Growth Capitalism
Back To Introduction
Chapter 3
The Role of Government
James Adrian
First Principles

      In order to be consistent with Growth Capitalism, a state must allow private property and private-sector markets. Laws must be enacted through a democratic process, and the market principles set by government must be stable. This requires a constitution - a collection of fundamental laws that cannot be changed easily without the consent of the governed. In addition, the role of government with regard to the private sector must be that of an umpire or referee rather than that of a participant or contestant.

      Government sets the rules of ownership and commerce for individuals and private-sector organizations. It enforces laws and adjudicates disputes. Its impartiality is critical to its credibility; and the impartiality of government is critical to justice.

      If innovation is to improve the lives of citizens over time, private-sector development of goods and services must rely on fair competition; and it must rely especially on the absence of competition from government. If capitalism is to be perfected to serve all citizens optimally, government must strictly refrain from favoring one lawful private sector activity over another.

      The impartiality that is so critical to justice and fair competition is not entirely available under communism or in a system of democratic socialism. These systems reserve the right to establish a government-owned enterprises such as steel mills, lotteries, and services of any kind. A government that runs a lottery will resist licensing a not-for-profit lottery, whether that lottery provides a better deal for the players or not. A government that runs a steel mill will excessively regulate private sector steel mills in the interest of preserving its own steel-mill revenues. Investing tax revenues in businesses in order to increase government revenues does not benefit the tax payer. Instead, it stifles part of the economy and reduces tax revenue through a reduction in investor and worker earnings.

      There must be an absence of government ownership of business entities, and an absence of government use of tax revenues to invest in activities designed to increase funds controlled by government. Government services that compete with or displace commerce in the private sector must be prohibited.

      Any enterprise must be entirely within the government or entirely within the private sector. There must be no quasi-governmental organization. Private sector organizations must not receive financial assistance from the government.

      Regardless of the form of government, if the distinction between the private sector and government is ignored, then government will tend to become more restrictive, intrusive, and controlling as generations come to pass.

Monopoly and Huge Entities

      Preventing and shutting down monopolies is a responsibility of government. The overall productivity and prosperity of a country is adversely affected by monopoly control of the availability or price of any product or service. Capitalism, as a means of doing business, is typically blamed whenever this government responsibility is neglected. The same misplaced blame happens when organizations are allowed to become too big to fail. Organization that are so huge that their failure would hurt innocent customers, vendors, and investors, are not responsibly regulated. Governments need to be held responsible for fostering absurd private-sector concentrations of market power. Some fraction of a markets yearly production must be set in each industry as a limit on the market influence permitted by any one organization.

Financial Instruments

      The regulation of banks must include the separation of investment banks from all other kinds. Financial instruments sold to the public or to businesses, including stocks, debt instruments, and derivatives, must be regulated. In the late 1900s and the early 2000s, failure to regulate large and widespread secret contracts involving derivatives produced enormous economic upheaval and massive losses to individuals. The terms of such contracts must be fully disclosed to the government. This would greatly reduce criminality, accelerate innovation, make markets more stable, and make market crashes dramatically less likely.

Honest Money

     The principle job of any national central bank must be to regulate the money supply. It must be owned by the people through their government and must not be organized for profit. Regulation of the money supply must maintain the value of the currency at a constant level. Money must not be more scarce or more abundant as time passes, whether that interval of time is one month, one year, one decade, or one century. Both the intentional encouragement and discouragement of borrowing brought about by government regulation of the money supply inevitably misleads investors, benefits some groups in the short term, and hurts many. No other abuse by government is more responsible for cycles of boom and bust. These mishaps are so common and repetitive that they are incorrectly accepted as natural to capitalism and are said to be the business cycle. This is a complete fiction.

      The velocity of money is the frequency with which the monetary unit is exchanged (whether that monetary unit is the dollar, the peso, the yen, or any other currency). Optimism increases velocity and pessimism decreases it. I have long been suspicious of the fact that a hundred cities might decide to have themselves an economic downturn at the same time. Obviously, such coincidences indicate that these cities must be affected by factors that they share in common. There are two such factors that are famous - manipulation of the money supply and centralized reporting of financial conditions. If the money supply were controlled without governmental attempts to adjust the economy, and the degree of optimism were allowed to be naturally diverse (by decentralizing news delivery), stable and consistent growth would prevail.

