Production bias in economic intervention

When an intervention is proposed, it’s usually offered that it will create jobs, or somehow otherwise create work. In Clash of Economic Ideas I’m reading about Indian economic planning and how in the early 5-year plans they proposed to subsidize low-scale labor-intensive cloth making. Otherwise power looms could take their jerbs! On the face of it, it looks like a policy where home weavers get more money (and maybe the price of cloth goes up… but people will be richer because of jobs, right?), but if we strip away the monetary veil, things look different.

What would this policy look like on Gilligan’s Island? The professor comes up with a way to harness the tide so that Gilligan doesn’t have to ride a stationary bike to generate power (bankrolled by Thurston Howell III). But the Skipper can’t let them take Gilligan’s job! So he forbids the professor from using his labor saving invention and there’s no costly transition from the status quo. Essentially the Skipper is consigning Gilligan to work harder than he otherwise would. For his own good!

Okay, that example is too easy, so let’s take it a step further. The Skipper decides they need a bridge (to where? Never mind, it’ll create jobs!) and sets Gilligan to work collecting materials while the professor draws up plans. This time the jobs created will actually result in something new, which is good. But is it good enough? If the discounted present value of the bridge is less than the present value of the costs they will have to incur, then a bridge building policy is like forcing or tricking Gilligan to work at a low wage when he would rather relax on the beach. Or if he pays Gilligan a good wage, then it’s like forcing the island’s tax payers to buy overpriced goods they don’t want; If I make you buy a Hyundai for $200,000, it hardly matters that you ended up with a reliable and efficient car because you got ripped off! The only alternative is that the person who decides to build the bridge eats the loss.

Entrepreneurs make mistakes, and that’s part of the learning process of the market. These sorts of mistakes are not just economically superior than poor policy, but they are ethically superior to state intervention or full-blown socialism. Let’s imagine that a government policy is passed with the expectation that it will be a net gain for the economy (tough, right?). This project is financed by either forcing/tricking someone to pay for it (taxes or inflation), or directly forcing someone’s hand (regulation or conscription). Even if the project turns a profit and the financiers are paid back, there’s something unsettling about the use of coercion. Contrast that with an honest mistake made by an entrepreneur. The financiers make a loss, but by their own volition. Nobody forced their hand, but they learned something and they can use what they learn to guide their actions in the future. Not so with a government failure.

tl;dr: Focusing on a policy’s effects on producers (“the seen“) overlooks what’s going on behind the veil of money: more work for producers without a commensurate gain is simply making them work harder than they need to, and it’s cruel. If (as is more often the case) it’s really a matter of making taxpayers buy something they don’t want for the price, it’s a ripoff and equally cruel. Even the ethical standing of “good” policies is questionable because it removes the element of choice from the individuals forced into backing the project.

Please keep it civil

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