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Tuesday, June 29, 2010

Government as Consumer

Destutt de Tracy, as I discussed in the June issue, was a French economist whom Thomas Jefferson did his utmost to bring to the attention of America. The first part of Tracy’s A Treatise on Political Economy (1817), the translation of which Jefferson arranged, is a primer in economics that will satisfy any aficionado of Austrian economics. It builds up a theory of exchange and commercial society beginning with a notion of value rooted in subjective utility and using a praxeological method.

Tracy’s book also discussed the nature and economic effect of government. And how refreshingly lucid is his treatment! It makes most modern descriptions of government look childish by comparison.

Government Consumes Wealth

Today mainstream observers regard government as a source of investment in society. Across the political spectrum, overlooking differences in detail, one finds agreement that government spending, at least at some level, creates value.

Tracy did not see it that way. Like other liberal, free-market economists of early nineteenth-century France, Tracy saw the State essentially as a predator, a destroyer of value, and the source of class conflict. (Which is not to say he thought government should be abolished.)

“In every society the government is the greatest of consumers,” he wrote. This puts him at odds with most of what is believed about government now. Government spending, he insisted, does not create wealth.

Nor does it stimulate others to create wealth, a belief that is dominant today. Prosperity cannot be achieved through consumption, he held, and he didn’t buy the “multiplier.”

“[T]hose who persuade themselves that consumptions can be a cause of direct riches, maintain that the levies made by government, on the fortunes of individuals, powerfully stimulate industry; that its expenses are very useful, by augmenting consumption; that they animate circulation; and that all this is very favourable to the public prosperity. To see clearly the vice of these sophisms, we must always follow the same track, and commence by well establishing the facts.”

He then proceeded to refute Keynes—a mere 119 years before publication of The General Theory of Employment, Investment, and Money.

“The expenditure [government] makes does not return into its hands with an increase of value. It does not support itself on the profits it makes. I conclude, then, that its consumption is very real and definitive; that nothing remains from the labour which it pays; and that the riches which it employs, and which were existing, are consumed and destroyed when it has availed itself of them. . . .” (This and all other emphases are added.)

In other words, real investment in a free market, which is driven by entrepreneurs’ attempts to satisfy consumers who—crucially—are free to say no, produces value, as indicated by the resulting profit. Thus we know that the output is esteemed more highly than the untransformed inputs. Government spending is not of that nature.

But what about government spending on infrastructure, those “shovel-ready projects” so beloved by the champions of government “stimulus”? Tracy cleverly pulls the rug out from under the argument by seeming at first to approve of such spending. Unlike the waste of other government spending, he says,

“It is quite otherwise with funds employed in public labours of a general utility, such as bridges, ports, roads, canals, and useful establishments and monuments. These expenses are always favourably regarded, when not excessive. They contribute in effect very powerfully to public prosperity.”

And yet, “they cannot be regarded as directly productive, in the hands of government, since they do not return to it with profit and do not create for it a revenue which represents the interest of the funds they have absorbed. . . .”

Besides, Tracy wrote, even government projects aiming at valued outcomes crowd out private efforts that would have been more efficient.

“[W]e must conclude that individuals could have done the same things, on the same conditions, if they had been permitted to retain the disposal of the sums taken from them for this same use; and it is even probable that they would have employed them with more intelligence and economy.”

Even spending on science would be better left to private entrepreneurs.

“Finally, we may say the same things of what the government expends, on different encouragements of the sciences and arts. These sums are always small enough and their utility is most frequently very questionable. For it is very certain that in general the most powerful encouragement that can be given to industry of every kind, is to let it alone, and not to meddle with it. The human mind would advance very rapidly if only not restrained; and it would be led, by the force of things to do always what is most essential on every occurrence. To direct it artificially on one side rather than on another, is commonly to lead it astray instead of guiding it.”


Sterile and Unproductive

Now Tracy goes in for the kill:

“From all this I conclude, that the whole of the public expenses ought to be ranged in the class of expenses justly called sterile and unproductive, and consequently that whatever is paid to the state, either under the title of a tax or even of a loan, is a result of productive labour previously executed, which ought to be considered as entirely consumed and annihilated the day it enters the national treasury. Once more I repeat it, this is not saying that this sacrifice is not necessary, and even indispensable. . . . But [every citizen] should know that it is a sacrifice he makes; that what he gives is immediately lost, to the public riches, as to his own; in a word, that it is an expense and not an investment.”

The upshot? For Tracy it is that government should be kept small and inexpensive. Note the jab he gives to “the greatest politicians”:

“Finally, no one should be so blind as to believe that expenses of any kind are a direct cause of the augmentation of fortune; and that every person should know well that for political societies, as well as for commercial ones, an expensive regimen is ruinous, and that the best is the most economical. On the whole, this is one of those truths which the good sense of the people had perceived for a long time before it was clear to the greatest politicians.”

You can find an Italian translation of this article here.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.