Friday, August 02, 2019

Lion Rock 29, Government does not create wealth

I am reposting portions of two good articles by a friend, Nick Smith, former Chairman of the Lion Rock Institute in Hong Kong. The image I got from the web (CTTO) and not part of his papers. Enjoy.

(1) No, the state doesn’t create wealth
29/11/2018 by Nick Sallnow-Smith

A good friend of mine recently sent me an article entitled “Yes, Government Creates Wealth”….
the view of the writer (who had written a book on the subject from which the article was an excerpt) is so common…. She simply assumes than whenever the State invests or intervenes, wealth is inevitably created.

She refers to three ways in which she claims the state creates value. The first – amazingly enough – is by bailing out banks! This is, to her, self evident creation of value. Yet allowing failed businesses to fail is essential to the creation of wealth. Let’s start from how we can assess whether wealth has been created. If a businessman creates a product or service for an input cost of $100 and finds buyers in a competitive market (without coercion) willing to pay $120, then he has created value of $20. If he cannot find willing buyers above, say, $90 then not only will he make a loss but he has destroyed value. The $100 of resources he has used might have been used productively in other ways. The function of profit and loss accounting is to tell the businessman whether he is using resources effectively or not. Business failures are crucial, so that resources can be redirected to profitable uses where value is being created, not destroyed. For the author of this piece to believe bailing out failed banks creates value is astonishing. No doubt she believes any economic downturn that results from large bank failures must be avoided at all costs. But the opposite is true. Once you prevent failure for the sake of “the market”, you ensure there is no effective market any more; no proper test of value creation. Bailouts subsidise value destruction.

The author’s inability to assess how wealth is created is underlined by her later examples of states creating value. Investing in infrastructure, education and science, and funding technologies, are also claimed to create wealth. Well they might, but how does she know? None of the output is sold in a free market to willing buyers. The value uncoerced buyers would place on these outputs could be less than the cost. Yet the writer never even asks this question, she simply assumes all government spending is valuable. Her complete failure to ask the most basic question is underlined when she complains about the national accounts. She notes that state spending is credited only at the level of government expenditure. Yet state investment, she notes, involves taking risk (true enough) which, she then assumes, must create value in excess of the cost. To calculate this value, she argues that If the private sector on average creates a return of a particular percentage, she can apply that percentage to government spending and thereby calculate how much wealth the state has created. It simply does not seem to occur to her that state spending might be loss making….

That a university professor of economics can write an article of this nature is frightening. Not only because it shows the intellectual poverty of some universities today. But because books like hers will be used as “academic” support for more state spending. Governments will claim they are empowered to spend more, because, “academic studies show”, it creates wealth. The writer criticises civil servants for being too unsure, too fearful of making mistakes! Since according to her analysis ANY state spending generates value, states must be bold. And not only states. The private sector is also urged to accept loss making activities urged on them by the state, for similar reasons. The value creation of these loss making activities has been “obscured”, she argues, so that private sector must also be urged to be bold, and invest in more loss making activities.

In a world where the size of the state and the weight of regulation on the private sector has driven down growth, decade by decade ( the EU being a prime example), to have the academic world urging more loss making spending on both the state and private sector is like economic bloodletting. If it’s not working, this must mean the quack has not drained enough blood yet!

… It is vital for all of us to remember, not only that the state does not create wealth (or if it does, you cannot tell) but that so many of its activities prevent price signals from working effectively in the so-called private sector. The cost of this is indeed “obscured”. That is where the real failure to create wealth can be found. Not in the lack of “boldness” in the state, holding back from commanding even more of our society’s resources than it does already. But in the corruption of free market signals due to the extensive and ever growing public policy of interference.

(2) Birdwatching
28/12/2018 by Nick Sallnow-Smith

… I have written before about the increasing reach of the global regulatory super state. Those 1970’s EU codes were limited to the type of carrots a farmer could grow etc.; an infringement on liberty for sure, but scarcely an attack on life as we know it. Today, as I noted in my piece on “Conduct”, the regulatory reach affects not only what you can do but how you can do it; how you “conduct” yourself. Not only is this more intrusive but it is much more subjective and hence it is harder to anticipate whether you could be deemed to have breached the regulations. Anti-money laundering regulations reflect a similar approach. Suspicious transactions which must be reported are defined subjectively. If the regulator thinks you should have been suspicious when you were not, then too bad for you, you pay the fine anyway, usually with no appeal being possible.

The very terminology used in this area should be frightening us here. “Compliance” carries a concerning connotation of subservience to the taskmasters. Comply, or else! And in many cases, the “or else” consists of arbitrarily large fines, which cannot be appealed. The sorts of due process which apply in criminal courts, are rarely seen in regulatory fora.

As I was listening to the expose of the latest ways in which the compliance super state was extending its reach, I could not understand why no-one in the audience seemed concerned. The passive acceptance of remote elites applying standards of behaviour to millions, on pain of arrest, with poor due process, ought to be the case of active debate and questioning. Yet it is not. Almost the entire financial sector simply passively buys the latest bird watching catalogue and moves on….

Just as controlling “conduct” is an extension of state (or super state) intrusion, compared with controlling only actions, now we are seeing an additional extension of state control to our very thoughts. In Europe today “hate crime” is increasingly being criminalised. Just as with “conduct” in the financial industry, this is inevitably subjective in definition. And, just like in finance, the “authorities” are now actively searching on the internet for such “crimes”, which they, the authorities, can then subjectively define as a case to be prosecuted. No complaint from a “victim” is necessary.  Step by step, with little resistance (any who disagree are typically regarded as dangerous cranks), every aspect of how we live is becoming regulated by the state. Hong Kong has traditionally been much more free in these respects and has a population much more inclined not to be “compliant”. But it seems to be more and more passive these days….

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