A. The "Productive Contribution" of Government Spending

Government expenditures52 are a coerced transfer of resources from private producers to the uses preferred by government officials. It is customary to classify government spending into two categories: resource-using, and transfer. Resource-using expenditures frankly shift resources from private persons in society to the use of government: this may take the form of hiring bureaucrats to work for government—which shifts labor resources directly—or of buying products from business firms. Transfer payments are pure subsidy spending—when the government takes from Peter to pay Paul. It is true that, in the latter case, the government gives “Paul” money to decide the allocation as he wishes, and in a sense we may analyze the two types of spending separately. But the similarities here are greater than the differences. For, in both cases, resources are seized from private producers and shifted to the uses which government officials think best. After all, when a bureaucrat receives his government salary, this payment is in the same sense a “transfer payment” from the taxpayers, and the bureaucrat is also free to decide how further to allocate the income at his command. In both cases, money and resources are shifted from producers to nonproducers, who consume or otherwise use them.53

This type of analysis of government has been neglected because economists and statisticians tend to assume, rather blithely, that government expenditures are a measure of its productive contribution to society. In the “private sector” of the economy, the value of productive output is sensibly gauged by the amount of money that consumers spend voluntarily on that output. Curiously, on the other hand, the government’s “productive output” is gauged, not by what is spent on government, but by what government itself spends! No wonder that grandiose claims are often made for the unique productive power of government spending, when a mere increase in that spending serves to raise the government’s “productive contribution” to the economy.54

What, then, is the productive contribution of government? Since the value of government is not gauged on the market, and the payments to the government are not voluntary, it is impossible to estimate. It is impossible to know how much would be paid in to the government were it purely voluntary, or indeed, whether one central government in each geographical area would exist at all. Since, then, the only thing we do know is that the tax-and-spend process diverts income and resources from what they would have been doing in the “private sector,” we must conclude that the government’s productive contribution to the economy is precisely zero. Furthermore, even if it be objected that governmental services are worth something, it would have to be noted that we are again suffering from the error pointed out by Bastiat: a sole emphasis on what is seen, to the neglect of what is not seen. We may see the government’s hydroelectric dam in operation; we do not see the things that private individuals would have done with the money—whether buying consumers’ goods or investing in producers’ goods—but which they were compelled to forgo. In fact, since private consumers would have done something else, something more desired, and therefore from their point of view more productive, with the money, we can be sure that the loss in productivity incurred by the government’s tax and spending is greater than whatever productivity it has contributed. In short, strictly, the government’s productivity is not simply zero, but negative, for it has imposed a loss in productivity upon society.55

Government expenditure is often referred to as “investment” resulting in “capital.” And we have heard much in recent years about Soviet and other multi-Year Plans busily engaged in building up “capital” by government action. Yet it is illegitimate to use the term “capital” for government expenditures. Capital is the status of productive goods along the path to eventual consumption. In any sort of division-of-labor economy, capital goods are built, not for their own sake by the investor, but in order to use them to produce lower-order and eventually consumers’ goods. In short, a characteristic of an investment expenditure is that the good in question is not being used to fulfill the needs of the investor, but of someone else—the consumer. Yet, when government confiscates resources from the private market economy, it is precisely defying the wishes of the consumers; when government invests in any good, it does so to serve the whims of government officials, not the desires of consumers. Therefore, no government expenditures can be considered genuine “investment,” and no government-owned assets can be considered capital. Government expenditures are divisible into two parts: consumption expenditures by government officials, beneficiaries of government subsidies, and other nonproductive recipients; and waste expenditures, where government officials really believe that they are “investing” in “capital.” These waste expenditures result in waste assets.56 The consumption of the governmentally privileged is, of course, in a different category from private consumption, since it is necessarily at the expense of the private consumption of producers. We may therefore call the former “antiproductive consumption.”57

• 52Government expenditures are made from government revenue. In the preceding section we have dealt with the major source of governmental revenue, taxation. Below we shall deal with inflation, or money creation, and in the present section a discussion of government “enterprise” is included. For a brief treatment of the final major source of government revenue—borrowing from the public—see Appendix A below.
• 53It may be objected that while bureaucrats may not be producers, other “Pauls” who receive subsidies on occasion are basically producers on the market. To the extent that they receive subsidies from the government, however, they are being nonproductive and living off the producers by compulsion. What is relevant, in short, is the extent to which they are in a relation of State to their fellow men. We might add that, in this work, the term “State” is never meant in an anthropomorphic manner. “State” really means people acting toward one another in a systematically “stateish” relationship.
       I am indebted to Mr. Ralph Raico, of the University of Chicago, for the “relation of State” concept.
• 54Originally, Professor Simon Kuznets contended that only taxes should gauge the government’s productive output, thus measuring product by revenue as in the case of private firms. But taxes, being compulsory, cannot be used as a productive gauge. In contrast to the present method of national income accounting, Kuznets would have eliminated all government deficits from its “productive contribution.”
• 55Even for those who do not accept this analysis, any who believe, empirically, that waste in government exceeds 50 percent of its expenditures would have to agree that our assumption is more accurate than the current estimate of 100 percent productivity by the government.
• 56If a waste asset owned by the government is sold to private enterprise, then all or part of it might become a capital good. But this potential does not make the good capital while used by the government. It might be objected that government purchases are genuine investments when used by a government “enterprise” that charges prices on the market. We shall see, however, that this is not really enterprise but playing at enterprise.
       See below for a more detailed discussion of the waste involved in waste assets.
• 57This is to be distinguished from the classical concept of “nonproductive consumption” as all consumption above that needed to maintain the productive capacity of the laborer.