Government: The Greatest Economic Malefactor, Part One

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Government: The Greatest Economic Malefactor (Part I of II)August 8th, 2010 → 3:11 pm @ Kevin N. Glick


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In recent times, the debate over the proper extent of government participation in the economic activities of society has been intensifying. Proponents of a larger role for the state in regulating or, in some instances, planning the economy stem largely from two misconceptions about what happens when the market is left to its own devices. The first assertion, is that a pure market economy will inevitably result in the stratification of wealth in society and thus the exploitation of the masses by certain privileged classes. The second fallacy states that a pure market economy results in chaos and the unstable disequilibrium between savings and investment that must necessarily result in the “boom-bust” of the business cycle. (1)



Proponents of a small or, as is perhaps the more logically consistent stance on this issue, no role for the government in economic activities claim, on the other hand, that the greater a government’s influence in economic affairs, the greater the restraints are on the liberties of the people comprising that society. While at face value this seems to more closely resemble an ethical, rather than a pragmatic argument, the fact is that governmental noninterference in the economy is conducive to greater economic growth and efficiency, and this precisely because of the freedom of individuals to make economic decisions uninhibited by arbitrary statutory restraints and without the fraudulent inducements of fabricated quantities of available savings brought about by the expansion of credit.



Attesting to the inherent connection between liberty and economic health, the very first use of the word “liberty” in human history can be traced to ancient Sumer (modern-day Iraq and Kuwait) and was used in the context of this very issue. Urukagina of Lagash, who ruled that city-state from 2380 BC to 2360 BC, used the word in a proclamation which detailed such reforms as the abolition of wage and price controls, and outlawed the seizure of property. (2) These reforms were made, presumably, as a result of the Sumerian society’s discovery of at least some of the principles which will hereafter be dealt with. These reforms were made, presumably, as a result of the Sumerian society’s discovery of at least some of the principles which will hereafter be dealt with.



Since Urukagina’s epiphanic proclamation, the debate has taken on many different forms and has plagued all civilizations to a greater or lesser extent as humanity’s understanding of economics and the constantly changing technologies and evolving demands that drive it have become more sophisticated. Some societies throughout history, such as the Soviet Union, have succumbed to nearly total regimentation by the state, whereby government planners control almost all aspects of economic activity, while other societies have, at various times, taken an opposite approach. Such societies have preferred a loose, regulatory role for government to the comparatively invasive practices of others.



Originally, the United States followed the latter course, but more recently the federal government has adopted certain economic practices that act contrary to the principles upon which American society was founded and to the purposes for which that government was established. This is made apparent if one contrasts modern examples of economic intervention with the record of the first two centuries of U.S. economic policy. A similar distinction is drawn when one contrasts the philosophical doctrines which informed America’s early economic policy with the philosophical roots of America’s current economic policy.



The United States was founded on the principles of Classical Liberalism, a political ideology that subscribes to the belief that individual liberty is inextricably linked with economic liberty. Philosophers such as John Locke, Frederic Bastiat, and John Stewart Mill all shared this opinion and, through rigorous examination of the consequences of government intervention in the free market, managed to articulate ever clearer models of what the proper role of government ought to be in the marketplace of a free society. (3)



The writings of philosophers such as these were very influential, both with the founding fathers and with succeeding generations of American political leaders. In fact, the laissez-faire doctrine they espoused largely dominated economic thought in the United States until the early 20th century (4) when it was succeeded by various Neo-Classicist schools, a progression which by the latter half of the century lead to the reign of Keynesianism. This transition began with the Progressivist presidency of Theodore Roosevelt, vastly accelerated under Wilson, and leveled out briefly until the beginning of the administration of FDR. That is not to say, however, that views contrary to the laissez-faire ideal were wholly absent in the United States before the onset of the 20th century or that the proponents of laissez-faire had disappeared by the end of the FDR administration, just that each of these opinions was, to a greater or lesser degree, neglected during one period or the other by mainstream economists.



Beginning in the late 19th century and continuing into the present, there have been advancements in economic thought in the classical liberal tradition that are able to adequately and succinctly refute the prevailing economic doctrines calling for greater governmental intervention in the marketplace. The most notable of these economic advancements comes from the Austrian or Misesian school of economics, which breaks with the other schools along epistemological and methodological lines. (5) These divergencies are what renders Austrian economics superior to other competing free-market doctrines (such as the Chicago School).



