How Government Crowds out Private Investment

Investment capital is scarce, which necessarily implies that there is a trade-off between government bonds and other types of economic activity. Put another way, investing $1.00 in government debt ensures that the same $1.00 will not be used for private investment or goods and services. According to historian Stephen Davies, government spending will almost always (or perhaps always) be less productive than private spending. This is because government agents spend other people’s money on somebody else. Additionally, government spending operates outside the realm of profit and loss, making it difficult to detect whether or not resources are being wasted.

5 Comments

  1. Brian Phillips

    Inefficient as well as no incentive to spend money wisely.  What a terrible combination our current system has become.

  2. asexymind

    Government directed demand goes to cronies and builds incentives for cronyism. This crowds out and reduces incentives for private innovation – which leads to greater political rhetoric to create more government programs/demand…

  3. libertyiowa

    I disagree with the comment in the video that if you are spending someone else’s money on yourself, you are going to be careful. I think if someone is spending spending someone else money on themselves, that is when a person is least likely to be careful with it. 

  4. diypirate

    Has there been an experiment where individuals are given an imaginary sum of money and told to spend it on another person for them? 
    Example:
    Person A is given $100 from Person B and told to figure out how to allocate it in a way that is best for Person C (in this case simply a photo and a brief bio). How would that $100 be allocated?

    This is an experiment on where people think our money should be allocated on taxes. It is highly subjective but, is there a method or means with which people base their decisions? Can we standardize or average those decisions? 

    How would you allocate taxes if, you had no choice but to allocate them?

  5. Jake Olson

    I think what Stephen Davies means by “reasonably careful” when spending someone else’s money on yourself is that you are still going to try to satisfy your own wants. As opposed to spending someone else’s money on another person, you might not even know what their wants are.

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