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The free market case AGAINST the Albert Park Grand Prix

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Here is an article by the brilliant Australian free market economics writer, Gerard Jackson, which explains why free market supporters should be opposed to the Grand Prix . . .

Melbourne's Grand Prix: another economic fallacy

By Gerard Jackson, Monday 3 September 2007

Government subsidised car racing, international conventions and sporting extravaganzas all have one thing in common: Their supporters claim that these activities promote economic growth. These people obviously cannot distinguish between consumption spending and investment spending.

This is made clear by their stock reply to critics of these subsidies that the events will stimulate business, create jobs, encourage tourism and increase government revenue.

In other words, the subsidies will pay for themselves.

But if this is so, why don't our so-called greedy capitalists bankroll them and keep the profits for themeselves? This kind of phoney economics is the stuff of which "magic puddings" are made. Unfortunately no one in Australia's establishment rightwing that I know of has pointed out this fact.

Economics is an inherently difficult subject that involves complex chains of reasoning. This is probably why certain hoary fallacies are always being resurrected, albeit dressed in different clothes.

Sometimes the new clothing is so alluring that it easily deceives the layman, and frequently those who should know better.

What we have here is two of the oldest fallacies in economics:

  • the forgotten-man fallacy and
  • the consumption-drives-the-economy fallacy.

Part of the problem is the old one of economic advisors and commentators failing to take into account secondary consequences.

A bad economic advisor only considers the immediate, visible and direct consequences of an economic decision. He does not enquire into first principles or investigates the long run results of the decision. He can only chant that "in the long run we are all dead". Well, we're not.

Then we have our forgotten man problem.

If the government spends $100 million on, for example, Melbourne's Grand Prix, this expenditure must ultimately-come from the taxpayer, our forgotten man.

Therefore, for every dollar the government spends on the Grand Prix a dollar must be taken a way from a taxpayer. $100 million expenditure means that taxpayers will have $100 million less to spend on the things they value most. It follows that there can be no net increase in spending.

However, critics of this view will point to the visible effects of the expenditure. They will count the number of jobs it created, the payrolls it generated. The amount of materials that have been used and the number of contractors that were hired will be cited as evidence in support of the social and economic merits of the race.

Finally, the government's advisers will add up the total amount of expenditure generated by the Grand Prix and present this as irrefutable proof that the expenditure has added to the state's economic welfare.

This, as I have already pointed out, is a glaring fallacy. All that the government has done is divert $100 million of spending from the pockets if individuals to its own pockets. This process does not add one cent to economic welfare; at best it merely alters its composition. That many think otherwise is due to their failure to recognise indirect and secondary consequences.

What are some of these consequences?

They are all the goods and services that would have been produced and consumed (not to mention forgone savings) by those from whom the $100 million was taken. This must also mean that the jobs that were needed to produce all those goods and services have been destroyed. These sacrifices are what economists call opportunity costs.

We have now reached the consumption-drives-the-economy fallacy.

This is one of the most persistent fallacy's in economics. It was one that the classical economists thought they had permanently laid to rest. However, Keynes gave it a new lease of malign life in his The General theory of Employment, Interest and Money (1936).

Put simply, the Keynesian view is that the economy is driven by consumption spending. This is nonsense.

It is savings that fuel the economy and it is entrepreneurship that drives it. Without savings there is no investment. Without investment there is no real growth.

As for consumption, it is the sole object of production. If we wish to increase future consumption, we must reduce current consumption, or at least its rate. Unfortunately it is not generally realised that consumption only takes place at the expense of investment.

If consumption is the force that drives the economy one would expect consumer spending to exceed business spending. It does not. As a proportion of total spending, business spending greatly exceeds consumer spending. This truth is concealed by the fact that GDP, a value-added approach, grossly understates total spending. Only savings and investment can raise a country's productive capacity and thus total demand, not consumption.

The Grand Prix is obviously pure consumption. It can add nothing to investment

As already pointed out, by using public money it diverts funds from investment to consumption. Hardly designed to raise Victoria's living standards.

If bread and circuses are all that is needed to promote economic welfare the Roman Empire would never have suffered economic decline.

The absurd notion that you can make a country or a state prosperous by robbing Peter to pay Paul was thoroughly discredited by John Stuart Mill in an essay he wrote in 1829 and from which I shall quote at length:

The utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained.

Taxes are not now esteemed to be "like the dews of heaven, which return in prolific showers." It is no longer supposed that you benefit the producer by taking his money, provided that you give it to him again in exchange for his goods.

There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasoning of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow: that the man who steals money out of a shop, provided that he expends it all again at the same shop, is a public benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman a fortune.

(John Stuart Mill Essays on Economics and Society, University of Toronto Press 1967, pp.262-3)

It should be obvious that there is no economic justification for Victorians — or the citizens of any other state or country — to be taxed to support sporting events.

Let supporters of these events find the money to fund their own pleasures and let their fellow citizens do with their own money as they see fit.

(c) 2007, Gerard Jackson
Reproduced with permission.