Neal's Workshop

As you may have noticed, I am a big fan of David D. Friedman. I regularly read DDF's blog, Ideas: daviddfriedman.blogspot.com. David is an anarcho-capitalist. What that means is that he is a proponent of anarchy, which simply means no government. Government is defined as is rule by coercion. Under this anarchist society, the various functions of government would be replaced by competing private enterprises. As noted in the sidebar, I have been reading one of Friedman's books, The Machinery of Freedom. Here, David lays the groundwork of anarcho-capitalism as well as why governments are inherently flawed. It is an excellent read, and once I am finished, I hope to write a full review.

One idea put forth in TMoF is that the business of governments is theft. Theft, in economic terms, is often mistakenly thought of as a zero-sum game: a thief steals $2 from you resulting in a $2 benefit for the thief and a $2 loss for you, thus $2 - $2 = $0. Theft creates no value. However, because there are costs to theivery, the equation is actually a negative sum game: the benefit to the theif is not the full loss to the victim; therefore, the equation is more like:

$2 - $2 - $1 = -$1. This is a negative-sum game.

Governments engage in taxation and subsidization. Taxes are first levied on the population and then redispersed into a subset of the population. Assuming there is no cost to the government, the transaction of taxation/subsidization is a zero sum game. Since there is at least some administrative cost to the government, the transaction goes from a zero sum game to a negative sum game.

It gets worse. Because subsidies are rents paid to individuals who meet certain criteria, people are incentivized to secure these rents by attempting to meet the set criteria. The benefit of rent-seeking is the net amount of the subsidy after the costs of securing the subsidy are deducted. If the subsidy is $100, you or I would be willing to incur costs of up to, say, $99 to secure the subsidy. Therefore, the following happens (in a mathematical sense): you are taxed $100, the government redistributes $98 (after taking an administrative cut of $2) to individuals who incur costs of $97 to secure the rent. Thus, the resulting economic impact is -$100 + $98 -$97 = -$99.

Said simply, governments reduce overall wealth because they, just like thieves, create negative-sum games.

Commence arguing.