Approximately forty-nine million people joined Brazil’s carnival festivities this year, spanning five days from February 9 to 13. Originally Catholic, the holiday has evolved to have numerous parades, known as “blocos” in Portuguese. Like other major events such as the Super Bowl, there’s consistent pressure for public funding. The Brazilian government, known for its history of high public spending, regularly subsidizes carnival parties through various channels including direct funds, tax reductions, and advertising budgets.
Advocates argue that these subsidies serve as investments, stimulating the economy and generating future tax revenue. Just as once stated by the former minister of culture, these advocates claim that increased consumption during the carnival season boosts profits for businesses, leading to higher tax returns. Additionally, they argue that without government incentives, investment in these festivities would be too risky.
However, this reasoning overlooks economic fallacies, which will be explained in more detail. While subsidies may stabilize demand temporarily, they don’t eliminate uncertainty. Moreover, they distort market signals, hindering efficient resource allocation. Withdrawal of subsidies could lead to market adjustments, promoting more efficient resource allocation and sustainable growth.
The Fallacy of the Entrepreneurial State
The theory of the entrepreneurial state suggests that government investments in the past have fueled major technological innovations, which private companies have capitalized on. Examples used include airplanes, the internet, and GPS. In addition to the errors in the examples mentioned by the proponents of this view, which have already been discussed in other works, this view also overlooks conceptual errors regarding entrepreneurship. According to the Austrian economics perspective, capitalist entrepreneurs invest in capital goods, aiming to earn profits amid market uncertainty.
For profitability, the final product’s value must exceed the costs of capital goods plus the prevailing interest rate. This uncertainty arises because predicting consumer valuation is challenging. Murray Rothbard outlined the role of the capitalist entrepreneur in investing and selling final products for a higher return.
Consider a practical example during carnival season: a costume seller anticipates a 20 percent return on production costs. If consumer valuation aligns with expectations, a 10 percent net profit is earned. However, if consumer preferences shift, resulting in a lower costume value, the entrepreneur faces a net loss.
Uncertainty stems from the unpredictability of individual behavior over time, beyond past data. Despite government subsidies boosting carnival attendance and the demand for costumes, uncertainty persists. Entrepreneurs still bear the risk and play a crucial role in market entry and value creation.
While subsidies may enhance predictability in attendance, they don’t eliminate uncertainty. Even if demand increases prices and production efficiency, entrepreneurs remain pivotal. They anticipate future demand and create value. This happens because, even with data on past valuations and decisions, there is no way to predict conduct outside the axioms of human action.
Even if the end of subsidies increases uncertainty and reduces profit expectations—so that the capitalist entrepreneur decides to invest less in the costume production process or even chooses not to allocate resources in this field and instead chooses other investments that he thinks are more profitable–this would still benefit the economy. This happens since this income has not been “lost,” it has simply moved from a less efficient area to a more efficient one—that is, one that is more valued by consumers, as described by Rothbard:
Government subsidy creates a separate distribution process (not “redistribution,” as some would be tempted to say). For the first time, earnings are severed from production and exchange and become separately determined. To the extent that this distribution occurs, therefore, the allocation of earnings is distorted away from efficient service to consumers. Therefore, we may say that all cases of subsidy coercively penalize the efficient for the benefit of the inefficient.
Consumption x Production
Another common argument for defenders of public money in carnival festivities is the appeal to the creation of wealth through consumption. This view—although prominent in the media and in official government accounts, which estimate the consumption contribution of carnival at $143.5 million in 2024—has major conceptual problems from an Austrian perspective.
Before goods or services become available, production and investment must occur to boost the capital stock. Consumption follows individuals’ valuations of the produced outputs. As resources are scarce and desires vary, consumers’ valuations are endless. Thus, the key economic challenge isn’t to encourage consumption but to promote production.
Returning to the example used, what should be the correct interpretation of the carnival economy? The production of goods and the provision of services take place with initial investments made to satisfy the different needs of the public during the period. Consumption and the amounts spent are only part of the story and the final part of the whole process.
It is also important to ask where the income spent on goods and services comes from, how consumers obtain the resources to satisfy their needs. Consumers, through income earned as capitalists, workers, and landowners, use these resources to obtain goods and services on the market according to their subjective personal valuation scale.
Consumption also faces a time dilemma, with present goods being preferable to future goods (which makes up the pure interest rate discussed in the previous section), known as high time preference. This predilection toward the present, however, creates incentives for greater consumption today and for less investment in longer production processes that would only create value in the future. For the rate of time preference to fall and capitalist entrepreneurs to find it more advantageous to invest rather than consume, a behavioral change in individuals through incentives, such as an increase in the real value of money, is necessary. Therefore, less consumption and more savings directed toward investments are what creates wealth.
Besides that, if only carnival consumption promoted wealth, it would only be necessary to ensure that a large part of the year was devoted to the festivities, with consumers—who are producers and capitalist entrepreneurs in other productive processes—spending their resources endlessly. The behavior encouraged is one of immediacy and consumerism, which would not lead to investment and the production of wealth in the overall economy.
The Seen and the Unseen
Government subsidies redirect resources via taxation or credit expansion, which causes Cantillon effects in the economy. What is initially seen is the utilization of these subsidies and the consequences they initially have on carnival celebrations.
Supporters highlight initial benefits but overlook outcomes without subsidies. Without a counterfactual, it is hard to predict exactly how individuals would use their resources; however, it is possible to say that market allocations would really reflect individual valuations.
If taxes were returned to the hands of individuals, it would be possible, for example, to invest in other productive processes that would satisfy different needs. Furthermore, the lack of subsidies could make some entrepreneurs exit the carnival market, reducing the number of inefficient firms that could not bear the associated risks.
The Unrealized
What is still unrealized, in this case, are the opportunities lost through state intervention. Those opportunities would create other goods and services more in line with the valuation of individuals, as explained by Austrian economist Dr. Per Bylund in his primer about the economy.
Going back to the example of reducing the number of entrepreneurs who would invest in carnival, it is possible to deduce that more efficient entrepreneurs—who would be better at dealing with uncertainty and also better at creating value for event attendees—would be rewarded in a situation without subsidies. With the intervention, however, the opportunity for more-efficient private financing of the event is lost, with a lower generation of value perceived by consumers. Furthermore, the investments made in other productive processes—creating jobs and value in other markets beyond carnival celebrations, which would bring benefits to the economy—would be possible if the government funds used in the subsidies were given back to taxpayers, another example of how coercive taxation also inhibits innovations in other fields.
Conclusion
Even though government subsidies for parties and other events might seem like a good idea at first, the costs involved should be considered. When government agents interfere in the economy, seeing themselves as entrepreneurial agents acting in the name of the state, they distort the market process in general, as is the case with subsidies for the carnival in Brazil and other events.
