In my column for the November 13th, 2009, edition of the Pittsburgh Tribune-Review, I – using a bit of 17th-century history – took aim at brazen armed robbery carried out by the government (so-called) of the State of California. You can read my column beneath the fold. (Alas, I am no longer confident that my concluding sentiment is correct.)
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… is from page 410 of the 2014 collection, The Market and Other Orders (Bruce Caldwell, ed.), of some of F.A. Hayek’s essays on spontaneous-ordering forces; specifically, it’s from Hayek’s previously unpublished 1961 lecture at the University of Virginia “Economics and Technology,” which is the third of four lectures that Hayek delivered in UVA’s Newcomb Hall during the Spring 1961 semester; the title of this lecture series by Hayek is “A New Look at Economic Theory”:
Where we want to make use of more knowledge of particular concrete facts than can be concentrated within a single agency, where we want to utilize knowledge widely dispersed among many people, we can do this only by a decentralization of decisions combined with an impersonal mechanism of co-ordination such as the market provides.
DBx: Among the many individuals who are blind to this inescapable reality are proponents of run-of-the-mill protectionism as well as proponents of more extensive schemes of obstructing ordinary people’s buying and income-earning choices – more-extensive schemes cloaked with the comforting name “industrial policy.”
The foundational case against industrial policy is not that the outcomes that industrial-policy proponents desire are undesirable in comparison to the outcomes that emerge on free markets. Industrial-policy proponents desire faster economic growth and greater and more widespread economic well-being, broadly defined to include not just more goods and services for consumption but, also, better and more satisfying jobs, lovelier communities, and increased prospects for people to thrive as they choose. Who with any modicum of civility doesn’t desire these things? The problem is not only that industrial policy offers no hope of achieving these desirable outcomes, but also that the use of industrial policy makes these outcomes less likely.
It is simply impossible for human beings to use coercion to grab an arbitrarily large chunk of property rights over resources and then to allocate those resources in ways that will in the long-run result in a higher standard of living than would have been generated by leaving those resources in private hands to be allocated according to the rules of private property, contract, and tort, and by the resulting market prices that arise from economic exchange. Markets use more knowledge than can possibly be processed consciously by the human mind or by a committee of genius human minds aided by 31st-century information-processing techniques.
What industrial policy can achieve are superficial outcomes that can be falsely passed off to the general public as desirable. Industrial policy can result in more manufacturing jobs in the home country. It can raise the real wages of workers in a select number of firms. It can reduce the home-country’s trade deficit. It can ensure that buyers in the home country purchase no inputs or outputs of a certain description from foreigners. It can decrease the home-country’s “dependence” on foreign countries.
What industrial policy cannot do is to raise overall living standards. Each of the above “achievements” of industrial policy must come at a cost that exceeds its benefits. But because these costs are spread out while these benefits are concentrated, the costs are unseen and the benefits seen. Industrial-policy proponents can then pound their chests triumphantly. And their many victims, sadly, will think this chest-thumping to be justified.
In the above, in order to highlight what industrial policy cannot achieve, I describe the best that industrial policy can possibly achieve. Yet in practice industrial policy is likely to fail even on its own superficial terms. Many of the outcomes, such as those listed above, that industrial policy can achieve are ones that industrial policy as carried out in the real world by necessarily uninformed and politically biased human beings will fail to achieve.
…..
Pictured above is UVA’s Newcomb Hall, where Hayek delivered the lecture from which the above quotation is taken.
… is this comment, offered on this post, by frequent Cafe Hayek commenter Richard Fulmer:
Someone who believes he can steer the economy is like a flea who believes he can steer a dog. While the flea can make the dog miserable, the dog is unlikely to end up where the flea intends.
DBx: Yes.
And – quite seriously – anyone who supposes that he, she, or a collection of government bureaucrats can possibly have access to enough information to outperform competitive market processes over time is delusional. Any such achievement is less likely than is the brain of a literal flea to grasp the theory of general relativity.
But there are additional concerns surrounding UBI, which are deal breakers for me. Without a strong guarantee that all anti-poverty measures would be terminated—and that they will not be brought back to life later—UBI is a terrible idea. Under such circumstances, UBI won’t live up to one of its chief selling points, namely, to serve as a more efficient substitute for the highly inefficient welter of existing welfare programs and to do it in a simple and uniform manner.
Wall Street Journal columnist Daniel Henninger laments America’s new nihilism. A slice:
The new nihilism says no matter how many reform police commissioners are appointed or black mayors elected, “nothing has changed.” That is the definition of hopelessness.
It is not hopeless.
One could, for example, give people a better chance at home ownership and home equity, as HUD Secretary Ben Carson has proposed, through reforms of the mortgage-lending market and reducing regulatory hurdles to urban housing construction. Get rid of those godawful public-housing prisons. But no, the public housing authorities are patronage mills, so it can’t happen.
George Will rightly warns of the increasingly casual use of the military.
David Henderson makes the case for saying ‘no’ to state- and local-government bailouts.
Tarnell Brown explains why we need to keep talking about George Floyd.
The always-wise George Melloan writes wisely about the lockdown. A slice:
Chucked into the wastebasket along with the Bill of Rights was fiscal restraint. Modern Monetary Theory, actually an ancient pie-in-the-sky notion recently resurrected by State University of New York at Stony Brook professor Stephanie Kelton, marched into the House of Representatives and took over, giving Nancy Pelosi and her followers permission to spend unlimited amounts of borrowed money to relieve the misery caused by the lockdowns.
The Care Act was the result, and $2.7 trillion was added to the federal budget deficit. Ms. Pelosi, thus unchained, proposed to spend yet another $3 trillion, which began to stir some belated uneasiness among Republicans, including Trump, who had previously offered little resistance to this wild flight from fiscal reality.
