Here’s something you don’t see often–elites admitting they are junksters.
The essay by Ferguson of the Weekly Standard covers the important stuff about why state and government sponsored adn sympathetic “experts” are so often wrong–this time economists working for the the Organization for Economic Cooperation and Development (OECD).
Their economic “predictions,” MODELING if you will, are just as bad and just as results oriented as Climate research and environmental studies–always slanted to promote statism and totalitarian environmentalism.
When making economic forecasts they were wrong on the side of socialist statists–wonder why?
http://www.weeklystandard.com/print/articles/wrong-again_784910.html
A good section from the piece to attract your attention is here:
Mr. Ferguson:
The new report is not solely an admission of error. It is also a catalogue of errors by type. The biggest mistakes, the economists point out, occurred when they forecast growth rates in countries with a relatively high level of government regulation. This surprises the economists, though it won’t surprise anyone who takes a dim view of government regulation generally. The forecasters, good statists all, assumed that the regulations “would help to cushion financial shocks” in the highly regulated countries and would therefore aid recovery.
The economists now say they failed to consider the damaging effects of regulation. In the real world, regulations “delay[ed] necessary reallocations across [economic] sectors in the recovery phase”—which, translated from the Economese, means that government was retarding the ability of businesses to do what they do best: find a way to create value and make money even in calamitous circumstances. The concession is implied, but it’s clear the economists regret letting an ideological assumption in favor of government intervention overwhelm their forecasts as the recession swept the globe, raining on the regulated and unregulated alike.
Well said, Government do not build roads people do, they are the middle man and they do take a cut, there is a cost to government building roads, most of the time that cost is acceptably some times is is not. Where we really get into trouble is when they are not the middle men, light rail anybody?
The argument for non-excludable goods is a bit shakier than the argument for solid public goods, but in the end, it is a non sequitur. You’re discussing whether government HAS value in the sense that its existence is justified by the services it might facilitate. I was saying that government does not produce value or add value to anything produced in the sense that it does not increase the exchangeable value of goods or services in the context of supply and demand. That is to say, it does not turn parts into product.
Government does not exist because it produces value; it exists because it facilitates arbitration within a group (without getting into a discussion of bad governance). The government does not build the roads. The people provide the money. The contractors build the road. The government (perhaps I should say bureaucracy for clarity) acts as a middle man because people like me have no interest in going through the process of getting quotes, hiring a contractor, and getting the small chunk of road in front of my house paved in hopes that everyone else will be as diligent as I. The government facilitates the process of getting the road built, but it in no way guarantees the end result will be better than the one I could have gotten for myself. The fact that the government has an operating cost guarantees that the end result will cost more than it would have, had I been able to do the job without going through them. Therefore, the government may provide a useful service but it does not add value to the end product, only cost. The more hands that touch a dollar on its way between the producer and the consumer, the less that dollar is able to buy.
The friction metaphor holds because friction is a necessary reality. In an efficient system the friction losses are minimal and reduced to only those points absolutely necessary. In an inefficient machine, friction losses occur at points where they are unnecessary to the function of the machine. Even something as simple as the fulcrum on a lever reduces the amount of energy getting from the input to the output.
Uh, actually government does (or at least can) produce value. That’s why it exists. If it didn’t regions without government would outcompete those with and we don’t see that in the world.
Specifically, there is a class of goods called “public goods”. Public goods are those goods with two specific properties- they are non-rival (my consumption does not impede or limit your consumption). And they are non-excludable. If it is provided to anyone it will be provided to everyone (over some area anyway).
Public goods are things like roads, police, firemen, national defense and the like. We had pretty much figured them out by 1850. Of course the line between public good and regular good is not actually that black and white. But in general public goods have a very large (positive) public component that other goods do not. Conversely, we call goods with a noticeable negative public component ‘pollution’.
Goods with these properties will not be provided efficiently by the free market as people will free ride on what a few decide to purchase rather than buying their own and adding to everyone’s value.
So, to maximize the benefit to the people, we compel payment (taxes) and create a class of firm called government to collect taxes and use the money to provide public goods.
And then government gets out of hand. It has this large coercive power, see…
According to Max Weber, government has done one economic function reasonably well: command a monopoly over violence. Such a monopoly was the basis for private property right that are enforced by the state.
This monopoly over violence was turned on its head by Marx who regarded it as the source of exploitation. So we had disastrous experiments with state ownership of property in many countries extending over many generations.
We know now that there are sweet spots in every sector of every economy. Unfortunately for economic modelers, the sweet spots are found by political pragmatists not ideologues.
Thank you gents for your fine comments.
I was taught a similar mechanical engineering based metaphor. As government does not produce value but does incur cost, it is related to the role of friction. Just like energy out is always less than energy in due to friction losses, money out of the government is always less than money in. The larger the government agency involved, the greater the coefficient of friction.
I am a physical chemist, so I have a bias in favor of empirical verifiability and systems that obey mathematical and physical laws such as those of Thermodynamics. I find the works of V. M. Yakovenko (“The Statistical Mechanics of Money”) to be most enlightening. By establishing the correspondence between energy and money, and between molecules and economic entities, he has developed a ‘model’ that describes the tendency of an economy towards equilibrium. In an equilibrium (i.e. ‘healthy’) economy, the dreaded Income Inequality is a natural consequence of the fact that in every economic interaction, one party leave with more money that the other.
Further it establishes that arbitrary intervention in an economy (such as performed by governments) can only disturb the equilibrium temporarily, that such interventions are doomed to inevitable failure, and that the net effect on the economy is always ‘chilling’ – in the thermodynamic sense – dissipating resources in manners that are less than optimally productive.
*I* am an economist and… um, yeah, no kidding. But, it should be noted that SOME economists do this, not all economists or most economists or anything like that. Of course, the ones that do it are pretty much the only ones the public ever hears from- government employees or media.
The Left wing loves its statism because Big Brother can fix everything, so they choose the economists that tell them what they want to hear to put on the air.
The only way to make a prediction is to apply a model. And economists already know what the models say. Apply the Keynes model to a weak economy and it will say that increased government spending will ‘stimulate’ the economy and make everything sunshine and roses. The CBO said that. I lost my respect for the CBO then.
More spending = higher GDP is a prediction of the Keynes model. The ONLY model that makes that prediction is Keynes. Ramsey, Solow, Tobin and Sidrauski say the opposite.
I had to learn all five models. I learned Keynes first, as an undergrad. I knew then that Keynes was full of [deleted]. As a grad student I learned the others. They all make economic sense. And they all agree with each other. Each comes to the same conclusions/recommendations from different starting points.