The nonsense behind state intervention

Both Keynesians and monetarists believe that increased government spending, or more money injected into the economy, is sometimes necessary. The intervention is in the form of unfunded government spending, artificially low interest rates to boost demand for money and bank credit, or a drive to make the currency “competitive” by lowering it. These methods have been tried unsuccessfully time and again, and they must be denounced if we are to understand our true economic condition.

The reason they don’t work can be summarised as both an oversight and a fallacy. The oversight is to look at only one side of a government spending proposal: a new bridge, hospital or school is a visible benefit. What is easily ignored is the cost, which is spread between many individuals’ savings and earnings. If these resources were not redirected, they would be available to consumers to spend as they see fit. This is important, because it is consumer demand that drives innovation and economic progress, not government redistribution.

The basic fallacy is to subscribe to ideas that are consistent with the cost of production, or the labour theory of value, and to try to shoe-horn it into the reality of consumer price subjectivity. The list of economists who have made this mistake is far longer than those that understand the error, including Thomas Aquinas, Adam Smith, David Ricardo, John Stuart Mill and Karl Marx. It is the bedrock of socialist thought, which divides us pejoratively into the exploited and capitalist classes. The truth is very different: the consumer through his choices decides prices and what is made, and any producer that fails to respond goes out of business.

The nub of the problem is mainstream economists do not understand prices. They draw supply and demand curves that illustrate, other things being equal, lower prices stimulate demand. Putting to one side the fact that other things are never equal, that is a reasonable starting point. This is then contradicted by macro-economists who believe that falling prices defer and suppress demand, and moderately rising prices stimulate demand.

Therefore the contradictions start from the most basic level, and from there the errors multiply. Instead of abandoning cost-of-production theories, mainstream economists seek to subsidise producers, either directly or by monetary means. It amounts to a subsidy for businesses that would otherwise fail. Furthermore, successful businesses are encouraged to seek subsidies and discouraged from redeploying their capital into genuinely profitable investment.

Through relentless government propaganda nearly everyone today believes that state intervention is a force for good, but the truth is very different. Government intervention amounts to reducing wages and destroying savings through monetary inflation, while putting prices up. Admittedly, there can be a short-term artificial boost from lower interest rates and monetary expansion, but this is quickly reversed when prices start to rise.

A reasoned analysis of the true effects of government intervention reveals the truth: it comes at considerable economic cost, disrupting economic progress and leaving us all worse off as a result. Is it any surprise that reflation has now finally ceased to even generate short-term benefits?

This article was previously published at

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6 replies on “The nonsense behind state intervention”
  1. says: Gary

    “What is easily ignored is the cost, which is spread between many individuals’ savings and earnings. If these resources were not redirected, they would be available to consumers to spend as they see fit.”

    This was illustrated by Bastiat in his Broken Window Fallacy from That Which is Seen, and That Which is Not Seen. He said that is is absurd to think that breaking windows to employ people to get them fixed was an economically productive enterprise, because it failed to take into account the opportunity cost thereof.

    This idea was taken to its reductio ad absurdum conclusion by Keynes calling for govt to dig holes and bury money in bottles for enterprising people to dig them up again. Except Keynes was serious that this was an endevour that was better than nothing to create full employment. Keynes and his followers never did seem to understand opportunity cost, the driver of all the decisions of free market actors.

    1. Breaking windows doesn’t make us better off? Well revelation of the century. I mean I’ve been chucking a bricks through my living windows once a week all these years and then calling out the glaziers to replace the glass. But now, thanks to Austrians I understand I’ve been wasting my time.

      As for Keynes “hole digging” idea, do you honestly think he meant that seriously? There is such a thing as a “joke” – didn’t you know?

      1. says: Craig Howard

        As for Keynes “hole digging” idea, do you honestly think he meant that seriously? There is such a thing as a “joke” – didn’t you know?

        Keynes most certainly did mean it seriously. He believed [as do many today] that spending money on anything — no matter how useless or unproductive — is better than saving it. He came up with a rather ridiculous example just to show how deeply he believed that.

        There. You’ve learned two things from the Austrians today. Not bad at all.

      2. says: Gary

        In the The General Theory of
        Employment, Interest and Money,Keynes said “digging holes is better than nothing”.

        Actually, it is worse than doing nothing because doing nothing is saving the money and that impacts on the interest rate of saving, which is an invaluable signal linked to the investment rate to provide a feedback control mechanism.

  2. says: Paul Marks

    Ralph Musgrove – Keynes was not joking.

    The idea that more spending (for example on paying people to dig holes and fill them up again) is at the heart of the “demand” fallacy, which is at the centre of modern (so called) “economics”.

    It is why fools (to use a polite word) think that creating more money (from nothing) and handing it out to be spent is “good for the economy”.

  3. says: waramess

    All this and the thought that the government employ vast numbers of people to collect administer and spend my money whilst I need no help at all.

    These people might just as well be employed digging holes in the road and filling them back in.

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