The Hidden Costs Behind Every Government Program

When the state constructs a new bike lane, school, or begins a new space mission, the natural inclination of the majority is to cheer this new endeavor as progressive. We possess one new structure or have accomplished one new task than before; society has moved forward, the thinking goes.

The state is responsible for truly technically impressive or beautiful accomplishments like the Apollo missions, the Moscow Metro, the Palace of Versailles, etc. that most would agree clearly produce benefits for society.

Confronted with these concrete and widely celebrated examples of government accomplishments, how can libertarians deny that state action is sometimes a benevolent force in society?

Opportunity Cost

Leaving aside moral considerations and focusing on utilitarian considerations, the answer revolves around opportunity cost and demonstrated preference.

Opportunity cost is the benefits that could have been obtained through the best forgone alternative to an actual employment of resources. If a slice of pizza costs two dollars, and a hamburger costs two dollars, then the opportunity cost of a slice of pizza is a hamburger, and visa-versa.

The resources of any given country are scarce, and the “economic question” that must be solved is, how should the limited resources available be applied to best satisfy people’s subjective preferences?

Even if, for example, the state builds a library that is beautiful, the books are neatly organized, the librarian is competent and cordial, the temperature is well-regulated, and the computers are state of the art, we still need to hold our applause.

In order to be able to celebrate the employment of resources by the state in a particular application, it’s necessary to consider the alternative uses that could have been possible with those resources. If there exists an alternative option that could have better satisfied subjective preferences, then the actual employment, even if it produced benefits, was a relative failure.

Voluntary Exchange and Demonstrated Preference

Now the question is: by what standard can it be determined which employment of resources is best, relative to the subjective preferences of consumers, in any given case?

In instances of voluntary exchange, every exchange is not only ex-ante mutually beneficial, it’s ex-ante the best employment of the resources being exchanged, from the perspectives of the respective property owners. This is called demonstrated preference, which Rothbard explains to mean, “simply this: that actual choice reveals, or demonstrates, a man’s preferences; that is, that his preferences are deducible from what he has chosen in action.”

For example, if Smith sells Jones a lamp for twenty dollars, we can know that of all of the alternative uses of the lamp Smith had available to him, such as using it to read, using it as a decoration, keeping it in storage, etc., selling it to Jones for twenty dollars was his most highly preferred option, because that is the option that he freely chose.

Likewise, Jones thought buying Smith’s lamp was the best of all possible uses available to him of his twenty dollars. Otherwise, he wouldn’t have executed that option.

Involuntary Exchange

On the other hand, sometimes exchange, production, and consumption are not conducted as a result of the voluntary decisions of all of the owners of the property involved, but rather under compulsion of physical force. Then, in the absence of demonstrated preference, it can never be known whether the act benefited any of the involved parties or caused them harm, let alone that it was the most beneficial employment of resources for every party involved.

Given that usually countless options are available to actors at any given time, if would be an astronomically unlikely coincidence for the state to happen to dictate what consumers would have voluntarily chosen to do at a particular moment in time anyway. In this way, it’s metaphysically possible for state action to be equally ex-ante beneficial to all parties involved as voluntary exchange, but never more.

Fundamentally, acts of taxation and regulation, due to their involuntary nature, sever the link between consumers’ subjective preferences and the way in which their resources are deployed.

The Seen and the Unseen

Behind every million dollar tax-funded high school, for example, there hides a million dollars’ worth of other goods and services that these taxpayers never got to purchase, but would have preferred over the high school. Perhaps these goods would have been a million dollars’ worth of flowers, food, board games, medical services, books, cutlery, home renovations, farming equipment, computer software, and math tutor services.

There’s nothing stopping taxpayers from funding a high school on their own and sparing themselves the deadweight loss of bureaucracy. It really is simply the case that if consumers want a high school, they can pay for one, and as private high schools demonstrate, they often do.

However, the state using taxation to build a particular high school can only divert funds from more highly valued opportunity costs to the lower ranked high school. Otherwise, no compulsion would have been necessary. Despite this undeniable and simple logic, in the U.S., tax-funded expansions of the government K-12 education system, among other interventions, are widely celebrated.

In terms of public opinion, part of the explanation is that the high school can be seen and cheered because it actually exists, whereas the lost opportunity costs, by their very nature as forgone alternatives, never occurred, as so mourning their loss requires abstract reasoning and imagination on the part of the public.

Frédéric Bastiat described this phenomenon in his classic work “That Which is Seen, and That Which is Not Seen.” Conspicuous state projects win the public relations war over quietly letting people spend their money as they actually wish to.

The interstate highway system, the Louvre, and the Sixth Fleet may be impressive, but they’re not cause for applause. Relative to the preferences of the taxpayer, no matter how grand and awe-inspiring a project the state completes, it will always and everywhere ex-ante fall short of voluntary exchange.