The Working Licensed Producer Fallacy

Licensed producer OrganiGram CEO Denis Arsenault is defending government spending on his business, spinning the government handout as good for the local economy.

But it’s not good for the economy, whether local or global.

To understand why, we need to go back to 1850 and read French economist Frédéric Bastiat.

Arsenault is committing a logical fallacy, known in economics as the “broken window fallacy.”

In Bastiat’s example, a vandal breaks the window of a baker, causing the townspeople to reflect on the broken window and how it will employ the glazier.

It’s true that the glazier’s income will be higher than it otherwise would have been, but there is no net stimulus to income or employment.

The income derived from fixing the broken window is offset by the reduction in income of someone else in the community, who is now earning less because of the vandal.

In Bastiat’s example, the baker was going to spend money anyway, and so the vandal merely forced him to spend money repairing the broken window.

But it is fallacious to assume the employment of the glazier as a net gain to the economy, because the baker might have spent the money getting his shoes repaired. Therefore, the glazier’s gain is the cobbler’s loss.

The vandal didn’t “create jobs” or “boost the local economy” by breaking the window. All he did was give more work to the glazier at the expense of someone else.

By destroying the window, the vandal made it necessary for someone to devote scarce labour time and resources to restore wealth back to its original state.

If the vandal hadn’t destroyed the window, labour and resources would have been used in order to grow the wealth of the economy.

In Bastiat’s example, the community is poorer as a result of the vandal’s actions. The glazier may be richer, but it is at the expense of the cobbler, and the baker certainly isn’t richer with a broken window and no new shoes.

It is this analysis that reveals why OrganiGram’s handout is nothing more than a corporate welfare version of the broken window fallacy.

Arsenault says the handout will be good because his company will create jobs. But what is the point of work? North Korea has “full employment,” I don’t see anyone praising their economic model.

The point of work is to produce consumption goods and services. Work is a necessary evil, not an end in itself.

Taxation is like breaking a window, and by funnelling money into a licensed producer, all the government has done is prevent New Brunswick bakers from buying new shoes.

Or to put it another way, once cannabis is out of the criminal code, all the government needs to do is get out of the way and let entrepreneurs get to work.

Corporate welfare may benefit a hundred or so New Brunswick workers, but, on net, society is poorer, because the necessity of applying more resources and labour — just to return to the status quo in terms of wealth — is a cost, not a benefit.