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The Effects of Public Policy on Private Activity

The Effects of Public Policy on Private Activity
by Alex Merced

One of the problems of people who advocate for a growing role of government is that they operate in a mindset of unlimited resources, or that a growth in government has little to no effect on their current resources. The reality is that the economy has a static and generally decreasing amount of resources, so when the economy is being productive innovations will help us use less of these resources to accomplish our day to day tasks. This is the benefit of a free market or private activity, the innovations that allow the shrinking pie to be spread even further.

For these innovations one needs investment, capital, and ideas. Capital gravitates towards ideas, cause good ideas will serve as a magnet for even more capital, but again there is a limited amount of capital to gravitate towards these ideas. So essentially, to survive in a world of growing scarcity you need innovation which needs investment which is maximized by freeing up capital for investment.

So where does the government fit in on all of this?

Since there is limited resources not all of society will get fair slice of the pie, or even slice at all. Overtime though this percentage should shrink as innovations will free up these resources travel to more and more people in a variety of ways. Although people generally grow impatient for this to happen and will call for programs to watch for the welfare for those who are unable to get a piece of the pie. Although these programs themselves must take resources from this pie/economy to watch for the currently small amount of people outside of it.

The government has two ways to move resources from one place to another:

1. Government can tax the people and redistribute those resources to the outsiders, although the people are taxed this means the people have less resources to invest or consume, and since the potential consumption of a potential innovation is diminished the amount people are willing to invest in it is reduced.

2. Government can borrow the money but there is limited amount of loanable funds, so if the government borrows these funds then they can't be borrowed to invest in innovations also hampering the innovation process.  Even worse, to pay this debt with interest the government must tax later resulting in the effect previously mentioned. So borrowing has a worse effect than taxation since it reduces current lending and future consumption.

The result:

In the end, after taking these resources out of the economy, the economy has less resources to support the population that it was able to support before (it's productive capacity has been reduced) and now even more people fall outside of the economy creating a demand for growth in the social programs previously established. The growth in demand will increase the size of these programs and increase the size of resources that must be taken out of the economy creating a cycle that drives more and more resources into these "public" programs and away from private production.

So while the public sector has gotten larger and larger, the world has survived in spite of this cause the innovation that has occured has minimized the impact of this resource drain. Innovation is the key to battling scarcity and in this case you want resources free to gravitate towards ideas meaning the public sector must be dismantled.

Posted Apr 21 2010, 07:19 PM by Alex Merced