The main question you need to ask whenever you hear about an outcome of “government spending” is: Instead of what?! The cost of any economic decision is never simply “What were the outcomes?” but also ‘What were the potential outcomes?” – what was the opportunity cost? What could have been achieved if I invested my time and capital differently?

Today President Obama announced that 1 million jobs were saved due to the $787 billion dollar stimulus plan he initiated earlier this year. I ask, “Instead of what?”

At first glance this may sound like a great headline for Obama, but only if you make an all-too-often economic fallacy about the nature of government spending. When we are on the receiving end, it is all too easy to forget that governments do not have their own source of wealth; they only absorb wealth from their citizens through taxes and monetary inflation. In this sense there is no such thing as government spending, only redistribution. As argued by many intellectuals throughout the past century, this kind of economic planning often comes with disastrous effects. Yet politicians refuse to listen, often only citing Keynesian economists – who justify increased government spending even when it is in contradiction with the most basic laws of the free market.

In this article I will argue that almost all government spending “for the sake of the economy” – no matter the intentions – is bad. I will argue that it doesn’t matter which way the money flows; it is the principle of the action that hurts the economy and undermines the intelligence of the market. And in the end we all lose out as a result of government meddling in the economy.

Government spending vs. Market spending

I find the best way to frame the battle between markets and governments is as follows,

When individuals are given the chance to keep their earnings (private property) and spend it as they see fit (voluntary contracts) – does this lead to better outcomes than when governments decide where money should be spent?

ARGUMENT 1: Fallacy Of Intentions (The Belief In A “Benevolent Government”)

One argument in favor of government is what I call the fallacy of intentions. This is the general belief that a benevolent government can provide for society better than self-interested individuals.

The underlying premise is that individuals are greedy and we can not expect greed to serve the general welfare of the people. As John Maynard Keynes once said, “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”

But this is a fallacy. Governments, like markets, are also a conglomeration of individual humans; humans that have the same potential for greed as anyone else. One of my favorite rebuttals to this fallacy is a quote by Austrian economist Ludwig von Mises, in which he states:

“If one rejects laissez faire on account of mans fallibility and moral weakness, one must for the same reasons also reject every kind of government action.”

A Keynesian might then counter this point by arguing that in a democracy – since the people elect their representatives – greed could therefore be limited.

But certainly “greedy individuals” are just as capable of organizing campaigns and becoming elected officials as “benevolent individuals”? America is already a great example of how money seems to be the best predictor of government power.

However we cannot blame this on capitalism, we can only blame government for not following its original constitutional foundation. This is why it is my belief that a constitutional republic, one which concentrates government power closest towards the individual, is one that best serves a free society. A constitution is necessary in order to define the purpose of government and to limit it from breaking these restrictions.

ARGUMENT 2: The Intelligence Of Governments Versus Markets.

Another argument in favor of government is that government can better allocate resources than the free market can. It is believed that under laissez-faire capitalism self-interested individuals will only act in a way that maximizes profit for themselves and consequently not provide for the needs of others.

However, economic activity is not a zero-sum game; everyone reaps benefits from voluntary trade. If individuals didn’t see benefit in an action they simply wouldn’t do it. As Adam Smith once famously wrote in his influential book “The Wealth of Nations” (1776):

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Adam Smith later named these market forces the invisible hand. Ludwig von Mises claimed that Smith believed that the invisible hand was that of God. He did not mean this as a criticism, since he held that secular reasoning leads to similar conclusions.

Mises’ contrasted the invisible hand of the market with central economic planning, claiming the the latter was not only undesirable but impossible. In his theory of the “economic calculation problem” which was later expounded by Nobel laureate Friedrich Hayek, Mises argues that governments cannot possibly have the knowledge to know what is good for the economy. Mises believed that only the voluntary actions of consenting adults could properly allocate resources throughout the market. Hayek expanded on this idea by stating the efficient exchange and use of resources can be maintained only through the price mechanisms possible through free markets.

When governments legislate price and wage limits, the market is inhibited from reacting properly when changes occur in supply and demand. Due to the uncertainty of the economy, government can not possibly have enough knowledge to benefit society through massive spending. In fact, they almost always undermine a “natural market” solution from taking place. The more you give individuals a chance to act freely the better each individual’s needs will be met.

Of course the market isn’t perfect or Utopian. Individuals do not always make the right decisions for themselves and economies will fall into recessions during bad economic times. But this is true for any aspect of life. Just because half of American marriages end in a divorce doesn’t mean we want the government to make decisions on who we should marry. Life is filled with mistakes; it is how we learn, and it is a part of freedom.

So, yes, it sounds nice when we hear that Obama created X amount of jobs or saved Y. But how would this solution compare to a market solution? How do we know Obama is “creating” or “saving” jobs that really serve the American people? Yes, governments can help the unemployment rate by starting wars, or even by having everyone build pyramids, but is this really signs of a growing economy? Is this really an efficient allocation of resources? When Obama and Bush “bailout” companies that the market has already chosen to fail, then they are only delaying the inevitable destruction of these jobs. The people have already chosen another product. People losing jobs is a necessary function of a healthy market.

Note on GDP as a measure of economic growth

Like unemployment rates, GDP is another statistic that can be easily manipulated by government. The government reported this week that the economy grew 3.5 percent from July through September. But since government spending is a part of GDP, no wonder the “economy grew” with all this stimulus spending.

“What kind of man was Ludwig von Mises? As this unique film shows, Mises (1881-1973) was a man who never stopped fighting for freedom: not when the Nazis burned his books, not when the Left blackballed him at universities, not when it seemed as if statism had won. With courage and genius, he fought big government until the day he died … in 25 books, hundreds of articles, and more than 60 years of teaching.

Mises was the twentieth century’s foremost economist, and one of its most important champions of Liberty. Here is a film that does justice to this extraordinary man, and to his equally extraordinary ideas.”

“The economic calculation problem is a criticism of socialist economics, or more precisely central economic planning. It was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek. The problem referred to is that of how to distribute resources rationally in an economy. The free market solution is the price mechanism, wherein people individually have the ability to decide how a good should be distributed based on their willingness to give money for it. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows, on the basis of individual consensual decisions, corrections that prevent shortages and surpluses; Mises and Hayek argued that this is the only possible solution, and without the information provided by market prices socialism lacks a method to rationally allocate resources. Those who agree with this criticism argue it is a refutation of socialism and that it shows that a socialist planned economy could never work. The debate raged in the 1920s and 1930s, and that specific period of the debate has come to be known by economic historians as the The Socialist Calculation Debate.”

Joseph T. Salerno is an Austrian School economist in the United States. A professor at Pace University, Salerno is an active scholar in the areas of banking and monetary theory, comparative economics, and the history of economic thought.