Two propositions on the state and wealth creation for Charlotte Gore

I know I really should stop, shouldn’t I? I just can’t help picking this scab…

Even if you consider the courts, the police, the road network and all the other infrastructure, non of these create wealth. At least, not for the Government or the public sector.

It’s the private sector that generates the wealth. And these lovely things? They’re all paid for by.. yep… the private sector. ;)

That’s Charlotte Gore on the inability of the state to generate wealth commenting on my last piece. The Government, by its very nature, has no means of creating wealth itself, she writes in a blog which inspired my original blog last week.

That the state cannot produce wealth is her proposition, and it is completely unsubstantiated in anything which she has ever written so far. Personally, I am willing to go further and say that she will never substantiate it, because it is not true.

I have some propositions with which to test her, which will hopefully bring Charlotte Gore into the reality based community, should she wish to join.

Thomas Byrne offers me the first proposition. This concerns the courts and the police, the night-watchman functions of the state.

Now now, what about those who -do- claim that those can be provided by the private sector.

And you know what he’s right! There are people who suggest even the most basic functions of the state should be privatised. They should be left to rational individuals to organise on their own.

This must sounds like an attractive proposition to Charlotte Gore: Libertarian. Now I assume she is with the 99%+ of the population which are dubious that this would ever actually work, but lets assume for the moment that this set up does work.

Why would a privatised firm want to run these services if they created no wealth and added no value? Why would anyone voluntarily purchase their services if they offered no goods or service of value in return?

If these services were provided by the private sector (because there is no public sector) would these activities add value? If yes, then why do they not do so when provided by the state?

My second proposition is a little more conventional: a Pigou Tax.

Say there is an activity, X (mixing chemicals A, B and C to produce chemical D for which there is a demand), which has the unpleasant side effect of Y which produces £Z of damage.

The state can tax Y to the value of £Z and distribute this to the population evenly as a rebate on the damage done by activity X.

Before this tax was applied X only cost A + B + C to produce and the cost of Y was imposed on everyone, not just those that wanted that produced by activity X. After the tax the cost of damage Y (£Z) is included in the price of X.

Everyone still suffers the damage but are now compensated for it, neutering the effect. Those that want the product of activity X pay for the process and the damage, the true cost of production.

This improves allocative efficiency and eliminates the subsidy which the whole population were providing to those doing X. By improving efficiency this creates wealth by moving resources to where they should.

Is this the state creating wealth? If not why not? Allocating scarce resources in a more efficient manner is the definition of wealth creation and this is precisely what the state has done.

There are just two propositions for you to mull over Charlotte. I do hope you revise your beliefs slightly in the light of evidence and logic.

Of course if you do not you will be in good company, the economic illiterates in the Republican party, led by Michael Steel, have long argued along similar lines.

STEELE: And first off the government doesn’t create jobs. Let’s get this notion out of our heads that the government creates jobs. Not in the history of mankind has the government ever created a job.

Of course the state has produced jobs, the police are one example, as is the biggest employer in the UK. These may not represent the most efficient allocations of scarce resources in your opinion, but they are allocated relatively efficiently and represent both real jobs and real wealth production.

You see, I don’t want to pick on you, I’m just trying to get to the root of “why some of us are bothered by the deficit” as you tried to explain in your original post. Because at the moment it looks like at least one reason you are “bothered by the deficit” is because you don’t understand economics.


8 thoughts on “Two propositions on the state and wealth creation for Charlotte Gore

  1. Sheesh. You’re still missing the important bit. While the courts, for example, are absolute 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.

    The state has NO MONEY.

    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.

    As it happens the Government takes a lot of wealth from the private sector and does a lot of these things itself, based on its own whims and ideas about what it things would be good.

    Without the private sector providing it with wealth to redistribute, or repay the debt it incurs, the state can do absolutely nothing. It can’t generate a single tiny bit of wealth. Anything it 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.

    The point of the public sector is not to make money. It’s to do things that it believes you can’t – or shouldn’t – make money from. This, inherently, is a consumption of and destruction of wealth, not its creation.

    We can argue about whether or not a certain degree or wealth consumption is necessary or desirable, but it doesn’t change the fact that anything that does create wealth or is part of the wealth creation process doesn’t need to be done by the State at all.

    1. At work, will respond, hopefully before I leave for Glastonbury at 5am on Wednesday.

      Needless to say I still think you’re wrong, but I know think you’re wrong in numerous complicated ways rather than just a few simple ones.

      You also haven’t address the Pigou tax.

  2. A Pigou tax is very sensible yes, but why aren’t you asking why it’s the case that one is needed in the first place? IMO a negative externality committed by X which demonstrably damages the property of Y is aggression against them, and in that spirit I think it is justified for Y to get compensation for the damage, yeah. This is in keeping with pretty much the fundamental non-aggression principle of most libertarians.

    1. Tort law is more expensive than a Pigou tax with no demonstrably superior outcome.

      That’s if its even feasible in the first place.

      How would a class suit work for the damage done by carbon dioxide?

      All the citizens of the earth versus all the other (and self same) citizens of the earth?

  3. Think about it: To use waste as an example; if there is a river that you can dump your waste into at no cost, the chances are that you will (if you’re a greedy corporation, at least). But if that river is owned by someone else, they have a real incentive to a) stop you doing it in the first place and b) pursue every legal option at their disposal to obtain damages and compensation once you have done it. If, on the other hand, the river is regulated by the state, who has that kind of stake in it? The regulatory officials have no personal interest in keeping the river clean, not like a private owner would.

    1. But there are to consider:

      transaction costs.
      limited knowledge.
      limited ability to capture benefits as well as compensate for costs.

      For example, a river’s cooling influence makes viticulture and wine production along its length favourable. For example, the Loire Valley in the east of France and the Rhone to the south.

      How would someone capture the benefits of this?

      In the end you’re arguing for a different set of regulatory arrangements. One in which private actors are given the rights over certain natural resources. They are artificially constructed rights and are merely a different means to a similar end. Its very feudal and although possibly efficient (but I’d disagree), efficiency is not our only policy objective.

      I’ve another post up tomorrow at 8am for Charlotte, hope you can drop by. I think I may have cracked this one. But she might just yet again not bother to read the post and make bland pronouncements on the private sector being fluffy as well as cuddly.

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