Sunday, April 17, 2011

Creating Wealth

Wealth of Nations.  Photo by the author.
     Knowing anything at all about human nature should be enough to make clear that if people do not have to pay for something they desperately want, they will use it up quickly. This point is not much of an insight, but it seems to elude everyone who is arguing against structural changes to Medicaid and Medicare. Like the British National Health Service, these programs promise far more than any nation can ultimately deliver. Access to health care must be limited, whether freely by price or deliberately by rationing and waiting lists. Once more the conservative position is the responsible one. However, not all of the conservative rhetoric has been accurate. This is normal for both political tribes, but in the context of the budget debate one claim is particularly common and particularly wild: “Government cannot create wealth; it can only redistribute wealth.” Just a moment’s reflection shows the confusion behind this claim.

     First, it is important to get clear what is meant by “wealth.” There are many definitions. Adam Smith, for instance, defined wealth as the total produce of the land and labor of a society. On the other hand, is there any serious economist who defines wealth as simply money? This seems precisely the mistake those conservatives make who proclaim that government cannot create wealth. The kernel of truth at the heart of the claim is that the money the government uses to pay its obligations comes from the population through taxation. It does, at least, as long as the government does not simply print the money it needs to cover those obligations, which would indeed be the creation of wealth if wealth were only money. But wealth is not simply money, and government does not simply redistribute wealth.

     Consider: However inefficient the federal bureaucracy may be, it does add value far beyond the simple dollars it expends. The military’s worth is not simply the dollars spent on buying weapons and paying soldiers: It is security. State and federal governments build roads and enforce the criminal law. The resulting highway system and public order immensely enhance the economy, and such enhancements really are a part of the national wealth. Government absolutely can create wealth, properly understood, just as the private sector can. Conservative polemicists weaken their arguments when they deny this fact.

     Still, it is also true that each sector is typically better than the other at certain kinds of wealth creation. Governments properly defend the shores and build the roads and enforce the laws that provide a secure forum in which the private sector markets can freely operate. It is a serious problem, however, when governments begin trying to provide market goods and services that are more efficiently created and distributed by the private sector. This point is another reason why governments cannot treat health care like a right. Health care is a limited resource, and no government can guarantee unlimited access to a limited resource—no matter how much wealth that government creates.


  1. Excellent post, sir. Indeed you got me to re-think my stance, as I was one guilty of using the phrase of "government does not create wealth".

  2. At the risk of disagreeing, particularly when I agree with your broader point, I don't think "wealth" is the word you're looking for; it's "value."

    The military provides security, which is undeniably proof that the government can provide value (but not wealth). Same for the highway system: the government has generated value in constructing it, but not wealth.

    One might make the argument that the value created by the government -- security and inexpensive transportation routes -- have generated positive externalities in the form of wealth to those who benefit. Gas stations and restaurants at highway exits, suburban land owners, etc.

  3. T. Paine, I certainly used the phrase myself over and over again before thinking it through and then checking some sources. Like many distinctions, it's pretty clear after the moment of insight and completely opaque beforehand.

  4. THR, I'm delighted by disagreement! Tends to prove we right-wingers are not intellectual conformists after all, despite the ridicule of the Left.

    On the point you make, as someone not a professional economist, I'd be happy to use value as a synonym for wealth. But I think that actually makes the point even more clear: "Government cannot create value, it can only redistribute it." That statement is obviously absurd.

    But let me ask you: If security and reliable transportation infrastructure are not wealth, then presumably they could not be measured in money value (that word again!). But it seems to me that if you assumed away public order (for instance), firms would have to pay for their own arrangements for securing shipments. There would be people able and willing to provide security, and they would charge whatever the market would bear. The cost of hiring such security services would be deducted from whatever profit the original firm would otherwise have made, and such cost would be an accurate measure of the diminution in wealth suffered because the government did not enforce public order. Thus, by providing an environment largely free of banditry, the government adds wealth to every single economic actor in the society.

    What do you think? Have I convinced you?

  5. No, you really haven't convinced me. I don't think "value" and "wealth" work as synonyms. I still think it's true to say that government doesn't create wealth, but government does create value.

    Questions that conservatives should answer are which areas government should create value, and shut down the ones it should not. Then, is government creating enough value, or do waste and inefficiency suggest that private solutions would generate more value.

  6. THR, we'll have to leave it there.