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A Simple Phrase for Unleashing Complex, Beneficial Processes
Posted By Don Boudreaux On October 26, 2013 @ 5:24 pm In Complexity & Emergence,Economics,Man of System,Monetary Policy,Myths and Fallacies | Comments Disabled
In this post at Free Advice  Bob Murphy quotes Paul Krugman’s (favorable) description of Keynesian economics as offering policy-makers a simple solution to fix the problem of the Great Depression. Krugman is correct that Keynesians
basically said “Push this button”– increase G, and all will be well.
Commenting on this post, Daniel Kuehn counters that
Austrians have a button to push too: abolish central banks.
It just happens to be a dumb button whereas Keynesians have a useful button.
My goal here is not to challenge Daniel’s allegation that abolishing central banks is a “dumb button.” George Selgin, my colleague Larry White, and other scholars vastly more knowledgeable than I (and than most people, including Paul Krugman and Daniel Kuehn) about monetary theory and about the history of money and banking can explain why central banks, far from being necessary, are harmful.
My point, instead, is to challenge the notion that abolishing central banks, or any other call to reduce government’s influence on the economy – any call to increase the freedom of consumers and producers to bargain and exchange with each other on mutually agreeable terms, constrained only by the basic common-law rules of property, contract, and tort and the resulting economic competition that arises – is akin to the Keynesian call to increase government spending.
The Keynesian call to increase government spending – or, more generally, almost all calls for government intervention, such as that to increase wages by commanding wages to rise through minimum-wage legislation – is indeed a simple button. ”This simple action,” the promise goes, “will bring economic betterment.” Consideration of the vast underlying microstructure of the economy, of unintended consequences, and of necessary tradeoffs hidden from the theorist by his or her mathematical models are mostly ignored. ”Increase G and Y will rise. Voila! We social engineers – having constructed a simple model in our papers and textbooks – are convinced that the real world is as simple and mechanical as are our impressive models.” Such a belief, however, is the height of simple-mindedness. It reflects a profound underestimation of the complexity of reality (not to mention an unjustified faith in the motives and capacities of politicians and other government officials).
But calls to “let the market handle it” are in fact calls to rely upon a deep and vast and iterative process for diagnosing and experimenting in many ways with steps to improve matters.
I take this opportunity to stroke my vanity by pasting below, in full, this post from March 17, 2006 , on this very matter.
“‘Let the market handle it! Let the market handle it!’ Don’t you tire of muttering this simplistic formula?” So ended an e-mail that I received from a reader.
It’s true that all of us sometimes are tempted to avoid thinking hard about complex issues and, instead, to fall back lazily upon simplistic mantras. We should guard against this weakness, in ourselves and in others.
At the same time, though, we shouldn’t confuse consistency with simplicity. The two are different. Just because I instruct my eight-year-old son to be always truthful does not mean that I’m a simpleton offering simplistic advice; it means, instead, that truthfulness is a virtue that should be pursued consistently — even if in a handful of instances my son might be made better off by telling a lie.
I admit that my proposed solution for many public-policy problems is to say “Let the market handle it.” But this response is neither naive nor lazy. It’s realistic. It reflects my understanding that almost any problem you name — rebuilding the Katrina-ravaged Gulf Coast, providing excellent education for children, reducing traffic congestion on highways — is most likely to be dealt with efficiently, fairly and effectively by the market rather than by government.
Saying “Let the market handle it” is to reject a one-size-fits-all, centralized rule of experts. It is to endorse an unfathomably complex arrangement for dealing with the issue at hand. Recommending the market over government intervention is to recognize that neither he who recommends the market nor anyone else possesses sufficient information and knowledge to determine, or even to foresee, what particular methods are best for dealing with the problem.
To recommend the market, in fact, is to recommend letting millions of creative people, each with different perspectives and different bits of knowledge and insights, each voluntarily contribute his own ideas and efforts toward dealing with the problem. It is to recommend not a single solution but, instead, a decentralized process that calls forth many competing experiments and, then, discovers the solutions that work best under the circumstances.
To recommend the market is to understand, or at least to cooperate with, the wisdom of James Buchanan’s  important insight that “order is defined in the process of its emergence .” It is to understand, at some level, Vernon Smith’s  awareness that “ecological rationality ” is greater than individual or “constructivist” rationality.
This process is flexible and it encourages creativity. It also denies to anyone the power to unilaterally impose his own vision on others.
In brief, to advise “Let the market handle it” is a shorthand way of saying, “I have no simplistic plan for dealing with this problem; indeed, I reject all simplistic plans. Only a competitive, decentralized institution interlaced with dependable feedback loops — the market — can be relied upon to discover and implement a sufficiently detailed way to handle the problem in question.”
None of this is to say that getting the government out of the way is sufficient to create peace and prosperity. Markets require a rule of law to ensure that, among other blessings, property rights are secure and exchangeable. At their best, governments can help to protect our rights. Markets also require a culture in which commerce flourishes.
Unfortunately, no recipe exists to create the legal institutions and commercial culture required by capitalism. If these prerequisites are absent, there can be no market to handle any problem. So saying “Let the market handle it” is not the same as saying “All will be just dandy if only the government gets out of the way.”
But when these prerequisite institutions are mostly in place, as they are in the United States and other developed countries, markets are amazingly creative and reliable. Calling on markets to deal with problems is then the wisest course.
Alas, though, foolishness frequently triumphs over wisdom. People too often suppose that large social problems can be solved only by deciding ahead of time which particular group of people and procedures hold the key to the solution.
While declaring “Let the government handle it” comes across as a solution, it’s no such thing. Instead, it is merely a sign of a simple and baseless faith — a simple and baseless faith that people invested with power will not abuse that power; that political appointees possess or will find better answers than will millions of people pursuing solutions in their own ways, and staking their own resources and reputations on their efforts; that only those ‘solutions’ that are spelled out in statutes and regulations and that have officials paid to implement them are true solutions.
So yes, show me a problem and I’ll likely respond “Let the market handle it.” I’ll respond this way because I know that not only is my own meager knowledge and effort never up to the task of solving big problems but that not even the Einsteins or Krugmans or Bushes amongst us can know the best solution to any social problem.
Solutions to complex social problems require as many creative minds as possible — and this is precisely what the market delivers.
Article printed from Cafe Hayek: http://cafehayek.com
URL to article: http://cafehayek.com/2013/10/a-simple-phrase-for-unleashing-a-complex-solution.html
URLs in this post:
 this post at Free Advice: http://consultingbyrpm.com/blog/2013/10/explaining-the-success-of-the-keynesian-revolution.html
 this post from March 17, 2006: http://cafehayek.com/2006/03/a_simple_rule_f.html
 James Buchanan’s: http://www.econlib.org/library/Enc/bios/Buchanan.html
 Vernon Smith’s: http://economics.gmu.edu/faculty/vsmith.html
 ecological rationality: http://nobelprize.org/economics/laureates/2002/smith-lecture.html
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