Can the State Produce Wealth?

Can the State Produce Wealth?
Profile photo of James E. Miller

In his latest speaking gaffe, President Obama once again demonstrated his ignorance on all things economics when he declared at a White House press conference that the “private sector is doing fine.”  Obama, who once remarked on how automated teller machines are putting people out of work, blamed the stagnating economy on public sector layoffs at the state and local level:

Where we are seeing weaknesses in our economy, had to do with state and local government, often times cuts initiated by governors or mayors who are not getting the kind of help that they have in the past from the federal Government, and who don’t have the same flexibility as the federal government in dealing with fewer revenues coming in

To those laid off government workers, let me be the first to proudly declare good riddance!  The state can only function off of the wealth it forcefully takes from the private sector.  Every public sector layoff means a relaxing of the burden every taxpayer faces by being coerced into supporting such nefarious leeches.  That may sound heartless but not when we analyze what the creation of wealth actually means.

According to the champion of compassionate liberalism himself, Paul Krugman, if state and local governments had not cut their employment rolls:

the unemployment rate would be much lower than it is — something like 7.3 percent instead of 8.2 percent. It sure looks as if cutting government when the economy is deeply depressed hurts rather than helps the American people.

Going by what Krugman contends, it would appear that jobs are good indicator of economic health.  But does every job signify wealth creation?  As long as someone is being paid for something, doesn’t their spending add to productivity?

When looking at what productivity really entails, it’s obvious that, contrary to Krugman’s logic, not all jobs are created equal.  In fact, it will become clear that the state’s necessarily violent nature results in the consumption of built up capital rather than the adding to or replacing of it.

First, by taking the idea that paying people an extraordinary amount for relatively useless tasks to its extreme logical conclusion, one can argue reduction ad absurdum that all that’s needed to jumpstart the economy is to employ people to dig ditches and fill them up.  Yet only a complete economic ignoramus would argue that such a policy actually creates any type of wealth.  The money squandered from the private sector to pay for make-work jobs like ditch digging is essentially wasted.

The process in producing something of value can be both simple and infinitely complex.  People can produce for their own consumables or to sell their wares to other producers.  Human demand is literally infinite.  The problem is that the world is dominated by ever-present scarcity.  To quote economist Thomas Sowell, “there is never enough of anything to satisfy all those who want it.”

In today’s modern economy of large retail stores and grocers, many have fallen victim to the error in thinking known as putting the cart in front of the horse.  In economic terms, they put consumption in front of production.   But logic tells us what hasn’t at first been produced can’t be consumed.  People weren’t able to purchase iPods without Apple producing them.  What is usually called Say’s Law of the markets is that the act of supplying allowing for demand.  Or as Professor Steven Horwitz puts it

Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption.

When it comes to buying and selling that contributes to the satisfying of wants, exchange must be mutually beneficial.  That is, both parties don’t see their transaction as an equal exchange but as gaining something they value more than what they are offering as remuneration.  The volunteerism that the free market represents is what makes the act of economization necessary.  Limited resources compel prudence.

The state doesn’t operate under these limits.  Though it is still beholden to the fact that resources are scarce; it doesn’t rely on voluntary payment for income.  The state is funded solely by acts of aggression.  Whether it is through legalized robbery (taxation), the promise of future theft (borrowing), or fraudulent counterfeiting (inflation), those in the confined within the bureaucracies of the state need not worry to the extent that the private individual must in regards to obtaining resource to utilize.  Politicians and tax collectors are only limited in their ability to plunder by how productive the citizenry under their control are.

The money spenders in government not only have the threat of force at their disposal to acquire funds, but also have no incentive to spend the income they happily pilfer in a cost effective way.  As economist Mark Thornton writes, “government spending does not have its value tested with consumers in the market.”  The only way to determine if something is of value is for it to be voluntary purchased.  Whenever consumers make a purchase they are telling producers that they are willing to give up other purchasing opportunities for the price charged.  When consumers abstain from making purchases, they are telling producers that the price offered is too high and they value the gains of their productivity being spent elsewhere.  Producers get the message to either drop their price by adopting new methods of production to become more cost efficient or enter into a new industry.  In short, only consumers ultimately decide what is of value through their purchases.  Since government is not beholden to such rigorous standards, it’s practically impossible to judge whether or not its expenditures actually produce anything of worth.

