Why Government Fights the Entrepreneur

Politics is boiled down to a bunch of people who want to make decisions about your life. Politicians leaning on the right typically want to determine what your personal life looks like. Politicians on the left typically want to determine what your financial life looks like.

Governments who are left such as any NDP party or the Trudeau Liberals, believe in the Marxist Labour Theory of Value. That is, the price of something is only determined by the labour required for its production and therefore higher prices or lower wages are exploitation. Therefore, you either trade labour for money or you don’t deserve your wealth. But Marx, and consequently the politicians that follow these theories, are wrong.

 

Fantasies, Fallacies, And Governments Role In The Economy

 

Following along in the general direction of Marx was John Maynard Keynes, who vehemently defended the idea that governments are obligated to spend money and go into debt if necessary to bolster an economy back into recovery. His writings, including his most popular 1936 work “The General Theory of Employment, Interest and Money“, spoke about the importance of interventionist fiscal and monetary policies to reduce the boom and bust business cycle. This interventionist theory is only based on hope and not on logic or principle. The business cycle is a natural ebb and flow of the needs of people and their nature as acting, rational beings and cannot be accurately predicted or controlled. Since the dawn of true interventionist policies, the boom and bust cycle has been set to a series of mismanagement, malinvestment and incorrect ideas and left us the burden of trillions of dollars of government debt.

Even Keynes recommended a paydown of debts when the economy recovered, but governments took his theories a step further. Instead of limiting spending to times of desperation for economic stimulus, politicians have now used deficit spending to fund pet projects, corporate welfare payments, and “investments” in the economy. Spending money by going deeper into debt is justified by the “best interest of the economy”, or “job creation”, but this is not the proper role of government, and remains in the realm of fantasy and hypotheticals. It also falls into the category of the fallacy of central planning as outlined in many of Nobel winner F.A. Hayek’s extensive writings on the subject. No central committee can ever find themselves in possession of greater intelligence than the balance of society, or ever hope to co-ordinate the exercise of the values and actions of millions of individuals operating both independently and simultaneously. Instead of small, intentional and temporary actions that Keynes intended, we have been left with an economy left on life support, permanently dependent on the fiscal stimulus of government.

 

Government Action Can Only Be Funded By Tax Revenue, Going Into Debt, Or Increasing The Monetary Supply

 

Simplified for the reader, the way our financial system works is money is created by a computer entry at the central bank to purchase assets such as bonds. These bonds are up for sale by either private or government entities. In the event the Bank of Canada buys a government bond, those funds are then disbursed through the transfer payment system and into the hands of Canadians who then spend them, and those actions stimulate the economy. In this way, the Bank of Canada takes responsibility for recovering the economy by growing its balance sheet. When the Bank of Canada sells those same investments, they are left with cash to take that money out of circulation. This action reduces the Bank of Canada’s balance sheet and takes stimulus out of the system. Of course, when government bonds are purchased, they are typically purchased for the long term; sometimes up to 30 years and are rolled over for an additional period.

Government action funded by tax revenue always faces a dilemma – take too little and rely on funding by deficits; take too much and cause people to change their actions drastically. This is in juxtaposition with reducing spending altogether. Albert Laffer commented on this dilemma further by taking the historical concept that increasing tax rates does not implicitly increase tax revenue. Scottish Enlightenment writers David Hume and Adam Smith also wrote about this 200 years before Laffer expanded the concept for modern-day politicians in 1974.

 

Politicians Have Been Long Attracted To The Demand For Easy Money

 

The easier money is to produce, the easier money can buy elections and re-elections. After all, “One of the great mistakes is to judge policies and programs by their intentions rather than their results” according to Milton Friedman. In this way, governments actively pursue spending money they do not have or perpetually increasing tax rates.

In their insatiable appetite for tax revenue, politicians keep seeking higher tax rates, introduce taxes for business owners and use divisive language to condemn the accumulation of capital as “unfair” or “selfish”. This is straight out of Marx’s handbook. Even with the misunderstandings of the Laffer Curve, governments understand that a 100% income tax rate would create ex-pats, and therefore attempt to strike a balance of reasonable tax rates. Having exhausted income tax levels except for the highest marginal rates (because taxes on “the 1%” won’t erode their voting base) they will seek ways to increase the tax on wealth such as potentially ending the primary residence exemption, or increasing capital gains rates.

Going back to the myths of Marx, many believed that a communist utopia could be reached over the long-term by demonizing capitalism to a point that the majority of society would shun the choice of entrepreneurship and become employees instead. In his book “Socialism Social-Democratic Style”, Austrian Economist Hans-Hermann Hoppe explains:

“And in accordance with common socialist beliefs, this tendency would, in turn, produce an increasingly uniform proletarian class consciousness which would lead to a swelling voter turnout for the socialist party”

Simply put, government policies that shift thinking to the left have a defined purpose; that of the “abolishment of capitalism as a social system based on private ownership” as Hoppe explains.

 

On Creating An Entrepreneur Friendly Environment

 

Today’s left-leaning politicians simply do not understand the ideas of creating an environment for attracting investment capital, let alone the benefits of private capital as the heartbeat of an economy. We desperately need a governance model of austerity, supporting the entrepreneur instead of attacking them, and reducing corporate welfare. Creating a reasonable and fair tax regime is a good first step to reducing the tax burden on society.

Nothing justifies the frivolous government spending of giving companies money to protect their balance sheet against losses. It creates mixed market signals and takes away the crucial learning entrepreneurs get from losses and profits without fantasy dollars propping up their balance sheets. Losses and profits provide feedback to entrepreneurs on what decisions have been good and what decisions have been bad. Good decisions creating profits that shouldn’t be impositioned (such as the clawback of the small business exemption rates in the 2018 Federal Budget) and bad decisions creating losses that shouldn’t be subsidized (such as billions of taxpayer dollars flowed to dozens of companies over the last 20 plus years).

 

And Creating A Tailwind For Saving Capital 

 

Knowledge gained by clear market signals, innovation spurred by the market, and sound money policies all contribute to a robust economy that can provide jobs for Canadians now and in the future. The next level is developing an environment that creates a tailwind instead of a headwind for people to save their capital for their future investment use to fund their projects or the projects of others. Keeping up the ideological attack against Canadian entrepreneurs and business owners will only send our economy on a downward spiral beyond any possible recovery no matter how much easy money you throw at it.

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DEVELOPING FINANCIAL INTELLIGENCE

The Wise Banker is devoted to bringing awareness and understanding to Infinite Banking and helping you unlock your financial potential.

© 2020 The Wise Banker. All rights reserved.