James d. Gwartney

Video:
The Economics of the Lego Movie
Some years ago it was widely believed that government planning and industrial
policy
(?)
provided the keys to economic growth. Economists Paul Samuelson and Lester
Thurow were among the leading proponents of this view, which dominated the popular media
and intellectual circles during the 1970s and 1980s. They argued that market economies faced
a dilemma: They would either have to move toward more government planning or suffer the
consequences of slower growth and economic decline. The collapse of the Soviet system and
the poor performance of the Japanese economy have largely eroded the popularity of this view.
Nonetheless, many still believe that the government can direct various sectors of the economy,
such as health care and education. However, given the incentives and information problems
accompanying central planning, this is unlikely to be the case.
More than two and a half centuries ago Adam Smith articulated the source of central-
planning failures, including those that arise from efforts to plan specific sectors (see the
quotation at the beginning of this element). Unfortunately for government planners, individuals
have minds of their own, what Smith calls “a principle of motion.” When individuals face
personal incentives that encourage them to act in ways that conflict with the central plan,
problems arise. When governments move beyond the protective function and begin to
subsidize various activities, operate enterprises, direct various sectors, and, in the extreme
case, centrally plan the entire economy, invariably internal conflicts will arise and living
standards will fall well below their potential.

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The record of government planning in different countries illustrates this point.
It is fraught with conflicts and internal inconsistencies:
The federal government of the United States pays some farmers not to produce grain
products, and at the same time, provides others with subsidized irrigation projects so
they can grow more of the very same grain products. Similar European Union subsidies
have resulted in surplus
(?)
production of many agricultural products, leading to the
popular expression “butter mountain.”
United States government programs for dairy farmers keep the price of milk high,
while government subsidizes the school lunch program to make the expensive milk
more affordable.
India’s food subsidy program tries to benefit consumers as well as producers. As a
result, India has accomplished the extraordinary feat of rationing grain to consumers at
artificially low prices, while simultaneously suffering excess supply, because farmers
are paid high prices. (Farmers are also subsidized via agricultural inputs—electricity,
water, and fertilizer—to the detriment of the environment.) The government has
purchased huge stockpiles of rotting rice and wheat, while the limited amount available
to consumers is allocated in ways that are corrupt and inconsistent with the stated goal
of helping the poor.
(79)
Around the world, countries spend $30 billion a year on fisheries subsidies, 60 percent
of which directly stimulates unsustainable, destructive practice. In 2012, the resulting
market distortion had a cost of $83 billion to the global economy.
(80)
In 2015 and 2016, the G7 governments gave at least $81 billion in fiscal support and
$20 billion in public finance each year for production and consumption of oil, gas, and
coal, while simultaneously extensively subsidizing wind and solar energy production.
In 2019, the United Kingdom was expected to spend €12bn in support of fossil fuels,
and €8.3bn in support of competing renewable energy sources.
Returning to India, a Comprehensive Action Plan to deal with pollution prepared by the
Environment Pollution Control Authority (EPCA) says that Compressed Natural Gas
(CNG) should not be promoted because it “is one of the major contributors of Nitrous

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Oxides and is also expected to increase Particulate Matter (PM1) in the air.” This
position is in direct opposition to the Central Pollution Control Board’s 42-point Action
Plan (2015) for Delhi, which required the city to indicate how it would begin to shift
public transport to a CNG mode as rapidly as possible.
In general, conflicting policies result from a fundamental tension between on the one
hand a system of market regulation that aims to put citizens and productivity in charge of the
economy and on the other a system of governmental rigging of the economy to benefit
politically favored sectors and firms.
Economic analysis indicates that extensive use of government planning will lead to
both economic inefficiency and cronyism. When government officials decide what is bought
and sold, or the prices of those items, the first thing that will be bought and sold will be the
votes of elected officials. When enterprises get more funds from governments and less from
consumers, they will spend more time trying to influence politicians and less time trying to
reduce costs and please customers. Predictably, the substitution of politics for markets will lead
to economic regression and, in the words of Ukrainian born economist Ludwig Von Mises,
“The worst evils which mankind has ever had to endure were inflicted by bad
governments.”
(81)

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