Libertarian Slogans That Are False: II

So, in part I of our series, we established that the proposition "Involuntary exchange always makes at least one participant worse off," is only true with certainty ex ante. Ex post, we can only say, "Well, it seems likely that the proposition is true, but we can have no certainty about it -- there surely will be exceptions." (If you recall, I got the libertarian trifecta agreeing with me here: Mises, Rothbard, and Murphy all concur that this statement is only apodictically true ex ante.)

This is an important initial result to establish along the way to debunking a second libertarian slogan as demonstrably false:

"The government doesn’t create resources or wealth, it simply redistributes them." (Now, don't tell me this slogan is a straw man!) What can this mean?


The first thing we have to deal with is what does the statement "creates wealth" mean? Let us begin by analyzing what it means in common speech. In the parable of the talents, Jesus describes a master who gives three of his slaves a certain number of talents (a talent was a unit of money at the time), and leaves on a journey. On his return, he finds two of them have invested the talents and can give him back more than he left them. He is happy with that result: they have created wealth. The third merely buried his, and earned nothing, and he is punished. In a more modern context, when people say, "Steve Jobs created a great deal of wealth by founding Apple Computers," they mean he started with a small amount of funds, and turned it into a much larger amount, based on the market value of Apple.

So, in general, when people say "X created wealth," they are performing an ex post, accounting judgment of the returns of an activity. Here are two, alternative interpretative frameworks that I think make claiming "X created wealth through Y" nonsensical (and which therefore make the claim "X didn't create wealth through Y" equally nonsensical):

1) It cannot be taken as an ex ante statement. First of all, there is the very obvious point that it is framed in the past tense! But even if we modify the statement to "X plans to create wealth through Y," it doesn't help: all people always plan that at least they will be better off after their plans go through, so everyone plans to "create wealth" (at least for themselves) with every plan they make. So in this case, it would be trivially true.

2) It cannot mean "creates wealth net of opportunity costs," since in that case, we could never assert it: we never know that some other plan might not have done better than the actual plan. Perhaps if Steve Jobs had only invested in a networking rather than a hardware company, he would have made even more money. Perhaps if the first two slaves in the Parable of the Talents had made a different investment, they could have quadrupled, rather than doubled, their master's talents. If we try to take opportunity costs into account, then we will be left saying "We never really know if anyone has ever created wealth; after all, there is always the possibility they could have done better!" If we never know if anyone creates wealth, the libertarian certainly can't claim that government never does so. No, we must rely on an accounting interpretation of profit (money invested is less than money earned) if we want these statements to be matters of dispute at all.

So, taking 1) and 2) into account, what the libertarian asserting "The government doesn’t create resources or wealth, it simply redistributes them," has to be claiming is that no government project ever returns an accounting profit. And that is an extraordinary claim, given, say, that several of the TARP investments seemed to have clearly resulted in large accounting profits, as did the Mexican bailout. And throughout history, we can think of many more examples where we might not be able to total up the exact profit and loss, but our intuitions should tell us that some government project did, indeed, earn a large return. Didn't Henry II's investment in establishing the Common Law in England result in huge returns over eight centuries, especially when you consider the entire revenue of the Crown at that time was only tens of thousands of pounds per annum, so whatever he spent on the project must have been on the order of a few thousand pounds? Didn't the Roman government's investment in establishing a huge Roman law, common market, and common language area in the Mediterranean basin yield continuing returns that must far exceed its investment, down to our day? Wasn't DARPA's investment in the Internet more than amply repaid? And remember, all we need is for a single case like these or the many others that could be brought up to represent a creation of wealth for the statement we are examining to be falsified.

Now, we established our first result to foreclose a possible objection to these examples, an objection which runs, "Well, OK, but the money to fund these projects was extracted involuntarily [we here bracket the question of whether tax payments are involuntary], so that must have made at least one party worse off, so we cannot call this wealth creation." But, as we saw, that principle only applies ex ante, a limitation on it agreed to by leading libertarians, and so is irrelevant to our ex post accounting of the results of various government programs.

Where does all this leave those who still wish to object to government programs? Well, rather than trying to make an indefensible apodictic claim, you should argue based on the odds: "OK, you can cite a few government programs that have created wealth, but how many more have wasted it? And how much more likely are private entrepreneurs to really be motivated to seek out profit-making opportunities?"

With that, we now have a rational basis for  discussion. We can examine if there are or are not particular projects that a government could reasonably be expected to perform better than a private enterprise. And I think these questions indicate that we really ought to have a predisposition towards handling matters of investment with market solutions rather than government programs. But we have demonstrated that the proposition, "The government doesn’t create resources or wealth, it simply redistributes them," cannot be defended on economic grounds, but is merely a propaganda slogan.

And, of course, nothing in this post should be taken to be contrary to the moral case against taxation. Libertarians could very well concede, "OK, various government projects at times may have created wealth: that in no way justifies the rights violations involved in taxation." That is a separate argument. And here, I think I have done libertarians a favor: just abandon the weird hybrid arguments that are consequentialist but pretend to have some apodictic basis: you can argue that generally the consequences of government investments will be inferior to those of private investment, or you can argue that taxes are unjust even if they result in wealth creation, but saying "The government doesn’t create resources or wealth, it simply redistributes them," is an incoherent oscillation between the two types of objections to state activity.

A NOTE TO THOSE ON THE LEFT: Praxeological reasoning has often been derided by non-libertarians as simply being a way to shield libertarian conclusions from empirical evidence. That is a mistake! Yes, it has been abused in the way you deride. But almost the entirety of this post is praxeological reasoning, and that reasoning has been used to debunk a bit of libertarian sloganeering.

There is no reason to take praxeology as the whole of economics. But, if not abused, it is a perfectly valid part of economics.