Milton Friedman, Adam Smith, and Other People’s Money

From an economic perspective, too much government spending is harmful to economic performance because politicians and bureaucrats don’t have very good incentives to spend money wisely.

More specifically, labor and capital will be misallocated because people in government generally are guided by political motivations.

By contrast, there’s a bottom-line incentive in the private sector to use resources wisely. This generates the most prosperity for society because the only way to earn income in a free market is to produce goods and services that other people value.

That’s sort of a macro perspective.

From a micro perspective, when government allocates money, you can only make yourself better off by taking from others. In a market economy, you make yourself better off by serving others.

In other words,enlightened self interest (you can even call it “greed” if you prefer) is channeled productively in a free market system, as Adam Smith observed several hundred years ago.

Now let’s look at a visual perspective, as illustrated by this image I saw onReddit‘s libertarian page.

Whoever put this together was quite clever to highlight the fact that people in the private sector generally buy in the top-left quadrant while people in government generally buy in the bottom-right quadrant.

And if you want to see the late Milton Friedman discuss this concept, here’s a video for your viewing pleasure.

[brid video=”37110″ player=”2077″ title=”Milton Friedman The Four Ways to Spend Money”]

I’ll simply add a few observations. One of the reasons I often compare market-oriented nations and government-oriented nations is to highlight how countries are more likely to become prosperous when most resources are allocated by private decisions rather than political decisions.

In other words, South Korea out-performs North Korea because its economy is largely driven by decisions in quadrant 1.

Just like Chile out-performs Argentina and Argentina out-performs Venezuela for the same reason.

P.S. This video on profit, narrated by Walter Williams, is a good addition to the insight of Smith and Friedman.

Written by Daniel Mitchell

Daniel J. Mitchell is a Senior Fellow at the Cato Institute, and a top expert on tax reform and supply-side tax policy. Mitchell’s articles can be found in such publications as the Wall Street Journal, the New York Times, Investor’s Business Daily, and the Washington Times. He is the author of "The Flat Tax: Freedom, Fairness, Jobs, and Growth," and co-author of "Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It."