'TANSTAAFL' can explain how the welfare state crumbles 

“TANSTAAFL” -- the acronym made famous by Robert Heinlein meaning “there ain’t no such thing as a free lunch” -- quite succinctly explains what’s happening to the world economy today. Stock markets are volatile at best, the Eurozone is teetering on the edge of collapse, debt-to-GDP ratios are rising everywhere, and good old-fashioned wealth creation has stagnated. The common solution offered by government to these problems is, of course, yet more government, either via regulation, taxation or handouts. Unfortunately, these are the bases of a welfare state, and it is the welfare state that is causing the issues.  No matter how pure one’s motives, or earnest one’s intentions, in order for the state to hand out free lunches, it must take them from lunch producers. After awhile, the producers quit producing, and the state has nothing to hand out. That’s about where we are now.

This isn’t a terribly difficult concept to understand, yet one that is apparently easy to ignore. Governments everywhere operate on the rather childish belief that people will be better off if those governments simply give them stuff. That belief, however, can only be maintained by studiously ignoring the plain fact that governments don’t actual produce any “stuff” -- people do. As I wrote a couple of weeks ago:


In truth, there is never a way to pay for expanding the welfare state because, while wealth creation isn’t a zero-sum game, the population of wealth-creators is; after all, not just anyone can create electricity, telephones, heart medications, MicroSoft, Wal-Mart, or even pencils without some know-how, sweat and inspiration. If that were possible, then wealth creation could never be retarded, regardless of the impediments. Some wise, noble, and completely selfless individual would always emerge to drive the economy forward. Alas, self-interest trumps all, without which wealth-creation is for the horses.

No matter how ingenious the plan, or divine the motives, the only way for governments to fund the welfare state is to tax the wealth-creators. As even the most Marxist of intellectuals knows, if you want less of something, then tax it. This is why cigarettes are levied against in ridiculous proportions, and why carbon taxes are considered (by some) to be the savior of our planet. Well, taxing wealth-creation works exactly the same way: tax it more, and you will get less of it. Which leads to the inexorable conclusion that, as the governments of the world sink deeper into fiscal crisis, the looters will be coming en masse.

Another way of saying this is that wealth is not created by governments, but by voluntary exchange of labors and services, the engine of all wealth creation which is fueled by individual pursuits of self-interest. In contrast, governments only create more government and are fueled by taxing their citizen’s productive efforts. They can “spread the wealth” to some degree without completely undermining the engine’s workings, but since left to their own devices all they do is grow and hand out more stuff, eventually they will consume that productive capacity through welfare.

To be sure, I’m not suggesting that having social safety nets provided through government is completely incompatible with wealth creation continuing apace. Even libertarian guru F.A. Hayek recognized that social security and free markets can happily coexist. But there are limits.  Governments that continually expand the welfare state destroy free markets -- i.e. voluntary exchange -- and the wealth creating capacity that accompanies them. And that is exactly what we are witnessing today.

As Greece staggers through its austerity measures, the Euro faces imminent collapse, and the American economy is squelched by incomprehensible public debt, one thing is certain: the welfare state is the weight dragging it all down. Whether it’s money thrown at corporations deemed “too big to fail” or fourteen months of wages for twelve months of work, it all comprises a voracious welfare state with no means to pay for itself. Taking from producers to give to non-producers merely leads to less and less production overall, and shrinking wealth.

In other words, TANSTAAFL.

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Michael Wade

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