Austrian economists believe that economic science is the science of human action (termed praxeology) and not simply catallactics (exchanges), and that, therefore, it is not subject to the same devices of understanding as the natural sciences (i.e. empiricism). Instead, the Austrians believe that there are certain praxeological principles that can be arrived at with apodictic certainty a priori (without the use of observation) while the other schools of economic thought, such as Keynesianism, derive their knowledge of economic principles a posteriori (through observation) and must confirm this knowledge by the formation of hypotheses and the repetitious (and often superfluous) testing and readjusting of such hypotheses. The a priori propositions of the Austrians are not subject to refutation because, in order to attempt such a feat, one would thereby implicitly accept the validity of the very proposition he or she endeavors to invalidate.



An example of an a priori synthetic praxeological proposition is demonstrated by the following conclusion which may be drawn from the interaction of two people, persons A and B, meeting each other in the street and engaging in a voluntary transaction, namely, that both person A and person B must expect to profit from this transaction. Furthermore, a reverse preference order must exist, as person A must value the good he is receiving from person B more than the good he is trading for it and vice versa. Any attempt to invalidate this proposition is self-contradictory because, as Hoppe points out, “[the fact that] A and B must expect to profit and have reverse preference orders follows from our understanding of what an exchange is.” (6) To posit a scenario contrary to that mentioned above in an attempt to refute its validity is necessarily doomed to failure, as any scenario that does not fall in line with the parameters of that described above, concomitantly fails to meet the definition of a voluntary exchange. Any attempt at this will thus necessarily result in the elaboration of some action other than a voluntary transaction.



Using propositions derived from similar logic, it is possible to show the fallacies of current economic practices, and how government actions guided by such flawed policies are detrimental to the overall well-being of the United States, both from the perspective of economic prosperity and that of personal liberty. These flawed doctrines include the implementation of price-fixing, rent control, minimum wage laws, and the use of an inviable central-banking system with a lack of transparency and congressional oversight.



Price-fixing is the practice of creating government stipulated ceilings on the level prices of particular commodities are allowed to reach. The idea is that when the prices of certain commodities that are considered necessities, such as milk, bread, meat, etc. are allowed to become “too high,” lower-income families have a harder time affording these commodities and thus have a harder time getting by. To solve what is perceived by politicians and some economists to be a market-induced injustice, the Congress, from time to time, passes laws to prevent the prices of staple products from reaching “unfair” levels.



The problem with this is that the lowered prices create an increased demand for the product while simultaneously lowering the incentive of producers to make and distribute the said product in greater quantities. This, in turn, leads to a shortage of the very products Congress had intended to make more available to those who required them. In addition, marginal producers of the commodity may be forced out of business because they are too small to carry the loss, and this will result in greater unemployment, which means an even greater number of people will now be less likely to afford commodities such as milk, bread, meat, et cetera. (7)



Wage controls follow a very similar pattern, as wages are simply the mutually agreed upon price of a given person’s labor between an employer and an employee. When a law is passed preventing businesses from employing anyone below a specified wage, employers will then refrain from hiring anyone whom they believe is not worth the mandated minimum price of labor. Anyone, then, whose labor is not worth the increased wage will be left unemployed instead of earning whatever wages they might have been able to get in a free market. (8)



Furthermore, rather than increasing the buying power of those whose wages are increased by the implementation of a minimum wage, the laws serve, instead, to decrease the buying power of consumers as a whole after the added costs of employment on businesses are transferred to onto them through higher priced products and by government in the form of increased taxation necessary for fulfilling the increased costs of welfare and unemployment programs brought on by the rise in the quantity of people who must resort to government handouts in the absence of available work. This trend has a double whammy effect on those who cannot find employment due to their skill level or situation not warranting their employment at the current minimum wage requirement, given that their income has been cut off and products have become more expensive. (9)



Rent controls also have undesirable effects that are contrary even to the aims for which they are implemented. In a free market, high rents are caused by a supply which is not adequate to meet the demand. These high rents force tenants to occupy less space, which means that a greater number of families are able to be housed when the amount of available space is lacking. When rent controls are imposed, however, tenants are able to occupy the same amount of space they would in a more balanced market, which means a greater number of potential tenants are left homeless. Secondly, the increased profits that come from higher rents in a free market allow landlords to accumulate more capital for future investment, meaning the production of more rentable facilities to meet the increased demand and as this happens, rents will come down and still allow landlords to turn a profit. Furthermore, when rent controls are in place, especially if they do not allow for adjustments resulting from inflation, landlords will have no incentive and a decreased ability to make repairs to their property. Because new facilities are not being built, tenants are unable, in such circumstances, to leave the deteriorating property to find better accommodation elsewhere and must, instead, bear the declining living conditions. (10)



