… is from pages 180-181 of the 2016 Mercatus Center re-issue of my late colleague Don Lavoie’s excellent 1985 volume National Economic Planning: What Is Left?; Don here discusses the many proposals floated in the mid-1980s – from the left (by the likes of Robert Reich) and from the right (by the likes of Felix Rohatyn) – to revive in the U.S. the Reconstruction Finance Corporation (RFC) as a means of ‘strengthening’ America’s economy through government efforts to ensure that ‘important’ industries thrive:
In all of this literature one finds many more suggestions of potential expenditures of money by the new RFC than of possible sources of revenues. It has to be borne in mind that any argument for offering subsidies in the form of cheap credit to some favored industries, whether old or new, is also an argument for penalizing other (possibly unidentifiable) industries.
At any given time an economy has only a limited supply of investment funds to allocate to its various possible production projects. In a free credit market entrepreneurs have to compete with one another to discover possible projects in order to secure future command over such funds. To the extent that government agencies disperse favors in the form of cheap credits, the competitive discovery process is subverted and politically favored projects succeed at the expense of others that may have been more economically efficient.
DBx: Show me an instance of government force used to swell the sales, profits, or domestic employment levels of some industry or firm and I’ll show you funds forcibly diverted from some other uses that likely would promote faster economic growth; I’ll show you also politically influential cronies. And I’ll show you also a third thing: economically naive and flawed arguments deployed in attempts to justify this forcible misallocation of resources.