Corruption and Defective Incentives

      Laws against clear corruption are necessary, but they are not sufficient. The wisdom that fully appreciates the natural consequences of incentives and disincentives must be applied to the creation and maintenance of procedures - especially where it concerns the duties, options, and powers of elected representatives. If this is lacking, decades can go by without the enactment of remedies fervently desired by the vast majority of citizens. The issue of term limits for representatives is an example. In the absence of an opportunity to occupy a higher office, most representatives want to hold their office for as long as possible. As a result, a majority of representatives never vote for limiting the number of terms they themselves may serve in a given office. This produces an additional difficulty. The representatives must spend much of their time seeking campaign funds for their reelections. In turn, that leads to an even bigger problem. The representatives accumulate policy obligations to those who contribute large sums to their reelections. This does not serve democracy.

      It seems clear that some people other than the representatives must decide how many terms are enough. In the United States, this problem is solved by article five of the U. S. constitution. The governments of the states are allowed to amend the constitution. In this case, an amendment requiring term limits would do the job. There must be some similar provision in the basic laws of any free society to address conflicts between the personal motives of the representatives and the wishes of the majority of citizens. The term limits issue is by no means the only issue requiring that conflicts of interest be addressed by less interested parties. Those who seek power are not often keen on the obligation to balance their budgets, or the obligation to make sure proposed laws are constitutional before voting them into law.

      In most countries, there is a need to more often utilize the referendum as a means of enacting laws that conform to the will of the people. Without such a mechanism, wealthy lobbyists will continue to have more influence than citizens.

      Secret agendas can be guarded against if there is never just one person at the top of a pyramid. As an example, I feel that the highest office would better be occupied by more than one person, or even twelve.

Income Taxes

      Income taxes must apply to individual earnings and not to the earnings of organizations.

      The influence of wealthy individuals tends to prevent taxes from being predictable, understandable, and fair. The tax laws must not be used to encourage or discourage any particular type of production or service. If tax laws are easily changed, they become legalistic and complicated. In such a case, very wealthy individuals end up paying little tax compared to most people. Tax laws must be spelled out in the national constitution. Attempts to make taxation progressive ultimately fail, as they have around the world, if the national constitution does not define them.

      Net income must be taxed at the same rate for every tax payer, regardless of the source of earnings. This would be fair to the average tax payer because it would neutralize the power of the wealthy to bias tax laws. This tax method is made progressive in the simplest way possible by not taxing individual earnings that are below that of 75% of tax payers as calculated in the previous year.

      Tax exemptions granted to charitable activities make government the judge of what may be considered a charitable activity. Such exemptions encourage these activities and not others. With one exception, tax exemptions must stop. Tax exemptions are not responsible for the continued existence of charitable activities, but they are responsible for many other consequences. The one expense that must be taken into account through a tax credit or exemption is the age-old expense of bringing up children. Otherwise, it is better to maximize the income of earners rather than to create selective incentives. The government must not be allowed to be an orchestrator of social conditioning.

      Net income is defined as the earnings which remain after subtracting the necessary expenses of causing those earnings. The one other expense that must be subtracted is the expense of caring for one's children.

      It is the adult individual who must be taxed and not the family as a whole. This practice eliminates any possible penalty for being married, as well as any tax advantage or disadvantage for being a member of any particular family structure or group.

Sales Taxes

      Sales taxes and value-added taxes must not exist because they are thoroughly without any adjustment for the wealth of the purchaser, and because they artificially slow the velocity of money in the private sector.

User Fees

      Charges from a municipality for the amount of water used by a home, commercial building, or other enterprise must be regarded as a user fee in the same sense as that of a fishing license. Individuals and organizations using services that others do not use and can only be offered by government must pay for those services as user fees. The cost of metered or otherwise individually consumed services must not be borne equally by those who do not use them or do not use them to an equal extent.

Local Taxes

      Law enforcement, fire protection, snow removal, road repair, and numerous other services are often wholly or partly paid through real estate taxes. Instead, each resident of a local municipality - not just owners of real estate - must pay for these services according to income in the same way that national taxes are paid, and not according to the estimated value of real estate owned in that locale. All of these resident tax payers need to be represented and must be permitted to vote on the way funds are spent. There must be no real estate taxes. The profit from the sale of real estate must be taxed as income at the time of sale. The initial cost of the real estate must be measured in inflation-free currency and subtracted from the sale price to calculate the profit. Losses incurred by a sale must be accounted for in the same way that national taxes account for income losses. Residents who currently pay no tax are nonetheless voters.