There is a great fallacy in the belief that Government is “responsible” for and actually “runs” the economy. Undoubtedly, the best of socialism seeped into market economies in the form of welfare state. Most modern day government policy, however, is directed towards promoting laissez-faire, free market, competitive environment that allows market forces to operate at the most optimum level.

While the ideas of soviet-styled command and control economies ran out of steam with the collapse of communism, governments in developing countries, surprisingly continue to give the impression that they can direct the fortunes and failures of workers, managers, investors and entrepreneurs.

One implicit assumption that they make is their ability to “stimulate” the economy, as if the economy was an engine that simply needed a different setting for its carburetor.

Interestingly, this presumption usually gives the incumbent and its political challenger substance for debate and undeserved criticism. All failings become the focus of the challenger. Why did the incumbent not do enough to stimulate the economy? Why did he not press the right economic levers that he claims to hold?

Looking for resources to stimulate the economy

Russell Roberts, a research fellow at Hoover institution at the Stanford University, recounts a story that helps explain the problem with these views on the economy. Imagine coming across a young boy who is standing at the edge of the shallow end of a swimming pool.

He holds a bucket in his hands and he looks crestfallen. What’s wrong, you ask. Well, he explains, I’m doing a science experiment and it’s not working. What’s wrong? For the last hour I’ve been emptying water into this pool with this bucket. But the water level hasn’t changed a bit.

The pool hasn’t gotten any deeper. It’s a big pool, you explain. A few bucketfuls of water aren’t going to have much of a visible effect. The boy redoubles and re-triples his efforts. A week goes by. You come back to the pool and he looks no happier than he did before.

What’s wrong now, you ask. I’ve been doing the same thing eight hours a day for a week and I still don’t see any change. Is there a leak in the pool, you wonder? No, he says, no leak. I checked that out.

The boy shrugs his shoulders and gets back to work. You watch as the boy goes to the deep end of the pool, scoops up a bucket of water, walks the length of the pool and empties it into the shallow end.

What would you tell that boy? It would seem fairly straightforward to explain that taking money from your left pocket and putting it into your right pocket doesn’t make you any richer. So it is with water in the pool. The total amount is unchanged.

But if it rained each night of the boy’s efforts, he might actually come to believe that moving water from the deep end to the shallow end actually leads to making the water deeper. You might find it difficult to make your case.

The French economic pamphleteer Frédéric Bastiat first explained the phenomenon. “When looking at an economic system as whole, it is not enough to look at what is seen – the pouring of the water. You have to also look at the whole system and the constraints that may bind it.”

He himself used the example of a broken window. “Repairing the window stimulates the glazier’s pocketbook. But unseen is the loss of whatever would have been done with the money instead of replacing the window. Perhaps the one who lost the window would have bought a pair of shoes. Or invested it in a new business. Or merely enjoyed the peace of mind that comes from having cash on hand. The repair of the window is seen. The loss is unseen and therefore easily goes unnoticed”.

So it is with most actions of the government to “stimulate” the economy. It is easily forgotten that the resources to do the stimulating must come from somewhere like the water at the deep end of the pool.

Genuine economic growth takes time

The lesson of the broken window usually begs another question. If building stadiums does not enrich a city and if government spending generally doesn’t stimulate the economy, what does? What can a city do to increase economic activity? What can a government do in the face of rising unemployment?

The pace of modern life creates impatience with delay. We want everything yesterday if we can have it that way. Surely there is some policy lever, some economic button to push that can speed things up. But the lesson of the swimming pool and the broken window is that the fundamental constraints surrounding the system make it very difficult to change events in the short run.

A Government can no more stimulate the economy in the short run than you can make a child grow a foot in a week. Genuine growth takes time. The most a Government can do is to help create an environment for that growth to take place by unleashing the creativity inherent in a nation’s people and those they trade with in other countries.

Rearranging resources will not stimulate the economy, even in the long run. But that is not to say that there is nothing a mayor or a Prime Minister can do to improve the economy.

A city can always improve how it runs its schools, polices its streets or picks up its trash. It may decide that some of these tasks can be done more cheaply or effectively by private organizations or left to the private choices of the marketplace.

Appropriately designed tax cuts or tax reforms allow a city or a nation to finance its activities in ways that encourage wise and beneficial decisions. Any of these improvements will make the city a better place to live and will lead to economic growth. But all of these changes take time.

Economists, such as Russell suggest that, we as citizens should be a little more skeptical of claims of blame when things go poorly or bragging rights when things go well. At best, we should expect a little less of our politicians in the short run. We will perhaps find a little more contentment with their performance.

<I>“The most a Government can dois to help create an environment for that growth to take placeby unleashing the creativity inherent in a nation’s peopleand those they trade with in other countries.”</I>

<B>Baljinder Sharma

[email protected]</B>