“The usual effect of the attempts of government to encourage consumption, is merely to prevent saving; that is to promote unproductive consumption at the expense of reproductive, and diminish the national wealth by the very means which were intended to increase it. What a country wants to make it richer is never consumption, but production. Where there is that latter, we may be sure there is no want of the former.” -John Stuart Mill (1844)
While consumers do tell the market what is needed, they would ideally have been producers first. Without production, there can be no consumption, and therefore producers are in the best position to make decisions regarding what should be consumed. What the government creates is a system where people are allowed to consume more than they produce, because of the redistribution of wealth in one form or another. This makes the market respond to consumers who have not necessarily produced as much as they consume, and are therefore draining the country of resources.
For example, many people on welfare buy cigarettes. They have not produced the money they will spend (in terms of trading their labor for money), yet they are allowed to consume something with it. Had the producer of the money (say he payed $100 in taxes that went to welfare) had control over that money, none would have been spent on cigarettes, and all would have been invested in a new renewable energy company. That $100 produced cigarettes, and provided cigarette manufacturing jobs, instead of producing renewable energy, and providing jobs in that sector. While theoretically it could have happened the other way around, because of the nature of redistribution of wealth this almost never happens. The economy thus restructures itself based on the consumers, who are not necessarily producers. In an ideal economy, one would have to produce in order to consume (with obvious exceptions for people who can’t work–but who provides them with the ability to consume is another discussion).
When companies like General Motors are bailed out, it allows the market to give consumers a product which no producer approved. The government, which does not produce, took money from the private sector–producers–and gave it to a company which had failed, meaning not enough people wanted to consume what they were producing, for the price and quality. The government took someone else’s production, and used it as their own to demand a good. The problem is that the good demanded will not be market based, meaning the demand from government may not correspond to the demand from the consumer. In the case of GM, the government demanded more cars be built, without having the proper consumers in place. This is how resources are wasted by the government; instead of initiating productive activity, they initiate production of goods which are not in demand. The taxpayers will lose money on the GM bailout; our money was spent on building cars, instead of on whatever we wanted to spend it on.
Another thing our government does, is print more money, and pretend that by consuming, we can increase production. This is not true. Demand is enabled by supply; no matter how many people demand potatoes, if no potatoes have been produced, there will be no supply of potatoes. However if potatoes are produced, this supply of potatoes which the producer now controls, enables him to demand another good. He demands lumber to build a house, and because he has a supply of potatoes, someone takes him up on his offer, and goes and produces some building materials; he cuts down a number of trees on his property, and mills them. This man now has a supply of lumber, which is what enables him to demand potatoes. Each party in the transaction had to have the supply, before he could demand any goods.
Money can be employed by politicians, much like smoke and mirrors are used by a magician, yet the fact remains that things must first be produced, in order to be consumed. Demand is worthless, unless there is a supply. Our government could print infinite amounts of money, yet if no one grows food, we will all starve. Because the government prints more money, before allowing more goods to be produced, this causes inflation; less can be bought with the same amount of money. These are the reasons why a free market organizes an economy far better than the government. Free market economics ensures that in order to demand, you must have a supply. If you do not get to consume without producing, we can be sure that only the most important goods (to any individual) are produced, because they are trading their productive activity for someone else’s. In the case of our government, or welfare recipients, or corporate welfare recipients, they are demanding goods with the productive value that someone else created.