Imagine Ted wants to start his own company to, say, build and sell televisions. Ted rents the land and factory, hires workers, and acquires the capital goods and other inputs as necessary. Months later, he starts putting his televisions up for sale.
To make a profit, of course, Ted needs to sell the sets at a price higher than the amount he spent making them. At this point, however, he realizes that price is above the going market rate for comparable televisions. Other manufacturers are able to better economize in their production process, enabling them to sell their sets at lower prices than Ted.
Now Ted is confronted with two main options: try to convince consumers his product is worth the extra price they pay, or lower his price and suffer a loss, eventually going out of business.
Regardless of what Ted decides, he is not dictating the outcome. Consumers are. Ted may own the company that built the televisions, but it is the consuming public, through their purchasing decisions, that determines if his business succeeds or fails.
That’s how a free, competitive market economy works. Business CEOs aren’t in charge; consumers are. When it comes to shaping the economy, free markets are the best way to give power to the people.
But now, let’s say Ted doesn’t want to accept either of the above-outlined options. He won’t bow to the realities and preferences of consumers. Instead, he invests in lobbyists to lobby the state government to provide his business with an “economic incentive” grant (which amounts to a taxpayer subsidy) or create a specific tax exemption for his business.
All too eager to take credit for “creating jobs,” the politicians agree to this handout. The measure allows Ted to lower his price by compensating for the lower revenue with government favors.
Thanks to this government-granted financial relief, Ted’s company stays in business. It continues utilizing scarce resources like raw material, capital goods, land, and labor to build televisions. But this doesn’t change the fact that others can do what he does better and more efficiently.
Without intervention and favors from the political class, Ted’s continued command over these scarce resources would have been released to someone else who could more efficiently use them to build and sell profitable products.
In short, Ted has skewed the economic system in a way that benefits him at everyone else’s expense.
How long is this charade supposed to last?
At some point, politicians will face a choice: extend the government privileges to keep propping up Ted’s television business, increase restrictions and punishments on his competitors, or let market forces (expressed through consumer preferences) once again direct the economy by eliminating the government privileges Ted’s company receives.
Let’s say the politicians eliminate Ted’s subsidy and tax break after 10 years. Forced once again to compete on a level playing field, he is put out of business. So what was accomplished over those 10 years? Ted benefitted, no doubt. But at whose expense?
Naturally, Ted’s competitors were harmed due to his unfair political privileges. Some were forced to downsize, and others were put out of businesses completely. Jobs lost, lives destroyed.
Capital goods and other inputs were used in economically wasteful ways because they were consumed in Ted’s inefficient production process. These resources could have been used more efficiently elsewhere, freeing up more resources to be deployed, satisfying more consumer desires. Society is made poorer as a result. Ted’s benefit came at the expense of many.
Moreover, Ted’s company’s existence during those 10 years was the result of political decisions, not the decisions of consumers. The power of the masses to shape the economy toward their preferences and determine which entrepreneurs succeed or fail is transferred to the political class. Economic power is shifted from the many to the few.
Narratives like this should jump immediately to mind every time you see a ribbon-cutting ceremony with politicians taking credit for “creating jobs” with yet another targeted corporate subsidy or tax carve-out. Couched in pleasant-sounding terms like “economic development,” such government intervention and favoritism reward the politically connected few at the expense of the many. Free markets, and not government intervention, are the best recipe to give power to the people.