At his always insightful blog, International Liberty, Dan Mitchell, a senior fellow at the Cato Institute, explains why the private sector will always be better at allocating resources and running the economy than the government. He writes:
When I give speeches about the economic case for small government, one of my main points is that people in the private sector (workers, investors, managers, entrepreneurs, etc) are motivated by self interest to allocate labor and capital efficiently. To be more specific, the pursuit of higher pay and greater profit will lead people to allocate resources productively.
I freely admit that people in the private sector make mistakes (most new business ventures ultimately fail, for instance), but I explain that’s part of a dynamic process in a market economy. Every success and every mistake leads to feedback, both via the price system and also via profits and losses. All of which leads to continuous changes as people – especially entrepreneurs – seek to better serve the needs and wants of consumers, since that’s how they can increase their income and wealth.
In other words, Adam Smith was right when he said that self interest encourages people to focus on making others better off.
By contrast, when politicians and bureaucrats allocate resources (either directly via spending programs, or indirectly via regulation or tax distortions), feedback mechanisms are very weak. Once politicians intervene, they never seem to care if they are generating positive results. There are plenty of examples, however, of government imposing high costs while producing no benefits. Or even producing harm.
- Increased redistribution spending is associated with a halt in the historical progress against poverty.
- More education spending has completely failed to produce better education outcomes.
- More regulation and red tape to fight money laundering has not producedreductions in criminal activity.
- Foreign aid outlays that enable larger public sectors that undermine prosperity in developing nations.
And let’s not forget that “Public Choice” teaches us that interest groups will manipulate government to obtain unearned benefits.
The main lesson from all this information is that it’s good to have small government rather than large government.
Read more from Dan here.
Dan Mitchell Analyzing the Growing Burden of Government Spending
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