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How Governments Harm Society

Some potentially contentious reflections on the role and function of government in society

Allegory of Good and Bad Government by Ambrogio Lorenzetti (1339)

Winter has finally settled in, the solstice has just passed and the wet, wintry grey doesn’t seem to be breaking. It’s hard to believe that it was only a couple of weeks ago when I was back at the farm and woke up to the sun baking the frost off the grass — mist rising from the ground. It was at this point in time that I was reading “Why Australia Prospered” by Ian Mclean and watching the British election unfurl in another politically frustrating event.

Friedrich Hayek may have been onto something when he claimed that politicians are mostly incompetent. Socrates was definitely onto something when he thought a government could be formed to serve the people. It’s hard to find a politician that isn’t about their own ego, though. Then there’s the word abuse; empty promises, slogans, cat fighting, and xenophobia.

Politicians also have a habit of pushing through policy just so their government can look like they are doing something. If society is functioning well, if there is a good constitution and the courts are aptly setting precedents so the law evolves, then there’s no reason for the government to intervene. But politicians can’t be getting paid the obscene wages only to do nothing, can they? Beyond that motivation, their egos also need them to do stuff, like pass a bill this year and next year repeal it.

Isn’t government supposed to be representative of the people? Their voices discussing the issues of the day, and ensuring the prosperity and equal opportunity of all people. Yet when I look at politicians I mostly see middle-aged white men with big bank accounts. I see fat cats.

Wait. That’s bankers?

Hayek is much like Milton Friedman and believes in free markets. Thatcherism and Reaganism are versions of this Austrian school of thought. Hayek was critical of governments as they are slow to act, act in self interest, and don’t necessarily posses the relevant knowledge.

Even John Maynard Keynes was conscious of the lags of discretionary fiscal policy. The commonly taught first lag of fiscal policy is the recognition lag. Tell me a time when the government acknowledged a bad economy? You might have a quote from Paul Keating but other than that, politicians are inherently prone to positive rhetoric. So recognizing there is an economic problem usually only happens once there are protests, riots, or thousands and thousands of constituents crying out for action.

Once our beloved pollies recognize the issue, we have a media stunt. Lots of chest beating, more empty promises, slogans, and targeting a particular group of people.

This goes back and forth until — finally! — a party decides to bring a bill to parliament. Then the talks continue until it either passes or gets rejected in the House. If it passes then it has to go through the next house of parliament for further discussion. By this stage the crises or problem that could have been avoided has hit the bottom and is now repairing itself.

The government finally passes its legislation. The economy is already recovering and now it has a shot of steroids from whatever stimulus fiscal policy the government belatedly passed and rockets off. The government pats itself on the back, says what a great job, look at it go and then 7–10 years down the track the world comes crumbling down again. The government merely sows the seeds for the next bust.

The government actually distorts markets. Now don’t get me wrong I am all for a little regulation, and good taxation. Regulating credit markets and taxes like those on sugar and tobacco are great. Tax breaks like negative gearing for property investment though actually distort the entire investment and savings market. It moves money from productive investment into speculative investment. Providing cheap credit after a credit crises is no different to giving heroin to a junkie. That’s what low rates after a credit collapse is. These acts of the government distort where people would otherwise put their money given the real risk and return profiles of investments. The government’s intervention makes a gamble look better than investing in something that might make something tangible, something real.

The government does have a critical role. It is designed to protect and serve the people. It is also there to enable people to make and take opportunities. The government can perform this critical and essential role of enabling its people by passing contemporary laws around equality, and rights of people. Property rights have been fundamental to the success of the Western world. Empowering men and women of all race, age and background to be their best selves has been at the foundation of greatness.

To prevent people like Donald Trump, Pauline Hanson, and Jeremy Corbyn railroading and destabilizing our nations we need to have lean governments. Governments that focus on basic rights of people and the proper and free functioning of markets.

To enable the proper and free functioning of markets means there can’t be information, transport, or resource biases. There must be equal opportunity between city and country, poor and rich. Adequate town planning so that jobs are accessible to everyone. Good transport routes so that trains, roads, planes can facilitate the free flow of people, goods, and services. Internet and telecommunications of high quality and uniform speed so that there aren’t time or information lags.

Basic rights such as property rights, freedom of speech, and to make the most of your situation are to be supported. Government’s taxes put to good use so that people can focus on improving themselves and their communities and not just on getting by. Healthcare, education, and infrastructure are essential to any functioning society and free market.

If we have these things covered off then all we need is basic regulation. Make sure that no other person or business is abusing, exploiting, or harming another. We do not need the government to meddle by lowering interest rates, or creating excessive red tape. All we need is for the government to facilitate the innovation, initiative and positivity of the people.

As I read my book I found it astounding that the greatest period of growth in wealth per person was not when we had a government. It was before markets were regulated and the free flow of people, ideas, innovations, and goods occurred. It was before government intervened. In Australia this was from 1840–1890.

The one big takeaway here is that there is time for action and time for patience. An idle government isn’t necessarily a bad government.

Want to look into the issue yourself? I recommend reading a bit about Keynes, Hayek, and Friedman and see what you think. Also here is a link to a hilariously can’t-miss YouYube rap battle between Hayek and Keynes.



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Chris Leeson

Chris Leeson

Bringing finance and economics to you with a focus on in-depth analysis and everyday life.