Mises Wire

How Economic Realities Can Curb Activist Politicians

Advocates for increased levels of societal safety nets seem to primarily ignore obvious truths of public choice theory, as well as what economic trends have taught humanity for hundreds of years. Adam Smith famously said:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

This obvious truth is assumed by economists but misunderstood by those who advocate against so-called price gouging or for “free” healthcare or childcare for individuals and families. A basic grasp of economic realities and how they relate to human nature easily restricts these attempts to appeal to subjective feelings of fairness or charity.

Proponents for public healthcare, childcare, lunches for school children, or clean drinking water are certainly advocating from a place of legitimate charity. Personal altruism of course is a good thing, and many people feel called to participate in voluntary forms of charity. The glaring problem is that a society cannot practically or morally be expected to run on pure charity. This is because state-mandated charity is a form of slavery, not actual charity, and because most people participate in charity until it no longer serves their self-interest to do so. Of course, businesses exist to create value for their investors, which is done primarily by serving their customers adequately. A business cannot do this by refusing payment or not seeking profit.

Why must profit-seeking businesses exist in the first place then? Some believe that a new society or economy might remove certain trends found in human nature or economics. Realities of scarcity and the need for prices to act as market signals necessitate business and profit. In short, people will not work or invent for free. The state cannot facilitate paying them by itself as the state does not create value; it can only borrow or steal.

Thus, people must freely choose to use their income to purchase an item, which must be given a price point that cannot be arbitrary and must come from certain market conditions. Ludwig von Mises points out that a true socialist economy cannot exist practically as it would not have a way to determine the cost or price of products and services; this is known as the economic calculation problemF.A. Hayek also pointed out the problems associated with a socialist state by noting that socialist economies face a knowledge problem, as learned knowledge is best utilized locally, rather than centrally. A central authority has no way of anticipating what knowledge is truly needed where, while the market is constantly reacting to ensure that knowledge is used most effectively in the economy.

The human nature aspect is even more problematic. One can look to the largest socialist economy in modern history, the Soviet Union. The Soviet economy was a paper tiger; all aspects of it were oversold and were rife with high levels of inadequacy and inefficiency. This is partly because Soviet officials decided to pretend that human nature simply did not exist. Instead of seeking profit, party members and officials were supposed to seek the benefit of the Soviet state. Instead, the black market grew while the Soviet Union failed its citizens, and corruption became the unspoken norm among officials.

Economic realities cannot be ignored, regardless of how empathetic a person feels toward certain groups in society. Scarcity, profit seeking, the tragedy of the commons, and the necessity of the price system requires serious observers to relegate altruism to private action. Societies that have previously rejected economic realities have consistently seen famine or other catastrophes, forcing them to amend their economies, as we have seen with China and Vietnam.

Free childcare or healthcare has a moralistic sound to it, but these services cannot exist outside of the market paradigm. These services come with costs, and the market is best able to minimize those costs while permitting people to offer competitive services to customers. As is seen in the American healthcare system and higher education sectors, when the state subsidizes, prices increase and ingenuity decreases. It would be a shame to push the phenomenon onto other services or sectors in American society when the competing market is an obvious solution.

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