by Matt Kibbe
Before you leap to the conclusion that this “pretense of knowledge” is a disease that afflicts only Democrats, think again. Republican President George W. Bush proposed in 2004 “that mortgages that have FHA-backed insurance pay no down payment. . . . What we’re trying to do is make it easier for somebody to own a home, and there are practical ways the government can help.”12 As it turns out, making it easier for people to buy homes at the near peak of a government-induced bubble was exactly the wrong thing to do. Those mortgage contracts became a government-induced form of financial servitude for folks struggling to make their monthly payments on a home that was now underwater. But how could the Bush administration have known?
Former Massachusetts governor Mitt Romney, a Republican who made his fortune as a management consultant, is widely viewed as a technocrat, and he does little to dissuade people from the characterization. Governor Romney, as everyone knows, aspires to be our next president; and he touts as his chief qualification his experience at taking over and fixing failing companies. A particularly revealing interview by Joseph Rago and Paul A. Gigot in the Wall Street Journal showed the planner inherent in Romney’s thinking. On the one hand, “Mr. Romney describes the core failure of Mr. Obama’s economic agenda as faith in ‘a wise group of governmental bureaucrats’ rather than political and economic freedom.” Romney called it “a refrain that we have seen throughout history where smart people are convinced that smart people ought to be able to guide an economy better than hordes of individuals pursuing their self-interest, the helter-skelter of free people choosing their course in life.”13
But in a 2007 Journal interview, that same Mitt Romney revealed a very different outlook: “In that meeting the candidate began by declaring ‘I love data’ and kept on extolling data, even ‘wallowing in data,’ as a way to reform both business and government. He said he’d bring in management consultants to turn around the government, mentioning McKinsey, Bain and the Boston Consulting Group. Mr. Romney seemed to elevate the power of positive technocratic thinking to a governing philosophy.”14
Has he had a conversion? Like Congresswoman Michele Bachmann, who once confessed she reads Ludwig von Mises at the beach, did Mitt Romney sneak-read a copy of Hayek’s Constitution of Liberty? Not so fast, you hopeless optimist. When asked by the Journal, again in December 2011, about his views on how to fundamentally reform the monstrous labyrinth that is the U.S. tax code, he dodged the question, saying, “I simply don’t have the team . . . to be able to model out what will happen to all the different income groups in the country, what will happen to the different sectors of our economy based on dramatic changes.”15 The whole point of tax simplification is to eliminate the political biases and social engineering in the tax code that requires a team of experts to model, and an army of professional tax preparers to comply with. Wanting to redistribute income in a better way than the current tax code does make Romney almost sound like a wise “governmental bureaucrat,” doesn’t it?
Democrats and Republicans alike think that they know better, or at least can hire the experts who know better, than millions and millions of people acting on their own behalf. Sometimes their knowing is piecemeal, tinkering around the edges of the market process. Romney, for instance, seems more inclined to pick up a tuning fork than a hammer. But for some, like Obama, you really get the sense that his vision is, like the progressive planners before him, a wholesale rebooting of our economic system. Indeed, his whole mind-set—collect the dispassionate analysis of the smartest guys in the room, armed with the best data, and you’ve solved the problem—is an inherently progressive approach to public policy. William Schambra argues that Obama’s approach to public policy is textbook progressive, preferring “an approach to public policy that would make greater use of objective evidence, scientific facts, and expert counsel.”16 Obama, writing in The Audacity of Hope, argues for “having a nonpartisan group like the National Academy of Science’s Institute of Medicine determine what a basic, high-quality health-care plan should look like and how much it should cost.”17
AGGREGATING KEYNES
EITHER WAY, WHEN INTERVENTIONS ARE TRIED, PIECEMEAL OR wholesale, they fail to produce the desired effect. Interventions can lead to destructive, unintended consequences that cause real suffering for real people, many of them deceived by government-distorted signals. And of course, each intervention is followed up by still more interventions to fix the problems caused by the presumption of knowledge from the top down.
Part of the problem with planners wanting to plan is the aiding and abetting they get from the economics profession and its flawed assumptions. “It is vitally important to always remember,” says Peter Boettke, one of the brightest of a new generation of Austrian economists, “that in the field of economics bad economic ideas lead to bad public policies which in turn result in bad economic outcomes.”18 He is referring specifically to major government-induced economic dislocations attributable to the intellectual legacy of John Maynard Keynes. According to Boettke, Keynes got it wrong by throwing basic economics out the window. He misrepresented markets as inherently unstable, and his arbitrary use of aggregation had no economic meaning, but allowed for simplistic, politically attractive policy prescriptions of aggregate demand management through more government spending.
