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5. Binary Intervention: Government Expenditures

1. Government Subsidies: Transfer Payments

There are two and only two ways of acquiring wealth: the economic means (voluntary production and exchange) and the political means (confiscation by coercion). On the free market only the economic means can be used, and consequently everyone earns only what other individuals in society are willing to pay for his services. As long as this continues, there is no separate process called “distribution”; there are only production and exchange of goods. Let government subsidies enter the scene, however, and the situation changes. Now the political means to wealth becomes available. On the free market, wealth is only a resultant of the voluntary choices of all individuals and the extent to which men serve each other. But the possibility of government subsidy permits a change: it opens the way to an allocation of wealth in accordance with the ability of a person or group to gain control of the State apparatus.

Government subsidy creates a separate distribution process (not “redistribution,” as some would be tempted to say). For the first time, earnings are severed from production and exchange and become separately determined. To the extent that this distribution occurs, therefore, the allocation of earnings is distorted away from efficient service to consumers. Therefore, we may say that all cases of subsidy coercively penalize the efficient for the benefit of the inefficient.

Subsidies consequently prolong the life of inefficient firms at the expense of efficient ones, distort the productive system, and hamper the mobility of factors from less to more value-productive locations. They injure the market greatly and prevent the full satisfaction of consumer wants. Suppose, for example, an entrepreneur is sustaining losses in some industry, or the owner of a factor is earning a very low sum there. On the market, the factor owner would shift to a more value-productive industry, where both the owner of the factor and the consumers would be better served. If the government subsidizes him where he is, however, the life of inefficient firms is prolonged, and factors are encouraged not to enter their most value-productive uses. The greater the extent of government subsidy in the economy, therefore, the more the market is prevented from working, and the more inefficient will the market be in catering to consumer wants. Hence, the greater the government subsidy, the lower will be the standard of living of everyone, of all the consumers.

On the free market, as we have seen, there is a harmony of interests, for everyone demonstrably gains in utility from market exchange. Where government intervenes, on the other hand, caste conflict is thereby created, for one man benefits at the expense of another. This is most clearly seen in the case of government transfer subsidies paid from tax or inflation funds—an obvious taking from Peter to give to Paul. Let the subsidy method become general, then, and everyone will rush to gain control of the government. Production will be more and more neglected, as people divert their energies to the political struggles, to the scramble for loot. It is obvious that production and general living standards are lowered in two ways: (1) by the diversion of energy from production to politics, and (2) by the fact that the government inevitably burdens the producers with the incubus of an inefficient, privileged group. The inefficient achieve a legal claim to ride herd on the efficient. This is all the more true since those who succeed in any occupation will inevitably tend to be those who are best at it. Those who succeed on the free market, in economic life, will therefore be those most adept at production and at serving their fellowmen; those who succeed in the political struggle will be those most adept at employing coercion and winning favors from wielders of coercion. Generally, different people will be adept at these different tasks, in accordance with universal specialization and the division of labor, and hence the shackling of one set of people will be done for the benefit of another set.

But perhaps it will be argued that the same people will be efficient at both activities and that, therefore, there will be no exploitation of one group at the expense of another. As we have said, this is hardly likely; if true, the subsidy system would die out, because it would be pointless for a group to pay the government to subsidize itself. But, further, the subsidy system would promote the predatory skills of these individuals and penalize their productive ones. In sum, governmental subsidy systems promote inefficiency in production and efficiency in coercion and subservience, while penalizing efficiency in production and inefficiency in predation. Those people who ethically favor voluntary production can gauge which system—the free market or subsidies—scores the higher economic marks, while those who favor conquest and confiscation must at least reckon with the overall loss of production that their policy brings about.

This analysis applies to all forms of government subsidies, including grants of monopolistic privilege to favored producers. A common example of direct transfer subsidies is governmental poor relief. State poor relief is clearly a subsidization of poverty. Men are now automatically entitled to money from the State because of their poverty. Hence, the marginal disutility of income forgone from leisure diminishes, and idleness and poverty tend to increase. Thus, State subsidization of poverty tends to increase poverty, which in turn increases the amount of subsidy paid and extracted from those who are not impoverished. When, as is generally the case, the amount of subsidy depends directly on the number of children possessed by the pauper, there is a further incentive for the pauper to have more children than otherwise, since he is assured of a proportionate subsidy by the State. Consequently, the number of paupers tends to multiply still further. As Thomas Mackay aptly stated:

... the cause of pauperism is relief. We shall not get rid of pauperism by extending the sphere of State relief. ... On the contrary, its adoption would increase our pauperism, for, as is often said, we can have exactly as many paupers as the country chooses to pay for.3

Private charity to the poor, on the other hand, does not have the same effect, for the poor would not have a compulsory and unlimited claim on the rich. Instead, charity is a voluntary and flexible act of grace on the part of the giver.

The sincerity of government's desire to promote charity may be gauged by two perennial governmental drives: one, to suppress “charity rackets,” and the other, to drive individual beggars off the streets because “the government makes plenty of provision for them.”4 The effect of both measures is to suppress voluntary individual gifts of charity and to force the public to route its giving into those channels approved by and tied in with government officialdom.

Similarly, unemployment relief, instead of helping to cure unemployment, as often imagined, actually subsidizes and intensifies it. We have seen that unemployment arises when laborers or unions set a minimum wage above what they can obtain on the free market. Tax aid helps them to keep this unrealistic minimum and hence prolongs the period in which they can continue to withhold their labor from the market.

  • 3. Thomas Mackay, Methods of Social Reform (London: John Murray, 1896), p. 210. Recently, economists have begun to recognize that government relief encourages leisure, discourages work, and subsidizes poverty. See Yale Brozen, “Welfare Without the Welfare State,” The Freeman, December, 1966, pp. 40–42; C.T. Brehm and T.R. Saving, “The Demand for General Assistance Payments,” American Economic Review, December, 1964, pp. 1002–18; idem, “Reply,” American Economic Review, June, 1967, pp. 585–88; and Henry Hazlitt, “Income Without Work,” The Freeman, July, 1966, pp. 20–36.
  • 4. From the following admiring anecdote of such a drive, the reader can gauge just who was the true friend of the poor organ-grinder—his customer or the government:
    ... during a similar campaign to clean up the streets of organ-grinders (most of whom were simply licensed beggars) a woman came up to LaGuardia at a social function and begged him not to deprive her of her favorite organ grinder.
    “Where do you live?” he asked her.
    “On Park Avenue!”
    LaGuardia successfully pushed through his plan to eliminate the organ-grinders and the peddlers, despite the pleas of the penthouse slummers. (Newbold Morris and Dana Lee Thomas, Let the Chips Fall [New York: Apple-ton-Century-Crofts, 1955], pp. 119–20)