Should Government Manage the Economy?

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There is a Great Divide between economists, politicians and citizen activists about the proper role of government in a nation (the land and people).

On the so-called Left side we find the Liberals, Progressives, Marxists, Communists, Fascists, Socialists and Neo-Conservatives who support a paternalistic role of government as Mother-Boss-Owner, using laws, fiscal and monetary policy, and ample fiat money from a central bank in their attempt to produce the ideal society concerning social and economic issues. They all want big government, but have a different list of priorities as to what is right and proper.

On the Right side, we now only have the Libertarians and Anarchists (and a few traditional ‘Taft-Goldwater’ Republicans), who want limited or zero government. Libertarians only want the government to protect our personal and property rights, and not manage our lives, the economy, or the world. The debate among these groups has been active since democratic governments started to replace absolute monarchies in the 1600s.

In Part 1, which includes the Related Articles shown below, I discussed the role of monetary policy, sound money (using gold as money), and empire. Part 2, below, discusses the issue of Mercantilism (also called ‘Protectionism’). I define it as: A government policy of increasing the wealth of the government (not the people) by using tariffs to minimize imports, and maximizing domestic production of goods and services by decrees and subsidies.

Adam Smith first used the term ‘mercantile system’ in his seminal The Wealth of Nations in 1776.

Part 2: Mercantilism

Supporters of Mercantilism emphasize how it reduces off-shoring of jobs, protects the fiat currency from reduced valuation, creates domestic jobs, and increases the wealth of the nation. This approach requires a complex set of tariffs on imports and subsidies to domestic producers, including monopoly privileges for some firms. What they overlook, or avoid, is the inevitable abuse and damage caused by corrupt and incompetent politicians seeking votes by awarding the subsidies and tariffs to supporters.

The incompetence part shows as the government tries to ‘pick winners’ in choosing the beneficiaries of subsidies and tariffs to increase domestic production and exports. A myriad of rules are proposed to avoid this damage, but the results are always reduced liberty and less economic success in the nation.

Colonies became popular as sources of tax revenue and ‘internal imports’ for cheap resources (ores, oil), cheap labor, and products (bananas, coffee) that were not available in the homeland. These empires of colonies, or occupied neighbors, all failed as the colonial residents rebelled against the abuse of foreign taxes, laws, and costs of maintaining control drained the homeland. Empire-USA is now in the failure mode as we see rebellion against our well-bribed puppet leaders in the mid-east nations we control, and our ‘policeman and boss’ expenses soar worldwide.

A good example of ‘economists for big government’ is the recent series of articles on Activist Post by Ian Fletcher (click on Original Articles, eleven articles in February and March, 2011). He touts the benefits of Mercantilism, while making snide remarks about the wisdom of ‘believers’ in free trade, and calls them ‘dreamers’. His book Free Trade Doesn’t Work is on the same theme. Although he addresses reducing the big government tyranny of so-called ‘free trade’ agreements, unfortunately, he does not address monetary policy. He assumes that a nation’s currency is, and should be, produced by its central bank, and has no gold backing. Furthermore, he ignores the effect of the US Dollar being a fiat reserve currency, which means we never run out of money to pay for imports, thus leading to excess imports and off-shoring of jobs. And, while it lasts, buyers will accept our newly printed money with minimal impact on its exchange rate. Hence, he treats the exchange rate of currency as an ongoing variable in his analysis, and since ‘big government’ people like an ample supply of fiat money, he seeks no reform or abolition of the Federal Reserve System.

What he (and even all free-market advocates, to my knowledge) does not consider is that using gold as money provides the automatic balance and braking on excess imports and related off-shoring of jobs, as described in ‘Redick’s Law’ below. Since FDR started his big-spending ‘New Deal’ in 1933, and economist J. M. Keynes published his book General Theory of Employment, Interest and Money in 1936, big government has dominated US politics and academia, especially economists (that’s where the jobs and grants are!). It is not surprising then that Mr. Fletcher works as a Senior Economist for the Coalition for a Prosperous America, which describes itself as ‘a nationwide grass-roots organization dedicated to fixing America’s trade policies and comprising representatives from business, agriculture, and labor.’ In plain language, it is a special interest group that seeks the protection of government tariffs and subsidies for its members. He speaks warmly of big government economists such as Keynes, Stiglitz, and Krugman. As I will show below, the free market does a much better job of achieving sustainable liberty, justice, morality (no coercion, or theft), and prosperity, without subsidies and tariffs, and their inevitable abuse and corruption.

Redick’s Law of Area Pricing with Commodity Money

My book Monetary Revolution-USA has a section in Chapter 5 on the benefits of using gold as money (stable value, smaller government — no funding by creating money out of thin air — fewer and smaller wars, etc.), but my research for this article has produced a new reason, namely an automatic brake and balance to avoid damage by excess imports. I have not found this concept documented elsewhere. I humbly call it ‘Redick’s Law of Area Pricing with Commodity Money’, and define it as:

‘In a geographical area that uses a monetary system with a commodity as money, and prices set by weight of the commodity, such as with the gold standard, purchases of ‘imports’ (at ‘world’ prices) from other areas would result in a reduction in the money supply (weight of gold) in the Buyer’s area if not replenished by sales to other areas. A reduction in supply would make the money more valuable (basic ‘supply and demand’ would cause a higher purchasing power per unit of weight), and thus prices set by local suppliers would go down and become more competitive with imports. Purchases of imports would decline, and exports would increase.’

Thus, use of a commodity as money eliminates the need for tariffs and subsidies to avoid economic harm to an area. Incidentally, high exports would have the opposite effect, causing inflation in the home area. In this manner, constant ‘balancing’ occurs in exports, imports, and value of the currency domestically. I welcome comments and suggestions.

Herein lies the balance sought by Mercantilists, except that the government and its inevitable abuse by penalties and favors is not involved. This applies to any size area — region or nation — where the nature of physical money flow and transactions are separate enough from other areas for the ‘reduced supply’ to be noticed by buyers, sellers, and banks in that area. I estimate it would require a 20 or 30% reduction in supply, and six to twelve months, for the price change to take effect, depending on conditions in the subject area (communications, size, etc.).

In the case where there is no local supplier of an imported product or service (bananas, oil, etc.), the money supply in the buying area will decrease until purchases of: a) optional items (bananas) are reduced or ended, and b) necessities are reduced or alternate local sources are privately developed for necessities (solar or hydro instead of oil, etc.), consistent with the level of exports. Rising prices due to low supply of gold, for instance, will drive the transition due to increased domestic buying. Notice that no government intervention is required.

Conclusion

The nice part of being an advocate for limited government, and free markets is that the results in history show that it always works better for more liberty, peace, prosperity, morals and justice; especially when all the big government side effects (more dependence on government, less personal responsibility and initiative) and unintended consequences are included. There are examples of successful economic and social results (good standard of living and growth, good health care, education, etc.) from big government nations such as Sweden, but these always include a big loss of Liberty through intense control of the people’s activity. China is an extreme case where they relaxed many economic restrictions and introduced property rights in 1978, and growth zoomed! But, again, personal liberty is a casualty of such policies.

I like a big supply of Liberty. Those folks that are willing to exchange Liberty for security should emigrate, rather than imposing their self-serving controls on other US citizens.

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Dave Redick is a Wisconsin businessman, author of two books, and President of Forward-USA

The Phases of an Empire
The Cost of Building and Operating Empire-USA