Tariffs and other protectionisms offer yet further examples of the faulty economic policies often initiated by governments under the auspices of helping the economy to develop or stabilize. The main argument for the need for various forms of protectionism contend that “infant industries” require government protections against more firmly established foreign suppliers of the same product or service in order to give the domestic company enough time to get on its feet and mature.



To this argument, one objection that will immediately come to mind of even the most casual observers of history is that such protections rarely disappear even after the beneficiary firms become large enough or stabilized enough to compete with the firms from which various forms of statutory protections insulate them. “The problem with infant industries,” as Thomas Woods is so fond of saying, “is that they never seem to grow up.” A brief review of the U.S. steel industry makes for a wonderful case in point.



However, there is a more fundamental flaw in the logic of so-called “protectionism.” The assertion that foreign competition is somehow detrimental to the domestic economy flies in the face of the Ricardian Law of Association, which explains that any two entities, whether individuals, countries, or businesses, engaging in the production of the same products, can engage in a mutually beneficial division of labor even if one of those entities has an absolute advantage in the production of each of the goods produced. (11) Such economic ignorance deprives the American people of the highest quality and best priced products that only a truly free market can offer.



Still, proponents of protectionism also contend that such policies are necessary to protect American jobs which, if the products their labor produces should be subject to the full competition of low cost foreign products, would quickly disappear and leave such workers unemployed. First off, with protections in place what is actually occurring is the tying up of scarce labor resources in comparatively unproductive pursuits. In other words, in the absence of protections, the labor force that is currently engaged in the production of products which are comparatively low in the preferences of consumers would be shifted toward the production of products which are of a comparatively higher preferential order. This adds value to the economy. Secondly, the sincerity of government’s professedly beneficent concern with the protection of American jobs is called into question when one refers to the government’s habit of bestowing tax advantages on corporations opening up shop in foreign countries. All this taken together, it isn’t difficult to figure out whose interests government is really intent on protecting.



It is plainly visible, from the above examples, that even the most commonly implemented and widely accepted economic prescriptions of government are, in practice, contrary to purpose. Each of the aforementioned interventionist policies is detrimental to the health of the economy, violates the property rights of individuals, and bestows economic advantages on particular groups within society, largely at the expense of all other groups. However, there still remains another pernicious practice of governments the world over, to be inspected and subsequently challenged: the practice of Central Banking. However, for the sake of brevity we shall end here and leave the topic of central banks and monetary policy to be examined in a forthcoming article.



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1.John Maynard Keynes, “General Theory,”

2.Robert L. Scheuttinger and Eamonn F. Butler, “Wage and Price Controls in the Ancient World,” Ludwig von Mises Institute, February 27, 2009, http://mises.org/story/3346

3.See: John Locke’s “Second Treatise of Government,” Frederic Bastiat’s “The Law,” & John Stewart Mill’s “On Liberty”

4.Thomas J. DiLorenzo, How Capitalism Saved America: The Untold History of Our Country, from the Pilgrims to the Present, (New York: Crown Forum, 2004), pg. 157-161

5.Hans Hermann Hoppe, Economic Science and the Austrian Method, (Auburn: Ludwig von Mises Institute, 1995), pg. 1-2

6.Hoppe. 1995. pg. 4-5 (Citation applies to the example as a whole. The quotation is on page 5)

7.Hazlitt. (1979). pg. 119-124

8.Hazlitt. (1979). pg. 134

9.Hazlitt. (1979). pg. 135

10.Hazlitt. (1979). pg. 128-130

11.Ludwig von Mises, “Human Action: A Treatise on Economics”, (Aubern: Ludwig von Mises Institute, 1998), pg. 158-163



About the author

Kevin Glick wrote 3 articles on this blog.



Kevin studied Government & National Security for two years at Tiffin University and has now transferred to Ohio State University to pursue a BA in "Russian" and "World Economy and Business." He is a staunch Libertarian and an ardent supporter of Austrian Economics and Libertarian ethics.