This article will be short but nevertheless very important. Some time ago we published The Time Preference Barrier as one of the multiple barriers preventing Libertarianism from surging and becoming main stream. Today, we are going to make reference to a related barrier which is even more important. However, the difference is that this barrier exists not in the mind of people, but in the actions of governments.
We have mentioned time and time again that Libertarianism and Austrian Economics are inextricably intertwined. This is so because in a Libertarian system there is freedom for everybody to do as he/she pleases with their property. As such, this naturally leads to an un-hampered market (i.e. a "free" market) which is the object of study of Austrian Economics. Therefore, this link also works in reverse. A market that is not free will prevent people to do as they see fit with their property, thus preventing the exercise of their Libertarian rights.
THE POINT OF VIEW
People have the tendency to look at issues from a political perspective. This is so because people have been indoctrinated into believing that a Democratic system is the best we can possibly have and therefore all solutions to current problems must come from within such system.
However, reality actually works in reverse. The impetus to alter political systems (i.e. to evolve politically) originate in economic debacles (see The Three Laws of Political System Change). Thus, as the engine of change is the economy, anything affecting the economy will impact the rate of political change. Thus, again, it is fair game to ask what is affecting the economy and in which manner.
The classic scenario is a country with economic problems. In such country most people look towards the government du-jour for answers. As answers are given but solutions fail to materialize, this very same process repeats itself ad-infinitum. Question, answer, failure… question, answer, failure… question, answer, failure… and so on…
This is clearly so because governments attempt to "manage" the economy and in the process they destroy the free market, which is an optimized system. Thus, governments can only achieve pathetic under-achievements.
Is this under-achievement that is a barrier on itself… although not a typical one. We have said in The Three Laws of Political System Change that a disastrous economy is a pre-requisite for political change. This view is looking at the problem for above and asking, how low it needs to go before something changes?
But this is not the only possible view. If we would to have shining examples of quasi-free-markets or near-free-markets or less-than-manipulated-to-economic-death-markets, these shining examples would illustrate the disastrous economic environments where everybody else lives. This view, on the contrary, is asking the question: why are we so low and they so high?
Thus, lacking an economic high as an example is also hampering the evolution towards Libertarianism. And at this point we need to ask ourselves, what is hampering such economic high, in addition to Central Bank action? The answer? Taxes.
Well… sort of.
We have explained time and time again that taxes are disastrous at a very large scale because they destroy capital and alter market's structure (see Government Theft - Taxes). But there is yet another way in which taxes harm the markets. This way is simply by preventing (through bureaucracy, regulation or taxation) free investment.
Think about it.
It does not matter where you live there is some sort of Retirement Funds either run by governments or private companies under heavy regulations or both. It is a well-known fact that such funds are typically and by far the largest pools or available money (i.e. capital). Yet, if you look at the investments they make, you will find them concentrated in Bonds or Income-producing Mutual Funds. Why?
On one hand it is because such funds need to be able to deliver funds to people when they retire. They need a forecastable and secure source of income. However, this is only true for a portion of their capital; what happens with the rest?
Well, here is where Tax Agencies step in. Such funds can't.
Invest in whatever they feel like it.
If you look at the various regulations in your country you will be very surprised to know that there are very strict limitations into what such funds may invest and how much. Let's be clear.
Most such funds can only invest into what's known as "Investment Grade Vehicles" (aka bonds and shares of big companies and big countries)… and that's pretty much it! Yet, this is incredibly retarded because if you bother looking at economic statistics, you will notice that, in general terms, the economy grows in the area of Small and Medium Size Companies… companies where such funds are not allowed to invest!
As a consequence of these limitations, the very entrepreneurs that are capable of lifting the economy for everybody… are prevented from doing so by… "taxation authorities"!!!
There are many excuses such as "the law" was written for your own good to force funds to invest in "safe" investments… or to force them to "stimulate" the economy or to "stabilize" Stock Exchanges… and so on. All for "the greater good" of course. The funny (or pathetic) thing is, that if you look at the funds that actually outperform everything else, they are chock-full of those "risky" investments!!!
How can those funds do so, you ask?
If you have the time (and such funds do have it), what holds is not the "risk" level of an investment but the risk-adjusted level of such investment. In other words, if you can stay in the market for longer terms, it always pays to invest in riskier vehicles! The trick is to stay in the market… which those funds can do. Of course, this is assuming that the government won't screw-up the markets… which is a losing bet at best.
But herein lies the problem. Should "tax authorities" stop messing around with investment limitations, then those investments would stabilize the markets making them much more stable and profitable!!!
This would, in turn, create far more positive economic conditions for everybody!
How many trillions of …. (insert your favourite hard currency here)… are essentially parked doing nothing?!
Don't believe us?
Just take a look at what so-called "Sovereign" funds have achieved, and then tell us that's not possible!!!
The fact that governments prevent very large pools of money (i.e. capital) from investing in the very best entrepreneurial activity sets-up the economy for failure. This failure represents a counter-example to political evolution because it is presented as the failure of free-markets instead of what it truly is: a shameless manipulation of markets. Thus, instead of shining examples of what free-markets can accomplish (thus providing examples to follow towards Libertarianism) we are stuck with artificial economic barriers that create false-flag so-called "examples" to discourage the evolution towards Libertarianism and, by extension, free markets.
Note: please see the Glossary if you are unfamiliar with certain words.