by Matt Kibbe
So it was on November 17, 2011, when the twelve commissioners of the Tea Party Debt Commission were literally thrown out of Congress for having the audacity to bring specific ideas to balance the budget to a “boardroom” in desperate need of new ideas. This is the classic behavior of entrenched management circling the wagons against any entreaty that might undermine the status quo.
The Hostile Takeover of the U.S. Senate by the American people was now in full tilt.
CHAPTER 2
WHAT CZARS DON’T KNOW
I don’t sit around just talking to experts because this is a college seminar. We talk to these folks because they potentially have the best answer so I know whose ass to kick.
—Barack Obama
HOW IS IT POSSIBLE THAT MILLIONS AND MILLIONS OF PEOPLE LOCATED in disparate places—each individual in possession of a unique perspective, particular goals, wants, and needs, and a personal knowledge of their community and circumstances—can come together in voluntary cooperation to create something far greater and more valued than any one individual could have achieved alone?
It’s a great question. It is a particularly humbling question for a so-called public policy expert to ask, because just by asking it I have to admit that I don’t know a lot of what is happening in the world at any moment in time. The question itself acknowledges that at any moment in time there are many things in an infinite sea of facts, data points, and bits of knowledge that you and I can’t possibly know.
This humility—knowing that there is much you don’t know—is one of the foundational principles of a political philosophy based on individual freedom. It’s the bottom-up approach. But for a simple, timeless set of rules that protect life, liberty, and property, we should all be left alone to pursue our own interests as we define them, because we know best what is good for ourselves and our families. That’s very personal knowledge, not known by anyone else. Only freedom lets us use, in voluntary cooperation with others, what we alone know. Freedom works to best meet everyone’s goals in a world of uncertainty, trade-offs, and scarcity. Adam Smith wrote of this dynamic in 1776 in The Wealth of Nations, describing how it is that freely acting people can lead to an unintended coordination of individual interests:
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society. . . . [H]e intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention.1
The freedom-based, bottom-up approach does not depend on centralized direction, or the good intentions of a central director.
The opposite political philosophy, the top-down approach, requires that someone be “in charge.” Without adult supervision, things may not progress, and may even collapse into chaos. Someone needs to direct things. Someone needs to dictate. The top-down approach implicitly assumes, but seldom says explicitly, that certain people—those smarter than you and me—know certainly, and can act to improve things based on a better set of data, a more comprehensive set of facts, and a superior wisdom to do better than free individuals could do for themselves. Those special people just need the authoritative power of government behind them to succeed.
There is a certain arrogance to this top-down approach that presumes to know better. This presumption is what Nobel laureate economist Friedrich Hayek called “the pretense of knowledge.”
Economist Ludwig von Mises and his protégé Hayek developed their critique of top-down government planning based on their understanding of market interaction as a process between people choosing in real time. They understood the world to be driven by purposeful humans—folks who in the very act of living and working set out to accomplish things with every waking moment. But all this purpose yields results that are never predetermined, not by a design. This is not a world of perfect knowledge but of knowledge gained as life actually happens in the real world. Everyday life is a world of uncertainty, where the outcome of future decisions cannot be known for sure; instead they are guided by past experiences, traditions, informed risk-taking, and the knowledge that emerges from this push and pull, conveyed by institutions such as money and prices.
How is the coordination of individual plans even possible in such a complex world? The feedback mechanism is success or failure and profit or loss based on the choices made. This process, this feedback loop of new information, corrects itself untold times a day. This is how real people in their everyday acts of living, planning, failing, regrouping, pursuing, and dreaming solve the ubiquitous “knowledge problem.” We don’t know what we don’t know, but the process of figuring things out—the market process—coordinates our efforts with those of others. “The evolution of markets has delivered us into a world too complex for any individual intelligence to comprehend in detail,” wrote Don Lavoie in his important critique of top-down economics, Rivalry and Central Planning. Understanding this necessitates “our reliance on the greater social intelligence embodied in market processes.”2
Can you know what the best outcome is without undergoing the process that reveals individual preferences, corrects mistakes, rewards risk, and punishes bad behavior? This is perhaps the most important question economists and policymakers can ask, and too many experts in Washington, D.C., fail to ask it before they act.
Whenever faced with a public policy proposal, a potential “fix” to a very real problem facing our society that involves more government—more spending with money we don’t have or more government control over the decisions you and I make—I always ask myself two simple questions. First, do those elected officials and government employees involved in developing and implementing proposed new laws face the proper incentives to get the job done? In other words, do they have your best interests at heart, or their own? Second, even if they do have your best interests in mind, do they have the knowledge to outsmart the market? Do they know better what to do? Virtually every policy architect who has ever proposed a grandiose macroeconomic scheme involving a new and better government redesign of some or all of the private economy has simply ignored the question. From Karl Marx to John Maynard Keynes to Paul Krugman to Ben Bernanke, it’s the same. They feel no need to answer the question, because they assume they know.
