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[Originally published November, 2008.]

One of the great and most persistent errors of classical liberals is to believe in "good government," a government that does "what it is supposed to do."

There is nothing the state can do, and which society needs done, that cannot be done far better by the market. Another point that is just as telling: no state empowered to do what is supposedly necessary will restrain itself to those things. It will expand as much as public opinion will tolerate.

Sometimes the point is easier to see when looking at foreign governments, such as the tragic case of China. The government is embarking on an explosive venture to dump $586 billion into "infrastructure" over two years. The reason is the classic Keynesian excuse: the spending is needed to stimulate investment. Never mind that this trick has never worked in all of human history. This is instead a grand plan to loot the private sector on behalf of the Communist Party, which will then spend the money bolstering its power.

No country knows more about the failures of this type of central planning than China. Every form of collectivism has been tried out on these poor souls, and tens of millions lost their lives in the course of Mao's insane collectivist experiments. That this new plan is being enacted in the name of Lord Keynes rather than Karl Marx is irrelevant. The effects are the same: expand power and reduce liberty.

China's recovery from communism is one of the most inspiring stories in the history of economic development. The country went from being a suffering and impoverished land of catastrophe to being modernized in just 15 years. The state shrunk in scope nearly by default as the private sector grew and grew. This wasn't the plan. It was the de facto result of the new tolerance of free economic activity. The state went into protective mode to keep its power, and did nothing to stop the swell of private enterprise. The result was glorious.

Keep in mind this critical point: China's restoration as a civilized society came about not due to some central plan, but by its absence. The fact that the state did not intervene led to prosperity. Again, it wasn't a policy or a constitution or a law that made the difference. There was no switch from a communist-style government to a night-watchman state. Because the state abandoned its posts under public opposition and contempt, society could flourish.

But the state never went away. It's just that its depredations have been spotty and unpredictable. Had history taken a better course, the central state would have melted away completely, and law would have devolved to the most local levels. Sadly for the Chinese, the state persisted in its old structure, even as the private sector grew and grew. The state still had its hand in the large industries such as steel and energy, and, of course, it controlled the banking sector.

The government never became good (an impossibility). It was and is bad. It was just less bad than in the past, because it did less. But all states lie in wait for a crisis. The earthquake in the southwest provided one great excuse for intervention. There is no greater excuse for state expansion than an economic crisis—except perhaps war. Chinese officials can count on support from Western "experts" here, and the thoroughly disgusting US response to our own economic downturn has provided an awful model for the world. Think of it: the Communist Party in China is now citing the United States as the main reason for its plot to loot the private sector and bolster its own power at the expense of the country.

So much for being a beacon of liberty in a dark world! Instead, the United States is helping to shut out the lights and bolster decrepit despotisms. This is surely one of the great ironies of the current political moment. Instead of teaching the world about liberty, the United States' newly empowered unitary executive is christening various forms of dictatorship.

There can be no question that China's spending will not improve economic growth. It will instead extract $586 billion from the private sector and spend on political priorities. Never forget that no government has wealth of its own to spend. The money has to come from taxation, monetary inflation, or debt expansion that must be paid later. And government's spending choices will always be uneconomic relative to how society would use that wealth. That is to say, the money will be wasted.

But won't the spending spur investment? It can create local boomlets, but they will be temporary. To the extent that the new spending causes a spending response from investors and consumers, this is more evidence of an uneconomic use of scarce resources. If the money is used to prop up failing companies, that's particularly bad since it is an attempt to override market realities, an attempt that is about as successful as trying to repeal gravity by throwing things up in the air.

The nature of the state — and the core of its rationale for existence — is the conviction that it stands apart from and above society, to correct the failings of the market and individuals. A presumption of superiority is at the very heart of the state, whether it is minimal or totalitarian. Who is to say when and where it should intervene? Well, think about it. If the state is inherently wiser than and superior to society, standing in judgment over what is working and what is not working, the state alone is also in a position to decide when it should intervene.

No government is liberal by nature, said Ludwig von Mises. This is the great lesson that people who advocate "limited government" have never learned. If you give the government any jobs to do, it will presume the right to police its own conduct and then inevitably abuse its power. That is true in China and it is true in the US.

It was the science of economics that first discovered the radical incapacity of the state to make any improvements in the social order. It turns science on its head to invoke economics as a reason for the government to loot and pillage in the name of "stimulating investment." Stimulation here, there, and everywhere amounts to a diminution of freedom, security of property, and prosperity.

Keynes famously praised Nazi economic policies in the introduction to the German edition of his worst book, the General Theory. After a century of horrors, free men and women in China, the US, and the world surely deserve better.