A key principle in understanding Austrian economics is seeing the inefficiency of government spending.
In an era of overbearing states and reckless fiscal policy, this principle must be emphasized repeatedly. Politicians might claim the best of intentions when dishing out funds for military defense, social welfare, and public works. Their civil servants might try to realize these plans efficiently and thriftily.
However, the very nature of government spending goes against sound economics because government does not subject itself to the rigors of the free market. The latter operates according to a system of profit and loss, which enables entrepreneurs to use market prices as a guide to invest their limited capital rationally. Those who do this satisfy their consumers and earn a profit; those who do not suffer losses that force them to overhaul their business model or close down.
Governments escape this efficiency test because of their ability to draw money from taxes, a seemingly bottomless well of capital. Knowing that they can always fall back on tariffs and the taxpayer, politicians are liable to mandate outlandish policies that bureaucrats carry out with appalling wastefulness. As the great economist Murray N. Rothbard notes, this phenomenon makes inefficiency “inherent in all government enterprise” (emphasis in original).
Among the starkest examples of government inefficiency in modern times is Joseph R. “Joey” Smallwood’s premiership of the Canadian province of Newfoundland (now officially known as Newfoundland and Labrador). Premier from 1949 to 1972, Smallwood was the most consequential statesman Newfoundland has ever produced, having been the driving force behind its joining Canada in 1949. A considerable influence in federal and provincial politics, he also built a substantial international reputation.
Smallwood’s chief goal was to modernize Newfoundland. The province was heavily reliant on its fisheries, whose outports often used antiquated technology and whose saltfish export trade was bringing in poor returns. Chronic unemployment had stalked Newfoundland for years. Most fishermen struggled to make ends meet, and there were few alternative means of employment. Ambitious young people, seeking a better life, were emigrating in droves.
Smallwood sought to overcome these difficulties through audacious government programs. The Canadian federal government had given the new province a cash surplus of approximately $45 million. Proclaiming that Newfoundland must “develop or perish,” Smallwood invested this money in new industries. In the 1950s, over a dozen manufacturing plants were established in Newfoundland, some built directly by the government and others having received loans.
At first, it all seemed quite promising. But as the commentator Harold Horwood remarks, Smallwood was ill versed in mathematics and had previously failed as a small businessman. He was therefore reckless with his finances even by the standards of government leaders.
As the Newfoundland and Labrador Heritage Website notes, some of Smallwood’s manufacturing plants relied on expensive imported raw materials, which virtually doomed them to economic loss. Even those that utilized local materials frequently struggled to find a secure market for their products since the province’s market was rather small and the Canadian and international markets were extremely competitive. Despite handsome government support, many of the industries folded quickly, taking with them much of Newfoundland’s cash surplus. Those that survived could provide employment only for a select few.
If a commercial company wished to stay in business after such setbacks, it would urgently have to rethink its commercial strategy. But Smallwood’s government could rely on taxpayer money for assistance. Thus, he continued to endorse poorly conceived development projects. In the late 1960s, for example, Smallwood supported the building of an oil refinery at Come By Chance. The result, the Heritage Website notes, was an economic disaster.
Although he cannot be blamed for the international 1973 oil crisis, the fact that there were already refineries in eastern Canada by this time prevented the Newfoundland refinery from becoming the economic miracle that Smallwood expected. It closed in 1976, having run up around $500 million in debt.
Another example is Smallwood’s establishment of a paper mill in Newfoundland. Because the island already boasted two paper mills, it was decided to base this third one on the mainland in Labrador. Labrador had the requisite forests, but as the Heritage Website points out, its territory was underdeveloped and key waterways were frozen for much of the year. These factors, which any half-decent entrepreneur would have spotted, made its construction ridiculously expensive—approximately $155 million. As one might expect, the venture proved to be economically unsustainable.
Smallwood’s modernization of the fisheries was also dogged with incompetence. For instance, in December 1949, Smallwood was conned by Icelandic fishermen (or men pretending to be Icelanders) who promised to breathe new life into Newfoundland’s fisheries if the government gave them money to purchase some modern herring boats.
Without properly checking their identities, Smallwood enthusiastically gave them a sizable $412,000. The Icelanders (or pretenders) acquired some obviously old vessels, caught a few token fish, and then disappeared—taking the government’s money with them. Smallwood never got these funds back. Indeed, as Smallwood’s biographer states, he lost even more money trying to recuperate part of his loss by selling the old boats. They remained unsold for three years until “a buyer . . . paid $55,000 for them—a sum he was able to afford by way of a government loan.”
Much more could be said about the failed policies of Smallwood’s government. Nevertheless, the evidence already provided illustrates well enough the incisiveness of the Austrian critique of government spending. Smallwood had good intentions, but as a government leader directed by political goals, he pursued projects recklessly and inefficiently. When they failed, he simply moved on, knowing that greater taxes could be levied to cover the debts.
Supporters of Austrian economics have protested the fallaciousness and injustice of this behavior for years. The fact that governments around the globe continue to act like this makes it imperative to continue such protests.