Immorality of Intervention

by John Schmitt
Issue 218– December 26, 2012

The ideological battle between free markets and government intervention or “investment” —as statists often refer to it— should be easily won by free market thinkers. However, beginning with Hoover’s tariffs and planning, through FDR’s New Deal, LBJ’s Great Society, Nixon’s price freezes and Obama’s stimulus package, we have repeatedly allowed economic planners to win the argument.

The superiority of capitalism as an effective economic system has both logic and history to support it. Then we must ask why we are constantly battling and losing to statists who scoff at “trickle down economics” and arrogantly preach their enlightened morality to us free thinkers. The answer must lie in the nature of the debate. Leftists see this as a decision between morality and a sort of uncaring Social Darwinism; they attack capitalism as immoral. In order to triumph, we must change the conversation; we must attack the immorality of government intervention and promote our own convictions instead of defending the pure practicality that we know to be true.

The defining moral argument is not complicated; it is not some grand statement about the brilliant nature of humans. It is simply this; capitalism is the only economic process that allows people to lift themselves out of poverty. To those who throw their hands up and begin screaming about wealth disparity; until the birth of free market capitalism, the world was primarily comprised of dirt-poor peasants and a miniscule ruling class, such as a monarch or theocratic ruler. No society was able to escape poverty and establish a middle class until the industrial revolution and the beginning of private capital investment.

The economy is best handled on the micro scale, not in the aggregate. Individuals do not enter into transactions that they do not believe to be beneficial for them. This assumption leads to a need for a government that solely upholds the rule of law, contracts, and freedom of information. Anything beyond that leaves the individual subject to exploitation by the government. The statist will argue that the government is the only thing that can prevent powerful capitalists from exploiting workers and less fortunate individuals. This is based on the false premise that the government is some impersonal force of good. The government is made up of the same greedy capitalists that are looking to exploit the populous; the distinction lies in their elevated status. Whereas, the capitalist in the private economy must compete on a level playing field, the excuse of government or societal good allows others to use coercion and unjust law to better exploit society for their own gain. As long as we accept the assumption that people enter transactions for self-betterment, this competition for labor or capital prevents us from exploiting one another. The assumption can be incorporated using Prof. Matt Zwolinski’s example of an auction. If the value of a worker’s labor is one dollar, and we auction off that dollar, then the bidders will find it beneficial to bid on the labor for any value up to a dollar, so they will competitively bid on the labor until they reach the dollar. The capitalist finds it much harder to exploit the individual than does government.

The argument against this is clearly that there are several countries or groups of people within a population that unfortunately remain in poverty and that society requires some sort of redistribution or progressive system to even out success as a means of self correcting our greed. To first address this, we must expose the misconception that economic activity is a zero sum game, for it is already clear why competitive greed actually hinders exploitation. If it were, there would only be a fixed amount of capital or value in the economy, and the only variable is how it would be distributed among the population. This understanding is incomplete because it does not adequately explain where the aggregate wealth of an economy is derived from, nor does it account for wealth creation. The gross product of an economy represents the total value of the goods and services it produces, so the aggregate wealth in the economy is dependent on the level of productive activity and not a fixed value. With each productive action performed, one is creating wealth, whether by doing a service or adding value to a good or raw material. The increased capacity to perform these productive actions creates economic growth. When one examines increased productivity, innovation, population growth, natural growth in money supply, and the overall increasing standard of living, it is hard to argue that we have not experienced real economic growth.

To the one who believes in the zero sum game, growth and contraction is simply accessing the wealth or value that already exists. Therefore welfare and/or deficit spending in general make sense, for the government is simply providing wealth to the people that it otherwise could not access. They see the money they spend at the grocery store as having an inherent value. Therefore, if we add money into the economy, we are adding value. However this is not the case, the money we use was previously backed by precious metals to retain its value. Since we removed the gold standard; currency is backed by the overall value of the economy it represents. It is arbitrary in the sense of what the exact value is that one dollar represents— it is constantly changing—yet it is not arbitrary in that the currency does represent a fixed quantity of goods and services that the given economy provides.

It is by this principle that we understand that only with increased productivity can we create value and wealth, not by printing money, or increasing the money supply by some other means to increase demand. One cannot increase real aggregate demand for goods and services without increasing production first. For by examination of the supply and demand curves, we would see that we would be adding arbitrary value to the same set of goods and services.

This arbitrary increase in value is precisely what some economists argue stimulates the economy. They refer to this as increasing “nominal” aggregate demand, in other words, giving the illusion of added value, or more buying power. They propose doing this by increasing the money supply in times of economic contraction in order to stimulate the economy into real growth. Well what happens when reality catches up to illusion? Inflation, the value of money goes down and you lose purchasing power with the same amount of currency. This does not seem moral, nor does it lead to sustainable economic growth. The manipulation merely provides the illusion of economic expansion. In the long run demand side economics cannot possibly create real economic stimulation. Growth must originate from suppliers for they determine the total value of an economy, and one can only truly have demand for a value if the demand exists, or exists to the extent of its value. This is a very hard concept to accept if your conceptions of economic growth are limited to a fixed sum of value in an economy, because then value becomes an arbitrary distinction, and not a representation of actual goods and services that can be provided.

Free market thinkers often overlook the importance of this basic explanation of money and value, for it is so obviously clear once it is explained. However, many do hold this misconception of a zero sum game, and therefore the merits of value based arguments do not hold weight because value is seen as an arbitrary idea. We are so frustrated when we have to listen to arguments about successful job creators, their greed and how their wealth is immoral because it forces others into poverty. If we explain the idea of the value of goods and its place in determining economic growth, it is much easier to explain capital reinvestment and using “sitting” capital as a way to create jobs and wealth. As free thinkers, we understand that one man’s pleasure is not another man’s pain; we know that the success of one facilitates the success of another through their ability to invest. It is time that we stop assuming everyone understands this, and we educate our fellow man.

John Schmitt is a student at the University of Chicago and blogs at Turning Point USA where this first appeared.