Do government investments produce economic growth? Nonsense! - part two

The material is a continuation of THIS ARTICLE

Third, with this obvious truth in mind, we can also explain the apparent success of state investment in South Korea. The state’s intervention to invest simply coincided with a period of increased self-awareness of many people as economic actors, a growing desire in society for more entrepreneurship and innovation, and a growing acceptance of the social role of the entrepreneur and innovator. Indeed, immediately after the Korean War, the cultural influence of the United States in South Korea was very great. Within a generation, there were two significant revolutionary changes in the cultural climate of Korea: a change in the religious affiliation of a large part of the population (from almost 100% traditional religions to almost 30% Christianity) and a change in the attitude of many people towards the idea of business, money, entrepreneurship, trade, etc. The traditional Confucian and Buddhist views of money and wealth as “necessary evils” gave way to the European Christian view of the positive social function of business and entrepreneurship. Korea was changing its worldview long before the economic change began, and long before any investments were made in the economy.

In general, public investment has a negative effect on the economy, but in Korea, where a revolution in public opinion is currently underway, innovation and private initiative are so high that they neutralize and overcome the negative effect of public investment. (The situation is similar in Sweden for several decades until the 1990s.) Korea's economic success, therefore, must be attributed not to public investment - which elsewhere has failed categorically - but to this revolutionary change in people's thinking about the economy and business. Therefore, even without public investment, Korea would have achieved the same economic success as the Netherlands, England, Scotland, Switzerland and the United States have achieved without public investment under the same circumstances.

You can find more information about the importance of innovation and the changed attitude towards business and money for economic growth in Deirdre McCloskey's book, Bourgeois Dignity.

In short, it is not government investment that has achieved economic growth in Korea, but a changing public attitude towards entrepreneurship and innovation. Similarly, it is not building state-owned factories, but only innovation and entrepreneurship that can produce economic growth. When the state intervenes, it only discourages entrepreneurs and innovators.

Fourth, the irony in the above position is that it assumes that the factory is not a means of economic growth, but a consequence of economic growth. After all, in order for the state to invest in something, it must have accumulated resources. The question is, where will these accumulated resources come from? In an absolutely poor country, where there is no economic growth and no productivity, the state cannot accumulate any funds in any way, no matter how it tries. So in order to invest in a factory, there must have been some economic growth and growth of the resource base beforehand – either in monetary resources, or in human capital (someone has to work in this factory, right?), or in material resources, or in knowledge of production processes, and so on. If anyone doubts, let them create a state in Antarctica, where there is no population and no resources, and let them make state investments in factories. Let's see what kind of economic growth it will produce.

So, where will the state get these resources for investment?

One way is to tax its own population. That is, the country's economy must already have some productivity, some preliminary economic growth, for it to make sense to tax the savages along the Amazon because there is nothing to tax - there is no economic basis. The state can only accumulate investment funds from a population that is already productive, that has already achieved some economic growth even without state investment. Thus, state investment is only a consequence of previous economic growth, which could have continued without it, since it began without it. There is no need for state investment.

But on the other hand, if economic growth already exists for the government to tax, then private entrepreneurs and investors in the market already have an idea of what to invest in, and they are doing it successfully. Then—and this is important to understand—government intervention merely takes investment funds away from those successful private investors who have created economic growth, and directs them to activities of the choosing of bureaucrats who have neither the experience nor the knowledge nor the personal interest in any endeavor other than the regular receipt of a salary. Worse still, when politicians make these decisions, their immediate interest is in buying votes for the next election, not in the economic success of the factory. Quite directly and obviously, government investment not only does not help economic growth, nor is it the cause of it, but can only come from prior economic growth created by private investment, and acts only to take funds away from it, and to stop it.

The other way is to seek funds outside the country, from foreign lenders. In this case, the question is: What will make foreign lenders invest in a given country? No lender automatically gives its money without having studied the risks. If a lender is willing to invest in a given country, it is because there are already beginnings of economic growth there. If savages on the banks of the Amazon go to a banker and ask for a loan to continue their way of life as before, or to drink the money, they will not get a loan. In order for a government to receive such a loan, the conditions for economic growth must already be in place. In such a case, even without the state asking for a loan for investment, the world's bankers would invest in such a country anyway. There is no need for government investment.

Of course, some will object, today loans are also given to countries that cannot produce any economic growth. Greece, for example. But Greece is actually confirmation of what I said above, that government investment only destroys economic growth. Greece received loans for political, not economic reasons. Now bankers are discovering that governments do not produce economic growth, no matter how much loans they are given. That is, not only is there no need for government investment, but in the end government investment destroys the economy. The financial crisis looming over Europe and the United States is a good lesson in the inexorable economic realities of the world. Stupidity has consequences.

So, there is no need for government investment in factories to have economic growth. First, because the economy is not just factories, but a multitude of tangible and intangible resources, and factories are not even the most profitable of these resources. Second, because what produces economic growth is not the resources themselves, but the courage of the entrepreneur and the effort of the innovator; government investment produces neither entrepreneurship nor innovation, and therefore cannot produce any growth. Third, because even where there appear to have been positive results from government investment, in fact the results have come from a change in the mindset of the majority of people, despite government intervention. And fourth, government investment is only a consequence of prior economic growth, not a cause of it, and therefore all government investment does is take money away from private investors and channel it into areas that serve the interests of bureaucrats and politicians.

So how is economic growth produced?

Very simple: Should the creativity of innovators and entrepreneurs be unleashed?

How?

By allowing them to focus their efforts on producing new things, with better quality and at better prices?

How will this be done, and how will they be motivated to do it?

By eliminating government regulations that take time and effort, entrepreneurs are allowed to keep the fruits of their labor, efforts, and discoveries for themselves.

That is, the state should be removed from the economy, regulations and permits should be reduced to zero, and taxes should be reduced to zero. This is the only solution.

Everything else is utopia.

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