Any bureaucrat or committee chairman who wants to adjust economic outcomes to correct real or perceived market failures has to first come to terms with the very real possibility that a disruption of the market’s corrective processes—millions and millions of individuals learning and acting on new information—might lead to an unintended, more catastrophic government failure.
THE KNOWLEDGE PROBLEM
WHAT DO WOULD-BE PLANNERS KNOW? HOW DO THEY KNOW IT? These questions defined the work of Mises, whose research into the nature of economic coordination was no doubt spurred by the rising popularity of central planning in Europe after World War I. Until 1934, he had been a well-respected scholar in Vienna, Austria. The so-called Austrian School of economics is named after the geographical origins of its best thinkers: Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich Hayek.
Mises moved to Switzerland with the rise of the National Socialist Party in Germany. After the Anschluss, the occupation of Austria by Adolf Hitler, Mises joined many other Jews and fled Europe for the United States. There he took up a position at New York University. Perhaps because of his own personal knowledge and experiences with practical outcomes of the theoretical constructs of socialism, Mises’s initial work was on the nature of money, and its necessary role in facilitating economic calculation in a market economy. This led directly to a fundamental critique of socialism, one that is now acknowledged even by his fiercest critics to have been irreparably devastating to Karl Marx’s original vision. Mises predicted that even the best
-intended policies under government ownership of the means of production would lead to economic calamity because there would be no rational basis for sorting things out, for the allocating of scarce resources. He recognized that the relevant information was not already “given” to government planners and that no one mind or group of minds could possibly possess all the knowledge necessary to plan a complex economic system. Instead, monetary calculation and prices are the indispensable “guide amid the bewildering throng of economic possibilities.”3
Mises understood socialism in terms of its original Marxian aspiration: complete elimination of the monetary economy. Marx wished to replace production for exchange, which was directed by the blind forces of the market, with consciously directed production for direct use. It simply does not work. Mises argued,
No single man can ever master all the possibilities of production, innumerable as they are, as to be in a position to make straightaway evident judgments of value without the aid of some system of computation. The distribution among a number of individuals of administrative control over economic goods in a community of men who take part in the labor of producing them, and who are economically interested in them, entails a kind of intellectual division of labor, which would not be possible without some system of calculating production and without economy.4
Central planners cannot know which production projects are economically possible and which are not precisely because such knowledge is not merely data to be gathered and crunched.
Mises’s critics at the time failed to appreciate the fundamental nature of the Austrian’s critique, not just of Marx’s wholesale vision, but for piecemeal government planning. Most economists incline toward more government planning, intervention, and fine-tuning, because they view prices and knowledge as objective data points that exist independent of the process of the market, understanding the whole problem of economic organization as merely a technical one. With the right inputs and outputs, they believe, an economy can still be rationally directed toward a preferred state of equilibrium.
POLITICAL PRETENSE
SOUNDS FAMILIAR, DOESN’T IT? YOU LIKELY HEAR THIS PRETENSE OF knowing better whenever a politician opens his or her mouth and starts fixing problems. No politician in my lifetime better personifies the hubris of knowing better than Barack Obama. His administration, in all its various attempts to “fix” the economy, has sought to replace the corrective forces of the market process with a better plan, or a new direction that better masters “all the possibilities of production, innumerable as they are.”5 Consider Obama’s confidence in his administration’s “green jobs” agenda, circa May 2010:
The true engine of economic growth will always be companies like Solyndra, will always be America’s businesses. But that doesn’t mean the government can just sit on the sidelines. Government still has the responsibility to help create the conditions in which students can gain an education so they can work at Solyndra, and entrepreneurs can get financing so they can start a company, and new industries can take hold. . . . Around the world, from China to Germany, our competitors are waging a historic effort to lead in developing new energy technologies. There are factories like this being built in China, factories like this being built in Germany. Nobody is playing for second place. These countries recognize that the nation that leads the clean energy economy is likely to lead the global economy. And if we fail to recognize that same imperative, we risk falling behind. Fifteen years ago, the United States produced 40 percent of the world’s solar panels—40 percent. That was just 15 years ago. By 2008, our share had fallen to just over 5 percent. I don’t know about you, but I’m not prepared to cede American leadership in this industry, because I’m not prepared to cede America’s leadership in the global economy. So that’s why we’ve placed a big emphasis on clean energy. It’s the right thing to do for our environment, it’s the right thing to do for our national security, but it’s also the right thing to do for our economy. And we can see the positive impacts right here at Solyndra. Less than a year ago, we were standing on what was an empty lot. But through the Recovery Act, this company received a loan to expand its operations. This new factory is the result of those loans.6
This particular solar panel manufacturer filed for bankruptcy just a few months after Obama spoke at the newly constructed, government-financed facility. The dubious entanglements between the Obama administration, Obama’s political patrons, and the financial investors in the project rightly generated a public outcry over who exactly helped procure a $535 million government outlay of taxpayer dollars in the new president’s very first legislative initiative, the 2009 stimulus package. The scandalous facts in this instance make Solyndra an easy target for critics of the Obama administration. But the more fundamental point is the underlying audacity of a president who is so confident that he knows better—certain of “the right thing to do”—than the entirety of all the actors playing in global markets. He’s second-guessing billions of people, innumerable competing firms, every type of energy production that is a viable substitute for solar power, and other command and control governments. That’s an awful lot for a politician and a few bureaucrats to know about. This is more than pretense. The arrogance of big government is, as Hayek put it, a “fatal conceit.”
