Column by Jim Davies.
Exclusive to STR
In one of the best STRticles this year [5], the new Root Striker “forty2oz” proved that if five people each earn $100K a year, and one of them is a cop, as a group they receive not $500K but $400K. I've never seen it done that well, and no fuzzy math is involved.
Like all good writing, this stimulated thought, and mine went to the scintillating subject of the Gross Domestic Product, or GDP. America's is said to be $15 trillion [6]. But is it really?
Yes, because of how GDP is defined ; but the definition is highly misleading. It's here [7], and notice that it includes the value of services provided by government [8] – at cost. The amazing assumption is made that if government spends $X, then $X is a valid measure of what people would have spent on its services if they'd had the choice. So if a country had no government (where, where?) and produced a trillion bucks' worth of goodies, its GDP would be $1T. Fine. If it got a government that stole and spent half what others produced, without affecting their ability to produce (now we're really in fantasy land!), it would still have a GDP of $1T. Finally, if its government produced 100% of everything, it would still have a GDP of $1T.
That is, in fact, roughly what happened in real life for half a century: all the estimates of Soviet GDP assumed that what its government produced was validly counted in the measure. Yet all those clever government economists were astonished in 1989 when it collapsed.
It was valid enough – because, again, that's the way GDP is defined – but now we can see it's not a useful definition, or measure, at all. Not if we're interested in how well a country is doing.
In this Land of the Free, governments confiscate and spend about half of all we produce. Accordingly, its GDP is overstated by about 100%. Goods and services produced for people to choose to purchase, in the “productive sector,” amount to only about $7.5T. The rest is that same amount, sent round in a circle. If two out of four in Dunkin's are cops, the four jointly receive not $400K but $200K.
But why “about”--why not “exactly” 100%?
As I see it, that's because the true market value of government services is not exactly zero, assuming it could somehow be measured (and as von Mises famously pointed out in the 1920s, the fatal flaw of socialism is that, lacking freely moving prices, nobody can measure it). In forty2oz' example, there was a government cop, and while generally useless, cops are not totally useless, they occasionally do useful things like finding out who committed a real crime (the sort with victims). In the coming free society, there will be some who offer the service of detecting aggressors, for a price. So it isn't quite correct to disregard all of the cop's earnings.
Similarly, there will be some charitable work done, redistributing earnings from affluent folk to needy ones, all of course on a voluntary basis; this will be much, much smaller than the vast government “entitlement” industry of today, but it won't be zero.
Schools will reduce drastically in number as most children are being properly educated at home, but the cost of doing that is more than zero. Also, some will choose to use for-fee schools, the number of which will increase to meet the demand. Those fees will be finite.
Roads and sewers, too, will be maintained, and cost perhaps a large fraction of what is spent today by the government monopoly; free-market road owners will be much more efficient, but in the interest of pleasing customers, they'll probably do the job more thoroughly.
Point is, there are a few government “services” which are of non-zero value and which will be replaced by free-market alternatives which will perform for a non-zero price. So whereas the cancellation of all taxes might appear to double everyone's earnings (except of course those of the displaced government workers), in fact some new expenses will be incurred, so we'll not be quite as much as twice as well off.
It's not much better than guesswork, to estimate the net effect of all those huge changes, but mine is based partly on the “Bureaucratic Rule of Two” and partly on intuition about how much of what government now does will be replaced in any form.
To take the latter first: I cannot imagine that there will be any market demand at all to place military forces in any of the ~150 foreign countries presently occupied by the FedGov. Nor can I see demand for a standing army at home, though possibly some defense firms will offer their services. So most of the present “defense” spend will not be replaced at all.
Some other services will be replaced by a market equivalent; education and roads were mentioned above, and wherever there is a close similarity, the Rule of Two will kick in. It's an empirical rule that notes that when a government function is replaced by a freely competing market player, the cost halves or the quality doubles. Often, the ratio is nearer three than two.
Put the two factors together, and my rough guess is that 70% of present government work won't be done at all, and that the remaining 30% will be done for half its present cost. Now to work out the effect of this when government evaporates.
If 30% of the parasite sector's production is useful or necessary at some price, and if competitive market enterprise would deliver it for half the present cost, then 15% of that sector's portion of the current GDP might properly be counted as a measure of the country's prosperity. That would be (0.15 x 7.5 =) $1.125 trillion, to add to the productive sector's $7.5T, making a total of $8.625 trillion, as a fair assessment of our situation today – a “true” GDP. That's 57.5%, or a little over half of the false but publicly stated $15T GDP.
(Parenthetically, I should clarify that I'm using "dollars" in this purely for comparison, and assuming the 2013 dollar will retain its value during the turbulent years of government dissolution. In reality, it will of course revert to its true value alongside wallpaper, and be replaced by the market's choice of a sound medium of exchange such as gold.)
What will happen when government vanishes is that all its 40 million workers will enter the productive sector – their parasite sector will exist no more. They will add to its present size of about 100 million, and will eat only if they produce goods and services that people wish to buy – that is, they will add to the true GDP. After a little time to settle down, that addition will be in proportion to their numbers: (40/100 =) 40%. Our true GDP will rise from $8.625 to $12.1T and everyone's living standards will rise accordingly.
That's the immediate gain, from shredding government. Then the real growth begins.
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