There are countless examples demonstrative of this truth.  From the failed solar power company Solyndra to the State Department paying $6,600 a pop for Amazon Kindle e-readers, politicization has proven to be the biggest driver of government spending.  Because government produces nothing that can be determined valuable by peaceful means, this reinforces Mises’ claim that “the total complex of the financial policies of the Federal Government, the States, and the municipalities tends toward capital consumption.”  It’s why the services provided by the state are almost always inferior to what could be provided by a competitive market.  Since theft and coercion result in one party benefiting at the expense of another, the operations of the state are conclusively a net loss for society.

If the reader needs any more evidence of this conclusion, perhaps a visit to their local Department of Motor Vehicles is in order.

  • Public_Citizen

    " Politicians and tax collectors are only limited in their ability to plunder by how productive the citizenry under their control are."
    This doesn't apply at the federal level.
    Since the feds have the ability to print Federal Reserve Notes on demand and with the only backing being "The Full Faith and Credit of the United States of America" the only check on their quasi-legal counterfeiting is the ability to convince people and organizations that the FRN is a trustworthy medium of exchange. A proposition that is increasingly dubious.

  • Bill

    Rwe2late, this is clearly way above your head. None of those service jobs you mention produce wealth. Wealth pays for them. 'a group may democratically make a "voluntary" choice.' ???? what world do you live in ? Clearly, not the real one.

  • Ross

    Can the state produce wealth? It sure can; a wealth of useless paper monopoly money… with heavy accentuation on the word "monopoly."

  • rwe2late

    Myopic and mistaken article.
    First, the article posits the absurd notion that a public school teacher produces no "wealth", but a private school teacher doing the same job does produce "wealth". Similarly, for garbage collectors, firemen, food inspectors, etc.
    Second, the article maintains "The only way to determine if something is of value is for it to be voluntary purchased." That assertion ignores the possibility that a group may democratically make a "voluntary" choice. By myopically only considering individual actions, the possibility of social activities is denied.
    On an even more basic level, narrowly defining what is of human value as only that which is "purchased" has many shortcomings. One shortcoming is that those who command the money, however ill-gotten, get the most dollar votes as to what is of "value" regardless of consequences to what perhaps is the other 99%. Is human life itself also of no "value" unless it is "purchased"?

    • James E. Miller


      If wealth is produced via theft, why not let yourself be robbed against your will by muggers to improve your material well being?

      In the piece, I drew a strict line and said services provided via theft can't be productive because one party necessarily benefits over another in the act of stealing. Remunerative transactions are the only way for two parties to benefit. I was not implying purchasing things is the end all to wealth.

      As for as democracy goes, most if not all democracies are predicated on force and therefore a drag on societal well being. If 10 people got together and voted to have you hung for whatever reason, why you say that they should be able to make such a "group" choice?

      Remember, it may appear groups act but only individuals within that group are truly acting.

    • Public_Citizen

      For a given level of educational achievement the private school teacher produces a higher quality product than the public school teacher as measured by the lower dollar input to the private system.

  • Jbm

    ATMs do put people out of work in the short term. Obama's comment was simply that people need to be trained for modern employment. He would likely agree that in the long term, employment is helped by creative destruction.

    • Public_Citizen

      ATMs put ~some~ people out of work in the short term.
      They also cause the employment of a lot of people.
      The manufacturer has to have employees to build the machines.
      The Bank has to have more IT people to run the ATM system and they have more work for the Bank Messenger Service as the machine has to be serviced by certified and armed technicians {replenishing the supply of currency and receipt paper, removing receipt, cleaning and service of the mechanisms}.
      So in the short run a few tellers need to find other employment but a lot of other people have productive work. In addition society has the benefit of easier access to deposited funds [liquidity] and other services offered through the machine outside of "bankers hours".

Profile photo of James E. Miller

James E. Miller is editor-in-chief of Mises Canada and a regular contributor to the Mitrailleuse . Send him mail

More in Blog

Disgust at the LBJ Library

Patrick BarronNovember 13, 2017

Go With Taylor, President Trump

Taylor LewisOctober 30, 2017

For Restaurants, Sweeping the Floor is Equivalent to Cooking Great Food

Ash NavabiOctober 13, 2017

Shooting War in North Korea? History says Yes.

Doug FrenchOctober 11, 2017

Bank of Canada Raises Interest Rates… Again

Caleb McMillanSeptember 6, 2017

Free the Arctic!

Patrick BarronAugust 29, 2017

Preposterous Bubble Predictions and the Madness of Crowds

Doug FrenchAugust 21, 2017

The Bond Bubble

Caleb McMillanAugust 16, 2017

The Reason for Statist Immigration

Caleb McMillanAugust 15, 2017