The Cost Of Ignoring Opportunity Cost
Few intellectuals have articulated the virtues of the free economy as lucidly and persuasively as 19th century French economist Frédéric Bastiat. Bastiat is perhaps most famous for his “broken window fallacy,” a classic parable illustrating the concept of opportunity cost. Let’s suppose that a shopkeeper’s window is broken, which requires her to hire a repairman to fix it. Those who fall prey to the fallacy argue that the window breaking should be considered a welcome development. After all, the repairman has earned more money than he otherwise would have and he will subsequently spend this on other products and services. This will marginally increase the revenues of other businesspeople as well.
But we must not ignore the shopkeeper’s opportunity cost of fixing the window, namely those products and services that she had to forgo. The businesspeople selling these forgone items take a hit as a result of the broken window.
I was reminded of all this while reading a recent report from goodjobsfirst.org. One section outlined the subsidy programs offered to incentivize private enterprise to move from Kansas to Missouri. The Show-Me Institute’s Patrick Ishmael and Michael Rathbone have expressed concern about such programs over the past few months (here and here). In 2012, Freightquote moved its headquarters from Lenexa, Kan., to Kansas City, Mo., which landed the company $64.3 million in tax incentives. In 2011, North American Savings Bank received almost $6 million in subsidies to relocate to Missouri. Velociti benefited from $1.6 million in corporate welfare for moving to Riverside, Mo. The list goes on . . .
Such programs are defended on the grounds that they bring much-needed jobs to the state, but one cannot ignore the means by which they are financed. The government is not an exogenous entity, magically creating wealth out of nothing. (Trillion dollar coins notwithstanding.) To provide anything, it must first take from others. This confiscated wealth constitutes revenue that would have otherwise been spent, invested, or saved in the private economy. Accordingly, it is not a stretch to contend that the state creates jobs only by means of destroying them. Bastiat’s sage advice unfortunately seems to have been lost on many of our public officials.