Keynes was the first “macroeconomist,” and the author of The General Theory of Employment, Interest and Money, published in 1936. Around that time, a famous series of “debates” broke out between Keynes, who was at the University of Cambridge, and Hayek, who had just arrived at the London School of Economics. In many ways it was a debate between the classical traditions of fiscal responsibility and balanced budgets that had been, pre-Keynes, the accepted wisdom of public finance, and a wholly new way of thinking, from the top down, introduced by Keynes. The two academics’ arguments are brilliantly captured in the popular rap videos—“Fear the Boom and Bust” and “Fight of the Century”—of John Papola and Russ Roberts. The “fight” video depicts Hayek winning the intellectual argument but Keynes winning among the political and academic elites in the court of public opinion. And that’s exactly how it played out.
Not surprisingly, Hayek’s ideas about the decentralized power of freedom fare much better in the decentralized world of online media than they ever did in the cloistered monopoly of elite university academia. Freedom sells better in a world where people are free to choose what information they will consume. With total views of the two videos exceeding 4.5 million, Hayek is more relevant today than he ever was in his own lifetime.
There is, in fact, a boom in the market for Hayek’s ideas. “Fear the Boom and the Bust” was uploaded to YouTube on January 23, 2010. Glenn Beck featured a discussion of Hayek’s Road to Serfdom on June 8, 2010. “Aren’t you just a little curious,” Beck asked his audience, “if this is the first time you’ve ever heard of The Road to Serfdom, why that is? Gosh, it seems like a pretty important book. Why don’t we teach this everywhere?”
“Decide for yourself,” Beck advised. “Go online now and order it—The Road to Serfdom.”19
The endorsement, like a proverbial injection of artificial credit by the Federal Reserve Bank, created an immediate boom in sales. “The University of Chicago Press found itself in an unprecedented position: number one in Amazon and Barnes & Noble’s sales rankings with F. A. Hayek’s anti-big government book The Road to Serfdom,” according to a June 10, 2010, report from Publishers Weekly. “The 66 year-old book bested Stieg Larsson and Stephenie Meyer—at least for a day. . . . Press director Garrett Kiely told PW that the book has been a consistent seller since the election of Barack Obama in November 2008, selling about 27,000 copies annually. Although he declined to quote exact numbers, Kiely said that with Beck’s endorsement, the book has sold about half its annual number in a 24-hour span.”20
Even Steve Rattner, who served as Obama’s “car czar,” acknowledges the importance of Hayek’s ideas in the coming election. Writing in the Financial Times, he claims that
the “2012 rivals can be named: Hayek vs. Keynes. . . . Providing intellectual underpinnings to each side—while lurking mostly out of sight—is the work of long-dead economists. The White House continues to lean heavily on the playbook of economist John Maynard Keynes—without uttering his name. As huge deficits have failed to lift the economy, ‘Keynes’ has almost become a vulgarity in US discourse, in part because a very Keynesian Obama initiative—the 2009 $825bn stimulus (another banished word)—has been widely derided as ineffective.” Rattner went on to observe that “Republicans have been less coy about their favourite school: Ludwig von Mises and Friedrich Hayek. The quasi-libertarian, anti-statist sensibilities of these philosophers appeal to a public that has soured on government.”21
ALIEN CONCEPTS
KEYNES REPLACED CLASSIC MICROECONOMIC TERMS LIKE DEMAND (how much you want to consume at a particular price) with a new, imaginary construct of aggregate demand. He argued that government needed to step in to spend more money and boost aggregate demand to stimulate the economy because of chronic underconsumption by consumers. Hayek argued that government policies had, in fact, caused an artificial boom by distorting price signals with easy money. The bust comes when the false signals are discovered. More government distortions would prevent economic recovery, prolonging the economic pain.
Keynesianism legitimized the idea that governments can stimulate economic activity and lift the economy out of recession through deficit spending and public works projects. Whether or not such spending projects are “shovel-ready” investments in infrastructure projects that make sense is beside the point. “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principles of laissez-faire to dig the notes up again,” Keynes wrote in The General Theory of Employment, Interest and Money, “there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. . . . It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”22
If you worry that I am taking Keynes’s argument out of context, consider this August 15, 2011, exchange on CNN between Fareed Zakaria and Nobel laureate economist Paul Krugman, a preeminent advocate of Keynesian fiscal stimulus who has repeatedly argued that the failure of the Obama administration’s economic policies is a failure to spend far more money on far more stimulus. “Wouldn’t John Maynard Keynes say that if you employ people to dig a ditch and then fill it up again, that’s fine?” Zakaria asked. “They’re being productively employed. They’re paying taxes.” Krugman responds by wishing for “a program of government spending plus an expansionary policy by the Fed.”
What kind of spending?
