Bigger doesn’t mean better

Bigger doesn’t mean better
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First Published: Sun, Jun 21 2009. 08 34 PM IST

Ramesh Pathania / Mint
Ramesh Pathania / Mint
Updated: Sun, Jun 21 2009. 08 34 PM IST
Government is a “negative” concept. If one goes back to history to understand the motive for the formation of the government, it becomes clear that it was built by the public primarily to protect and provide justice to the public against unlawful acts such as external aggression, theft, rape and vandalism. The government was, therefore, not envisaged to be “positive” in its role but to operate as a passive body— to only weed out or to prevent negative acts in a civil society, under the rule of law. The only other crucial role of the government, apart from protecting and providing law and justice to its citizens, was the provision of public goods through the collection of taxes. All other goods and services were expected to be provided by the forces of the free market, operating under the universal doctrines of division of labour and knowledge.
Ramesh Pathania / Mint
Following this principle, it becomes clear that the role and size of government in any civil society should be minimal and peripheral—the major role of wealth creation should be left to the forces of free market. But unfortunately, over the years, all over the world, this principle has been turned over its head—with the power and size of governments increasing manifold while the role of markets has been reduced and stifled by government interventions of different hues. Big governments in turn have increased the scope of corruption as the state can play favourites with vested interest groups unlike free market forces, which treat every economic agent alike.
The modern-day state has, in fact, become so powerful that the common man has to depend on its mercy for envisioning a better world and a brighter future. Accepting the fact that a big government is here to stay, the focus of the general public has shifted to a race to the bottom—in deciphering which government would dole out more for its citizens. The criteria for a good and effective government, therefore, now depend on the number of “welfare benefits” each government can provide to its citizens. This perverse competition has led to increased size of governments over the years.
At this point, it should be noted that the government does not have its own source of income. All the expenditure of the government has to be funded through taxes collected from citizens. If the state has to spend more and more on its citizens, it has to increase taxes from the already high tax burden to fund its additional expenditure. But given the fact that raising taxes is politically suicidal, the government funds additional expenditures by resorting to borrowing money by issuing bonds or by printing money. The result is inflation and the crowding out of private investments, which is a net deadweight loss for society. What some section of society gains due to the seemingly benevolent acts of the government gets more than negated by the ill effects of running fiscal deficits and inflation. Inflation is a form of tax: What the government gives with one hand, it takes away from the other.
In this context, it is interesting to note that wherever there is intense market competition, there is no inflation. Prices of mobile phones, DVD players, television sets and airline tickets have been falling over the years due to cut-throat competition in these sectors, thus benefiting consumers. Meanwhile, wherever there is a government monopoly, there is inflation, reducing the real income of citizens and leaving them worse off.
Moreover, the government running state-owned enterprises with public money is a sheer waste of resources. One small example can make this point clear. Suppose the government collects Rs100 as taxes from its citizens to provide protection, law and justice and public goods to them. Now, say the government spends Rs40 out of this tax money to run the state-owned enterprises. This means that Rs40 less is available for the core functions of the government, which will never be compensated by the private companies due to free-rider problems. But if the government did not run these state-owned enterprises, then the private entities would have gladly come and filled the void. Therefore, the government trying to do more and more with limited tax money means that we as citizens will get fewer and fewer benefits. One cannot expect to get great security from the state if the government is using the limited tax resources in certain fields where private people would have invested gladly.
One should remember that the institution of government is not immune from the principle of diminishing marginal utility. With every additional increase in the unit of the government, the utility starts reducing; and after a point, a big government just turns out to be more of disutility than utility. So, it becomes clear that if citizens want an effective government, they have to demand a smaller government. In other words, so far as the institution of government is concerned, people should appreciate that “less is more”.
So, wealth generation or development is not a state subject; rather, it is clearly a market subject. Put simply, development requires private saving, private investment and entrepreneurs working under the forces of free market competition—not under the umbrella of a big welfare state.
Kaushik Das is an economist with Kotak Mahindra Bank. These are his personal views. Comment at theirview@livemint.com
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First Published: Sun, Jun 21 2009. 08 34 PM IST