According to Jonathan Rothwell, a senior research analyst at the Brookings Institution, at the time that the administration was making its initial investments in green energy, “there just wasn’t much known about the size of the green economy. It was hard to come up with precise numbers.”7
At the U.S. Department of Energy, the epicenter of informed strategic thinking on green energy within the Obama administration, “there just wasn’t that much known.” True enough, the very nature of capital investment and risk-taking in an inherently uncertain future always involves the potential of failure and loss. But in the private economy, the risks are borne by the same individuals and interests that will foot the tab for failure. Do you see a possible incentive problem with politicians and bureaucrats risking your money for their potential benefit? Does anyone believe that someone else will be more cautious with your money than you would be? Planners like Obama do, apparently.
President Obama is an unusually easy target when searching for politicians who think they know better than you do, even in Washington, D.C., where virtually every politician is likely to believe that they have been especially blessed with a vision to lead. Whenever Obama goes off script, his “vision thing” gets more transparent, easier for the rest of us to see. “We’re not trying to push financial reform because we begrudge success that’s fairly earned,” he told an audience in Quincy, Illinois, in April 2010. “I do think at a certain point you’ve made enough money, but you know, part of the American way is, you know, you can just keep on making it if you’re providing a good product or you’re providing a good service.”8 There’s that word again—at a “certain” point he knows certainly that enough is enough. Which successes are “fairly earned”? How much money is “enough”? President Obama has never publicly revealed his economic calculations on these points, but all this was said without the benefit of a teleprompter, so presumably with great personal conviction.
Democratic congressman Barney Frank, former chairman of the House Financial Services Committee, is also a regular culprit when it comes to political expressions of certainty. “It is also clear,” Frank said, “that left entirely untouched by public policy, the capitalist system will produce more inequality than is socially healthy or than is necessary for maximum efficiency.”9 How much touching by public policy do you suppose gets the market process to “maximum efficiency”? You may not know the answer to that complex question; I sure don’t. But Congressman Frank thinks he does.
Frank was also infamously certain about the financial soundness of Fannie Mae and Freddie Mac, the massive government-sponsored enterprises so culpable for putting buyers into homes they could not afford. He argued for “rolling the dice” in 2003: “I do think I do not want th
e same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation toward subsidized housing.”10 In July 2008, just weeks before the whole subsidized-housing house of cards collapsed, Frank knew that “Fannie and Freddie are fundamentally sound, that they are not in danger of going under. They’re not the best investments these days from the long-term standpoint going back [but] I think they are in good shape going forward.”11 He was certain it was so, because he was the chairman of the House committee of jurisdiction.
Think about how the housing bubble and the 2008 stock market crash was driven by the collapse in value of mortgage-backed securities. Now think about the culpability of the Federal Reserve, and the role of Fannie Mae and Freddie Mac. Didn’t they enable the bad actors and deceive the rest of us into making calculations based on corrupted price signals? To make matters worse, instead of acknowledging their mistakes and allowing the needed corrections to take place, the instigators of the first crisis now presume to know how to fix what they caused. Their “fixes” to the perceived failures of markets are making things worse. The presumption of knowledge and multiple efforts to improve on market outcomes by the government has resulted in systemic damage to the economy and real pain for countless individuals caught up in the boom and bust of government intervention. The unintended consequences of government decisions from on high seem only to encourage more intervention, but little accountability. There is no built-in correction mechanism in the top-down approach.
