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purchasing mining or office equipment, or whatever. A factory produces widgets that it sells for money that it uses to pay workers, purchase raw material and equipment, etc. An accounting firm sells a service, using the money to pay the accountants, purchase equipment, etc. Service firms of all kinds can profitably exist in any economy where there also exists a manufacturing base that ultimately underwrites the cost of these services. Together, production (mining, farming, etc.), manufacturing (cars, computers, etc.), and services (accounting, legal, etc.) form a synergy that keeps an entire economy afloat and working efficiently.

But wait a minute. Doesn't government supply a service, using people that it pays with taxes it collects from the consumers of that service? Isn't government part of this synergy?

Simply stated: yes, it is. A major key to the process, however, is the degree of input from each segment and the efficiency of that input. An economy that has no production or manufacturing, that consists only of services, cannot endure. There is nothing generating the underlying source of payment for the services, unless, of course, such an economy services another economy that does have a production and/or manufacturing base. Ideally, an economy will adjust so that the production and manufacturing base will balance the service sector, making everything work smoothly and efficiently.

Anytime a part of this system develops a significant inefficiency, the whole system suffers the consequences. Eventually, the inefficient element has to go, or it will drag down the entire system. For example, a manufacturing process that falls behind current technology will produce widgets that are either more expensive than gidgets, don't work as well as gidgets, or maybe are not even useful anymore, like chariot wheel spokes. If this manufacturer is subsidized with money extracted from the rest of the system, creating either an increasing but useless inventory of spokes, or tying up the money in the inefficiency of the manufacturing process, the whole system bogs down to the degree of this inefficiency. In effect, a percentage of every dollar produced in the system disappears, consumed by the friction of the inefficiency.

Fortunately, in real economic systems, chariot wheel spoke manufacturers eventually wither and die. They fall away from the whole, taking their inefficiency with them. Since this doesn't happen immediately, and since the effect exists at different levels in a whole bunch of industries and processes, every economic system has an inherent level of inefficiency that it can never overcome.

Government always adds to this inefficiency. It is inherent in the process. You cannot add a taxing entity to an economic system that consumes part of the collected taxes in overhead, and that supplies a delayed service worth less than the collected taxes, without adding a significant inefficiency burden to that system.

Learn more about this author, Robert Williscroft.
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