A Climate of Opportunity

Kenneth McDonald is a Toronto writer on economic and political subjects. This article is reprinted, with the author’s permission, from The Globe and Mail (Toronto) April 13, 1977.

Though aimed at Canadians, the ideas are equally pertinent in the United States or in any other nation.

When unemployment is at a record high, the federal government is pressed to create jobs.

The reaction is natural. Govern­ment has been allowed to assume such a major role in the economy that people look to it automatically for solutions.

It takes a considerable effort to perceive that the reverse is true. But the effort must be made.

The economy is in poor shape not for lack of government action but because government has acted too much. Its intrusion has been at the expense of the productive activities that alone can generate lasting employment.

Jobs are generated in a dynamic climate where new ventures replace and outnumber those that fail and where the continuous drive for im­provement throws off fresh opportunities in a multitude of direc­tions.

What benefit is to be had from make-work projects which are funded with wealth diverted from the productive process? Instead of being turned back to create more wealth, this money is “redistrib­uted.”

Those engaged in the projects may gain temporary relief, but it will be as short-lived as the political expediency that prompted it.

Where governments go wrong is in assuming an active role, for which they are unsuited, while neglecting the passive one for which they are.

By discouraging success and sub­sidizing failure they have created a climate where mediocrity is the norm, where the ambition of the young is to find a safe job with a (preferably indexed) pension and where anyone willing to take a risk is regarded as a freak.

By inflating the state’s bureaucracies, governments have created a condition where commit­ment has been replaced by commit­tees, where leadership is abandoned in favor of exhortation, and where no one is responsible for anything.

Canada is said to be faced with an energy crisis and with the economics of scarcity. Yet the scarcest commodity is not traded on the exchange. Nor is its scarcity a result of physical depletion.

The scarcest commodity is the economic energy that fuels the pro­ductive process. It consists of two elements: human ingenuity and the risk capital that must be found to turn that ingenuity to good ac­count.

Both require incentive.

Now, when the need is for recur­rent crops of economic energy, the Government’s proper role is to create a climate in which this will flourish.

That climate will come when peo­ple are encouraged to take risks. Their incentive will be the assur­ance of keeping a major portion of whatever reward the venture may bring them.

If they are to take risks, the risk must be set against the possibility of a reward commensurate with the risk: big risk, big reward.

For every ten ventures, eight may fail, two succeed. For it to be worth taking the ten chances, the two suc­cesses have got to pay off.

Where, for those ventures, is the risk capital to come from?

Not from banks. They are proper­ly restricted by a fiduciary respon­sibility to their depositors.

Not from governments. They have a similar responsibility to the taxpayers. The responsibility has been somewhat eroded of late, but it is still there. Moreover, civil serv­ants are conditioned not to take risks. There is a natural, but un­bridgeable, gap in understanding. (Not, unfortunately, that this stops them from trying.)

What governments could do, however, is change the climate. For example, they could change the tax­ing method from ability to pay to benefits received. They could tax costs instead of profits and apply a flat rate (estimated at about 16 per cent) on all personal income above an agreed-on minimum.

The stereotype of the top-hatted capitalist with cigar and gold watch chain is a belief that dies hard.

Today’s risk-takers are more like­ly to number a dentist, a builder, a professional engineer and an airline pilot.

Who is to say what is a “fair” return to them?

The irony is that, not only in Canada but in the West generally, governments and their bureaucra­cies are presuming to make that decision. In the Netherlands, for instance, it is proposed to define a fair return on equity as the yield on government bonds, plus 2 per cent for risk.

How can a civil servant, who is not exposed to risk, understand the function of risk taking? How many dentists would lend money to an in­ventor or a designer on the chance that at some time in the future, if the venture succeeded, they might begin to get 11 per cent on their money? They could get more tomor­row from mortgages.

The government that employs the civil servant is the biggest winner. Having no competitor itself, it is the biggest competitor of every business in the land. The money it risks was not earned or saved by the people who decided to risk it. But the return is assured. Through corporate tax, through personal in­come taxes and sales taxes, govern­ment takes a growing share of the fruits of production.

The private investor of equity capital, without whose willingness to share the risk the business would not have started in the first place, must line up, cap in hand, behind the Government which, having taken no risk at all, claims its reward from the day the doors are opened.

When government stops com­peting, when government reverts from its active role to a passive one, only then will it have contributed its share to the process of creating wealth and jobs.