The government-as-business myth


As Wichita begins its implementation of the plan for the revitalization of downtown Wichita, stakeholders like to delude themselves that the plan is “market-driven,” that the city will make prudent use of public “investment,” and that the plan’s supporters really do believe in free markets after all. It’s a business-like approach, they say.

But government is not business. The two institutions are entirely different. Government cannot act as a business does — the incentives and motivations are wrong. Furthermore, as Ludwig von Mises taught us, government can’t calculate profit and loss, the essential measure that lets us know if a business is making efficient use of resources. Thomas DiLorenzo elaborated, writing: “There is no such thing as real accounting in government, of course, since there are no profit-and-loss statements, only budgets. Consequently, there is no way of ever knowing, in an accounting sense, whether government is adding value or destroying it.”

This lack of accounting for value lets politicians run government for the benefit of, well, politicians. John Steele Gordon explains in the Wall Street Journal: “Governments are run by politicians, not businessmen. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen.”

Not looking beyond what is immediate is an example of one-stage thinking that is prominent in government, as seen in Wichita economic development: And then what will happen?

But some refuse to accept the distinction between the two, insisting that just because an organization — say the Wichita Downtown Development Corporation — is entirely supported (except for a little private fundraising) by taxpayer funds, it’s not the same as a government institution.

The City of Wichita suffers from all the problems cited in this excerpt from Central Planning Comes to Main Street by Steven Greenhut, which appeared in the August 2006 issue of The Freeman: Ideas on Liberty. As our city moves away from development based on markets to development based on government planning, and as Wichita moves away from a dynamic free market approach to economic development towards political and bureaucratic management of our destiny, we can expect these problems to become more ingrained.

Problems with Incentives

By Steven Greenhut

Most city managers and economic-development officials that I’ve talked to fancy themselves as CEOs of companies, and they argue that what they are doing is no different from what private companies do: maximizing revenues. “Why wouldn’t a libertarian support what we’re doing given that you value private business and understand the importance of profit?” I’ve often been asked.

The answer is simple. Cities are not businesses. They take the tax dollars of residents and make decisions about land use that are backed by police powers. They do not operate in a market; they do not have voluntary stockholders. Despite the delusions of city managers, the city staff usually is not as sophisticated or as skilled as corporate staff, which means cities often get a poor deal when negotiating with rent-seeking corporations.

When cities insert themselves into the economic development game, either with carrots or sticks, they:

  • Shift decision-making from individuals to governments;
  • Take money from taxpayers and redistribute it to individuals and companies;
  • Undermine property rights and other freedoms;
  • Encourage a class of rent-seekers, who learn to lobby city officials for favors and special financial benefits;
  • Put unfavored businesses at a competitive disadvantage with those who are favored; and
  • Stifle political dissent, as companies that are dependent on the city for lucrative work become reluctant to speak their minds about any number of city issues.

Despite what city managers will tell you, the choice is not between economic development and letting a city rot. The choice is between central planning, empowering officials to decide which businesses are worthy of their help, and the good old free market, which lets free people decide which business should succeed or fail.

City officials like to be “proactive,” as they say, and help with economic development. There is something they can do. They can get out of the way, by lowering tax rates, deregulating, ending zoning restrictions, and eliminating exclusive contracts with utilities and developers. It’s not out of the question. The city of Anaheim is doing just that, with remarkable results.

Mackinac’s LaFaive puts it well in a 2003 article: “The best business climate is one in which government ‘sticks to its knitting’ and does its particular assignments well, at the lowest possible cost while creating a ‘fair field with no favors’ environment for private enterprise.”

Not a bad template. Sure beats a world of central planning, where city officials can choose who gets handouts and even who gets driven out of town.


One response to “The government-as-business myth”

  1. westie

    Government is now beginning to utilize depreciation in their accounting in some financial documents. Wow! How long has the private sector utilized depreciation? Depreciation is only the tip of the iceberg concerning the differences between political resource allocation and markets.

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