If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and, really, inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better. . . . There was a Twilight Zone episode like this, in which scientists fake an alien threat in order to achieve world peace. Well, this time we don’t need it [to achieve world peace]; we need it in order to get some fiscal stimulus.23
I am not making this up, but Hayek anticipated such absurd outcomes from the “logic” of the Keynesian method à la Krugman, noting that “some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics.”24
Be that as it may, by all accounts Hayek lost the “Fight of the Century” among economists and politicians looking for an intellectual defense for bad behavior. It really came down to the incentives of planners to plan and the incentives of advisers who wanted to advise the planners. But the greater misunderstanding was with the Austrian view of markets as a discovery process, not a mathematical problem of inputs and outputs that could be tweaked and micromanaged. It was this misunderstanding that led Hayek to write his seminal paper on “The Use of Knowledge in Society,” published in The American Economic Review in 1945. Hayek posited that each individual, because of his unique situation within society, possesses a great deal of knowledge that is known to him alone—the knowledge of the particular circumstances of time and place. The individual may not even be able to articulate what he knows in explicit, rational terms. Institutions such as the price system emerge and continually adjust in an ongoing expression of these particular “bits of knowledge” that are dispersed throughout the market. Such market prices serve as a dynamic “system of telecommunications,” or better, as “guideposts to action.”
For Keynesians, times of downturn call for stimulating new demand. Any demand for anything will do because it’s the aggregate that matters. Government spending is, by definition, a component of Gross Domestic Product, the official government measure of economic output. We could literally spend our way to prosperity, if we just had the courage of Paul Krugman’s convictions. Can you imagine why Keynes’s ideas have such lasting appeal to congressional committee chairmen and presidents? As the great public choice scholar P. J. O’Rourke so precisely explained it, “giving money and power to government is like giving whiskey and car keys to teenage boys.”25 Think of Keynesianism as the car, and your tax dollars are the whiskey. It’s actually a Mack truck, and it has no brakes.
KEYNESIAN CONCEIT
HERE’S THE CONCEIT. ACCORDING TO HAYEK, KEYNES “WAS GUIDED by one central idea—which in conversation he once described to me as an ‘axiom which only half-wits could question’—namely, that general employment was always positively correlated with the aggregate demand for consumer goods.”26 Get it? Macroeconomists are really smart, much smarter than the “half-wits” who still think governments shouldn’t spend money they don’t have, particularly on public projects that are never going to be “shovel ready.”
Conceited government, it turns out, comes from conceited economists.
The problem with the Keynesian view is that it ignores the fact that public expenditures must come from somewhere. Each dollar spent on burying old bottles filled with banknotes or spent on building solar panels at three times the cost of what you can sell them for means that someone else will not spend that dollar. That someone else, by the way, is you, the person who earned it. That someone else would otherwise have been able to use that same dollar in ways that are informed by a real understanding of their personal needs. That someone else was highly likely to make a better decision that made better economic sense. This is what old-fashioned microeconomists call “opportunity cost.” If you do this, you can’t do that. There is a real opportunity cost, something better is always forgone, when the government raises taxes, raises the debt ceiling, or expands the supply of money and credit. That forgone opportunity might have been food on your family’s table, an investment in a new idea by a struggling entrepreneur, or a new hire by a small businesswoman trying to figure out how to keep the doors open and still comply with the new health care mandate under Obamacare. You might consider this common sense, but the experts, like Keynes himself, think you’re a “half-wit.”
The absurd policy conclusions that can come from aggregate-demand thinking are caused by using the wrong method to understand how the world works. The bottom-up view of economic organization is unique in that it does not focus on the imaginary equilibrium states typically employed by macroeconomists, where all relevant information is already assumed to exist. Everything is known, given by definition. Too often, macroeconomists think about the economy as if it were a chessboard, where all potential moves are potentially knowable, dependent on th
e intelligence and strategic acumen of the player moving the pieces. This standard equilibrium view begs the key question of economic organization. “If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of the available means, the problem which remains is purely one of logic,” Hayek argued. “That is, the answer to the question of what is the best use of the available means is implicit in our assumptions.”27
Planners can justify anything they want, even malinvestments in green jobs, by starting with the “right” assumptions. One great example of this was the estimated number of jobs “created or saved” crunched by Obama’s economic advisers that were used to sell nearly a trillion dollars in deficit stimulus spending to a skeptical public in early 2009. Those numbers were contrived, and ultimately proven absurdly off the mark, but they were presented with an air of scientific certainty.
THE SEEN AND THE UNSEEN
IN THE REAL WORLD OF MARKET PROCESSES, INDIVIDUALS DEPEND ON the reliability of relative prices as guideposts to action. They depend on money as a stable standard of value that facilitates economic calculation. Investors use these market signals to determine where to invest and where to allocate resources. Do I build more housing? What is the expected value of a new home should an individual borrower default on their mortgage? Do I buy more house for my family than I need, or can really afford, because the annual double-digit increase in its value over the past three years makes it a sure bet? What are competing returns on capital if I pull out of mortgage-backed securities and seek less-risky financial instruments with a lower yield?
Every government action creates unforeseen consequences that must distort relative prices. There is a difference between what is seen, or intended, and what is not seen—the unintended consequences. The nineteenth-century economist Frédéric Bastiat described this, the seen and the unseen, particularly well: “In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.”28
