The Profit Motive Drives Government

[ad]When analyzing the State (government) it is often claimed that it has nothing to do with market. In a sense, this is absolutely correct: the State is coercion, force, and violent means whereas the market (in a fundamental way) is the opposite, as it is based on voluntary cooperation and freedom to associate. However, if we take on another point of view it should be fairly obvious that the size of the State is utterly dependent on a market-place incentive: the profit motive.

Of course, the State has no competition – actually, it prohibits competition. Also, it does not work in a market and it does not offer goods and services to customers who have the right not to pay for them. Also, the State isn’t known for making profits – it seems utterly inable even to balance the budget. In this sense, the State doesn’t even behave like a monopolist; even monopolists earn profits, which are maximized through utilizing the influence of the monopolist on the market (also known as “market power”).

It might not even be true that the officials of the State make profits, even though they are sometimes (or always, depending on your philosophical view on government) overpaid. The profits politicians make through accepting bribes (“campaign contributions” from special interests) aren’t really profits made by the State, so in no sense does it provide prosperity to its “shareholders,” the citizenry and those elected for office.

We might even ask: Has there ever been a State that has consistently balanced the budget or had excess funds at the end of the year? The answer is most likely no.

But I would still argue that it is the profit motive that drives the State, or rather that it is the profit motive of those who, according to the myth, control the State. It is the profit motive of voters that drive the State.

People in general seem to believe that the State is a good deal for them. Taxes are paid, but most people tend to think they get more benefits from the State than they pay in dues. In some cultures, like in the Scandinavian Jante based culture, this statement is equivalent to getting benefits for which someone else pays more. You are better off is if you are worse off but someone else is even more worse off.

Most people have adopted the illusion of somebody else paying most of the goods and services provided by the State, and thus they, relative to other people, come out as “winners.” This illusion is supported by the State, which often makes sure to have a system of progressive tax rates, meaning “the rich” pay higher percentages in taxes, while offering loopholes, rebates, and deductions effectively making the tax system regressive rather than progressive.

As my undergrad economics professor Ken Schoolland frequently reminded the class, “there has never been a tax system beneficial for the poor.” The reason for this is simply that the rich have the means to get professional help to find loopholes, and they also have the means to purchase influence through lobbying. And, which is an often disregarded fact, those elected to office are often both rich and influential – why would they tax themselves to have others reap the benefits?

But this illusion of who pays the taxes that finance the goods and services provided by the State seems literally impossible to do away with. People genuinely believe they are better off (or less worse off) than others because of the tax system. And since taxes means there is an enormous pool of resources managed by the State, there is plenty of reason to make sure the benefits granted are granted to you.

The incentive is thus not to lower taxes and also not to decrease State spending – it is to redirect spending in such a way that it benefits you (or to increase spending on the benefits you find most valuable). People in general recognize that a small tax cut for everybody means you get a little more money out of each pay check, whereas a small tax increase could mean you pay a little more but get a lot more benefits (assuming you receive the benefits, of course).

In this sense, it is the profit motive that drives the constant and increasing growth of the State. The individuals in the voting populace correctly identify the chance to make a profit while others (are forced to) pick up the bill. The profit motive, as those of us who are economists know very well, is a very strong motive power (whether it is expressed in monetary terms or not) and it fundamentally affects the political environment.

It is thus the profit motive of individual citizens, suffering from the illusion that benefits handed out by the State are actually to their benefit, that makes for a constant growth in the State’s powers and the size of its budget. It is the same profit motive that gives politicians the opportunity to seize power through outbidding competitors in terms of number and size of State benefits.

Politicians are therefore not guilty of how power politics has come to [not] work, even though they are of course guilty of their actions. The incentive structures or framework of rules making the political system what it is, is the product of individual citizens believing they are acting rationally: asking for [increased] benefits for which they mistakenly think somebody else will pay.

Without exaggeration, it can be claimed that this is the fundamental structure of all political systems of power: they always tend towards increased State budgets and promises of benefits.

It is easy to realize that the continuation of this logic, letting the system of politics have its course, eventually leads to a change of the meaning of taxes in society. From being a “necessary evil” increased taxes will tend towards meaning “increased benefits [at somebody else’s expense]” and thus from negative to positive. This is the case in extreme high tax States such as Sweden, where political parties can get elected through promising to raise taxes. The voting population in such societies have learned to directly associate “higher taxes” with “greater benefits.”

What drives people in such societies is the same motive power as in all people: to maximize utility. The profit motive is one of the human being’s most fundamental instincts; to maximize the outcome of one’s “investments” is a means for survival.

This is a major reason why political systems, like any system of power, are dangerous – to all of us.