence. This is also a statement in denial of a widely accepted, in fact almost utterly irrefutable, theory. Enter stage right Joseph Stiglitz.
Whenever there are “externalities”—where the actions of an individual have impacts on others for which they do not pay or for which they are not compensated—markets will not work well. But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always.
The real debate today is about finding the right balance between the market and government. Both are needed. They can each complement each other. This balance will differ from time to time and place to place.
That is flatly in contradiction to Charlotte Gore’s argument.
In fact, once again Charlotte ignores the post on which she seeks to comment, as I make the very same argument in my post with regard to Pigou taxes. Do go and check as I think I argue it quite eloquently.
But wait. There is more.
Charlotte argues that whatever the state does at best “aids wealth generation by the private sector incidentally and indirectly only.”
This is an interesting argument because it assumes an economic system which hasn’t existed anywhere for thousands of years.
What she is describing is a system where trade is rare. Most productive processes aid wealth generation incidentally and indirectly only and only do so to any great degree when combined in aggregate with other services.
For example, I work in customer services, writing letters requested from members of staff and responding to letters sent in by customers. Even with the rest of the business, I am not aiding wealth generation in any way other than incidentally and indirectly.
Tim Worstall provides his beloved Scandium to all and sundry should you provide him with the cash he requires. Yet if a lump of Scandium were to arrive through my letter box I wouldn’t be able to put it to use as anything other than a paper weight.
Trade for my services occur in this case within a firm, Tim without, my services are for money as are his, but as usual we only provide part of the value added which the customer receives. Wealth generation only ever occurs as a small part of a value added chain, unless of course you are fucking Ray Mears.
But wait. There is more.
Charlotte: You’re still missing the important bit. While the courts, for example, are absolute [sic] essential for wealth creation – which they are, by the way, because they help make sure contracts are enforceable – they are PAID FOR by the Private Sector.
Here Charlotte argues that because service X is “PAID FOR by the Private Sector” that X cannot be a service which creates wealth.
My customer service job is “PAID FOR by the Private Sector” yet the job I do produces wealth. I still have the job, so I hope Charlotte would agree that it must logically produce wealth, otherwise it would not be “PAID FOR by the Private Sector” and I would be let go (what a wonderful euphemism, no?).
Things which are PAID FOR can still be (and almost always are) things which produce value. That they are purchased is not an indication that they do not produce wealth often the opposite.
Of course, the private sector is compelled to purchase these things. However, because all private actors can enjoy the benefits of the courts, police etc. (as you acknowledge) without paying for them a degree of compulsion is the fairest and most efficient way of delivering these.
Here you must be brimming Charlotte: “I didn’t mean PAID FOR in that manner, I meant that the private sector paid for these things yet they are enjoyed by someone else.”
Yet when we are discussing “the courts” (which you specifically cite) the private sector is enjoying the benefits, and as Joseph Stiglitz points out aboveit is almost certainly more efficient that the alternative.
There is no more.
The state can produce wealth, you have admitted even if you don’t realise it. You must refine your arguments if you wish to convince anyone.
Which actions of the state do not produce more wealth than are consumed in their production? Which actions of the state are mere second best uses for things which can best be used best by private enterprise? Etc.
Once again I conclude the same, you want to convince me of why you are, and therefore I should be, worried about the deficit, but you have yet to present any sort of logically coherent argument in favour of your position.
And now for something completely different.
Let me present an argument against the deficit to you which troubles me. It makes me rethink my position in a way you are unable to provoke.
This argument concerns fiscal policy and monetary policy.
Say the fiscal authority (call them the Labservative Democrats) and the monetary authority (call them the Bentral Cank) have different targets for employment and inflation.
If the Labservative Democrats decides to boost aggregate demand and inflation in an attempt to boost employment by fiscal measures (i.e. running a deficit) then there is nothing stopping the Bentral Cank from withdrawing stimulus to prevent an increase in employment and inflation (i.e. raising interest rates, or signalling they will raise interest rates sooner than otherwise).
This neutralises the beneficial effects, while leaving the debt. Bad all round.
I don’t have a completely satisfactory answer to this dilemma. However, I have several completely satisfactory answers to the arguments put forth by you. If you wish to convince others to your way of thinking then you need to start being more convincing.
I’m not sure I have much more time for you when as you can see, actually existing policy dilemmas exist for me.
 To bring you up to date Charlotte Gore argued that the reason she is upset about the deficit is because she doesn’t understand economics the Government, by its very nature, has no means of creating wealth itself and that it was simply building up debt with no demonstrable benefit.
I argued at first that the police, courts and army – the night watchman and thoroughly classical liberal functions of the state – did produce wealth regardless of your political ideology. So her principle objection is in fact fallacious.
However, rather than accept this she responded that “even if you consider the courts, the police, the road network and all the other infrastructure, non of these create wealth… it’s the private sector that generates the wealth.” I began to get exasperated here and as Quinn pointed out “it appears Charlotte… left a comment without reading this post.”
So I followed with another post wherein lied two propositions.
Firstly that if the police, army and courts did not exist it would be necessary for the private sector to provide them. Of course, they would only be provided by the private sector if they produced wealth, as the private sector is motivated only by the profit motive (oversimplification alert!), ergo they produce wealth, ergo when the state performs these actions it produces wealth.
Secondly, when negative externalities are produced, such as pollution, this can be taxed at the rate of damage and the proceeds distributed to the victims of said damage. In this way allocative efficiency is raised and wealth is produced (because scarce resources are allocated more efficiently when priced correctly).
See above for Charlotte’s response, and my response in turn to her.