When an electrical engineer sets out to design an amplifier, he relies heavily on the discoveries and innovations of past engineers and scientists. If instead he were forced to start the task from scratch, he would have to discover the equations that govern electromagnetic fields, invent an electric generator, invent capacitors, discover the physics behind semiconductor materials, invent transistors, and combine all of the knowledge in such a way to realize his desired application of amplifying a signal. Obviously this would be impossible for one man to accomplish in a lifetime. As such, any growth in technology relies upon knowledge that has been saved from the past.
Much like the engineer benefits from knowledge that has been saved in the past for his present applications, all people who interact with each other in the present benefit from the capital that has been saved from the past. The capital that has been saved by earlier generations provides economic growth and allows present resources to be utilized more efficiently. A look at why humans act and the effects of saving capital on human actions can shed some light on why this is so.
Humans interact and trade because they expect that the objects they receive in doing so will increase their own happiness. These objects can be tangible, like an amplifier or car, or intangible, like simple friendship. However, nothing comes for free, and the individual actor must give something up, perhaps money or his own friendship and time, to receive his desired object. Economically, nothing can be stated about the value each participant assigned to the objects except that they valued the objects they were receiving more than the objects they were giving, or else the interaction would not have taken place.
Saving capital allows people to produce objects that they can trade to others and thus receive the many benefits of the division of labor. The term "capital" is useful only in terms of the ends sought by the actor who utilizes an object. Capital is any object that is used to satisfy the wants of other people, and this is done through trade. Therefore, an accumulation of capital allows for the future satisfaction of other people's wants. To further illustrate the benefits of saving capital, imagine a society where instead of saving goods as capital, everyone started to consume everything they owned. At first there would be a huge boom in human interaction, as individuals liquidated the resources they used to produce goods for other people and traded them for consumption goods. However, once everyone no longer possessed any capital goods but only consumption goods, all human interaction would cease, the benefits of the division of labor would not be realized, and the society would decay into a group of autarkic individuals. Humans could not survive long if such a practice were implemented.
Unfortunately, the laws that dictate that technological growth can only stem from saved knowledge and economic growth from saved capital also applies to government. If one considers the laws and government mechanisms put in place in the past as "government savings," then a clear analogy can be drawn with respect to the capital savings of economic growth. The more government savings that have occurred in the past, the larger the present growth of government is. This result stems from the very nature of government: it is a mechanism of coercion and compulsion, and individuals who hold power rarely relinquish it voluntarily. When governments are first conceived, they are a means that people employ to collectively protect their own rights. A police force is authorized, and roads and courts are built. However, the initial confines of the legitimate government soon give way to the lust of power some people feel in imposing their wills on other people. The apparatus that once ensured that people who infringe upon others’ rights are punished or removed eventually degenerates into an apparatus that routinely infringes upon those rights itself. Consequently, present administrators of the government rely upon the power that the past administrators wrestled from the people, and the government savings of the past directly influences the its present size and power.
Whereas technological and economic growth generally occur hand-in-hand and complement each other, government growth and economic growth cannot occur concurrently forever. The very nature of a large government is that it uses force to interfere with the peaceful interactions of people. As the government gets larger, the free economy is meddled with more and more. The results of any government intervention in regulating human action are a distortion in the natural wishes of people and less human action. Government intervention is bad precisely because it decreases the benefits that individuals receive from social cooperation and the division of labor. The most extreme case of government growth decreasing economic growth is the case of a purely socialist society, in which the government has been maximized in size. The results of such a society, in which there would be no incentive for any human interaction, would be that all voluntary social cooperation would cease and total chaos would ensue. Calling it a society would be erroneous in fact, since a society consists of humans acting together under the division of labor for mutual benefit.
Perhaps the clearest present government intervention that increases government growth while decreasing economic growth is the practice of central banking. In the United States, the Federal Reserve controls all legal tender and, consistent with the Keynesian model of economics, frequently inflates the paper supply and decreases interest rates in an effort to stimulate consumption. As was discussed earlier, an incentive to spend rather than save initially results in a lot of human interaction, or a boom. However, true economic growth cannot be sustained, and the higher the inflation, the less incentive there is to save. Likewise, once individuals have liquidated a good portion of their capital, human interaction takes a nosedive, and the result is the bust. In this case and in many others, people often call upon the government to solve perceived economic or social problems, but the very nature of government and human action is such that an increase in government can only result in less social cooperation and therefore less and perhaps negative growth in the economy.
