Understanding the virtue of thrift: A response to Joyce McMillan

Understanding the virtue of thrift: A response to Joyce McMillan

In Response to Joyce McMillan’s article “Debunking the Tory myth of the magic money tree”, first published in the Scotsman on 02/06/17.


Understanding the virtue of thrift: A response to Joyce McMillan

If socialists understood economics, they would not be socialists.”
– Nobel prize-winning economist Friedrich Hayek.


Writing in Friday’s (02/06/17) Scotsman, Joyce McMillan asserts that any fiscal constraint by government (so-called “austerity”) is unnecessary, claiming that it has unleashed:

“…a litany of meanness and misery firmly based on the assumption that there is a finite amount of money in government coffers, and that to spend it in one place is automatically to take it from another… …the phrase when applied to the funds of a modern government is simply a lie.”

She goes on to argue that the ability of governments to borrow and to print money means that spending is, in reality, unconstrained. She is wrong, as I shall explain.

It is true that Government can print money and can borrow. However, any amount that the government spends – regardless whether or not it was raised in tax before it was spent – is paid for by taxpayers. If it taxes, the money comes from taxpayers. If it borrows, it borrows from citizens and pays them back – plus interest – from future taxes or borrowings. If it prints money, it creates inflation, pushing up prices for future purchases by taxpayers. This allows government to spend now, but consequently erodes the purchasing power of taxpayers’ salaries and devalues their savings. Indeed, this is perhaps the most pernicious method the government could use:

By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
-John Maynard Keynes


Ultimately all government spending comes at a cost; and though we may see the benefit of such spending in many ways (new bridges, etc), we may not clearly see who pays. French economist Frederic Bastiat called this distinction “That which is seen and that which is unseen”; today accountants call it ‘opportunity cost.’ For example, money I spend on a holiday is not money which I can also spend on the mortgage. In judging the merits of the holiday I must consider not only what I gain from it, but what I could have gained if I had reduced the mortgage by the same amount. In such cases we do not consider the holiday spending to be a good financial decision unless the benefits outweigh the benefit I would get from having a smaller mortgage.

This is one big reason why government spending is generally to be discouraged. It is not necessarily whether or not they can pay for it, but at what cost this spending comes. When a government spends money, that money is not available for private investment in industry. Unfortunately, governments make very bad investors, usually choosing to back the best political option and not the economic one. The return on the amount spent is invariably worse than would be achieved had the money remained in private hands. As such, when government grows, the economy suffers. This phenomenon is described in the Rahn Curve, which illustrates that for every 1% of GDP the government spends, the economy shrinks by twice that.

I don’t doubt the good intentions of people like Joyce McMillan who want near unlimited government spending on each and every good cause; however the road to hell is paved with good intentions. We only need to look at Venezuela to see what uncontrolled government spending and a disregard for economics can lead to.

This brings me back to my quote from F.A. Hayek. Hayek himself started out as a socialist but turned to become one of the most prominent libertarian economists of the 20th century. His desire to help those less fortunate didn’t change; he merely concluded that capitalism and freedom, not government, was the best way to achieve those goals.

I’d urge people such as Joyce McMillan to take the time to understand economics; then they may come to this conclusion too.


Liam Harkness is an accountant, writer and libertarian activist living in Edinburgh. He is the Treasurer of the Scottish Libertarian Party.

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