Wednesday, April 07, 2010

The Trap

The trap is simple: some really smart managers with really good tools can greatly reduce the "waste" of the system to the profit of all. That is the essence of communism, socialism, fascism and every kind of despotism known to man.

And don't forget envy. i.e. "Share the wealth"

F. A. Hayek in his nobel lecture entitled The Pretence of Knowledge discusses the error of the first assumption. About envy? I don't expect to see an end to it anytime soon. It may be a bug but it is also a feature.

The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.
That sounds like it was written yesterday. It was actually presented in December of 1974.

Then he lights into the notion that government spending can cure mal distribution of resources.
Let me illustrate this by a brief sketch of what I regard as the chief actual cause of extensive unemployment - an account which will also explain why such unemployment cannot be lastingly cured by the inflationary policies recommended by the now fashionable theory. This correct explanation appears to me to be the existence of discrepancies between the distribution of demand among the different goods and services and the allocation of labour and other resources among the production of those outputs. We possess a fairly good "qualitative" knowledge of the forces by which a correspondence between demand and supply in the different sectors of the economic system is brought about, of the conditions under which it will be achieved, and of the factors likely to prevent such an adjustment. The separate steps in the account of this process rely on facts of everyday experience, and few who take the trouble to follow the argument will question the validity of the factual assumptions, or the logical correctness of the conclusions drawn from them. We have indeed good reason to believe that unemployment indicates that the structure of relative prices and wages has been distorted (usually by monopolistic or governmental price fixing), and that to restore equality between the demand and the supply of labour in all sectors changes of relative prices and some transfers of labour will be necessary.
I didn't know he was a Tea Party guy.

He goes on at length as is the custom of worthy Nobel recipients. But let me give you the short version alluded to above. There is no way by general rules to obtain an optimum general functioning of a machine with 300 million pieces which are only loosely constrained by the rules imposed. In other words it is impossible to figure out the right general rules (beyond a very limited set). i.e. "subsidize here and limit investment there" can't work. OK. Suppose you tell the 300 million exactly what to do and give them each detailed instructions. Who is going to write those instructions - every day. How will you co-ordinate the necessary adaptations? An ice storm in Florida. A tornado in Nebraska. An earthquake in Missouri? And what if the predicted ice storm doesn't happen.

So macro policies are inefficient at best and micro policies are impossible. What does that leave?

Liberty is the best way for economies to adjust. The more government encourages monopoly the worse the outcome. Government Motors? Crisis Motors? Bank takeovers. Green jobs? It is not going to work well. In fact it may well work in reverse.

Well Congress spends the money. I think we need a new one.

Cross Posted at Classical Values

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