Mr. Robert Lighthizer
United States Trade Representative
Washington, DC
Mr. Lighthizer:
You call for the U.S. government to adopt industrial policy. And of course you insist that such a policy would result in splendid outcomes. Yet nowhere do you indicate how you and other government officials would get the information necessary to enable your schemes to outperform the competitive market processes that you propose to displace. This omission is fatal to the intellectual credibility of your case.
To see why, you could consult classic arguments by economists on the idiocy of industrial policy – arguments, for example, offered in this article by Charles Schultze and in this book by Don Lavoie. But, frankly, I doubt that you’ll bother reading these materials that you – given your position and your policy proposals – really should read. And so, because today is the 297th anniversary of the birth of Adam Smith, I simply leave you with a passage from The Wealth of Nations – a passage in which Smith eloquently warns against the pretenses of persons such as you:
What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation.*
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
* Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776 [1981]), page 456.
… is today a repeat, but a repeat that is warranted because a herd of intellectuals and politicians, left and right, is now grazing on some psychotic substance that creates the delusion that government officials are sufficiently informed and benevolent to be trusted with the power to override market processes with industrial policy; this timely quotation is from Book IV, chapter 2, paragraph 10 of Adam Smith’s magisterial 1776 work, An Inquiry Into the Nature and Causes of the Wealth of Nations:
The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
DBx: The very same arrogance, of course, is found in intellectuals who insist that politicians be given this dangerous power.
…..
June 5th is given on Adam Smith’s grave as the date of his birth in 1723.
Oren:
Debating Mike Munger at Pairagraph, you include as part of your case for industrial policy the assertion that “No economic theory holds that the attractiveness of a choice [of how to invest] will correlate with its value to the society.”
This claim is incorrect. The economic theory of how investors who are free of government direction are led to make socially advantageous choices is very well-developed. It’s the theory of profits and losses that is part of the more general theory of microeconomics. And it dates back to the writings of Adam Smith.
Here’s how it works; it’s quite beautiful and not difficult to grasp:
Consumers left free to spend their incomes as they choose reveal, through their spending choices, the relative values they attach to all products on offer. The resulting relative prices of different products both inform and incite entrepreneurs to direct resources to those productive activities featuring the largest differences between selling prices and costs of production. Production opportunities for which this difference is greatest are those for which the social value of increasing production is greatest. Happily, these opportunities are also those for which potential profits are greatest.
Businesses that successfully seize these opportunities earn profits; business that don’t succeed at doing so suffer losses. Further, profits attract yet more resources into these socially productive activities until unusually high profits there are no longer available. In contrast, businesses that waste resources by producing outputs that sell at prices too low to cover costs are driven by these losses to stop those activities. Owners of resources freed by losses from wasteful activities have strong incentives to redirect their resources into activities that produce positive value for others.
In this way, the attractiveness of each investment choice “will correlate with its value to the society.” This account is at the core of the economic theory of markets.
You will undoubtedly protest that this competitive process does not work perfectly. And you will be correct about this fact. But you will be incorrect in your protest’s implication that the case for free markets requires perfection. The economic argument for free markets is that markets over time allocate resources better than can any other method – better than tradition and better than politicians and government bureaucrats.
By now I’ve read many of your pleas for giving government officials increased power to override the processes by which markets allocate resources. But disappointingly, I’ve yet to find in your pleas any evidence that you actually understand the case for markets. The case as you present it is invariably not only a straw man, but a poorly fashioned one to boot. Even more disappointingly, I’ve yet to find in your case any explanation whatsoever of how the government officials who you would empower to override market processes will get the information required for them to perform better than the markets that they displace.
Whatever the shortfalls, lacunae, and qualifications of the economic theory of how markets allocate resources toward socially valued uses, those of us who oppose industrial policy at least have such a theory – and it’s one with a fair amount of empirical support. In contrast, you have absolutely no such theory.
We opponents of industrial policy offer theory and evidence; you offer straw men and assertions. So I close with this challenge: Tell us, publicly, just how government officials charged with carrying out industrial policy will get the necessary information to out-perform markets. Until you do so, you will not have earned the right to have your assertions or your policy proposals taken seriously.
Sincerely,
Don
… is from page 236 of Roger Koppl’s superb 2018 book, Expert Failure (link added):
Imposed knowledge cannot grow and change as freely or rapidly as synecological knowledge. In other words, it cannot grow or change as freely or rapidly as the divided knowledge emergent from an ecology of interacting, dispersed, and autonomous knowers. Imposed knowledge becomes dogma and thus deeply “unscientific” if, at least, “science” means open inquiry. Thus, apoplectic appeals to “science” in defense of the administrative state are mistaken.
DBx: Our world teems with unscientific people. And here, like Koppl above, I refer not to unschooled rubes or to those who would intentionally replace science with revelation, tradition-because-it’s-tradition, or some theology. Instead, I refer to educated, smart people who respect science.
Far too many such smart, educated people, while knowledgeable – many professionally so – of natural sciences, refuse to understand the economy scientifically. Seeing only some surface phenomena of the economy, they are blind to the inconceivably complex processes of detailed decisions and adjustments constantly in play that give rise to these relatively few observable surface phenomena.
These unscientific scientific people then, ironically, think themselves to be on the scientific forefront by measuring these surface phenomena with oh-so-sophisticated econometric tools and then proposing to improve the economy by having the government coercively adjust various of these surface phenomena into a pattern more pleasing to the fancies of the ‘scientific’ observers.
Is the observed “distribution” of income unappealing? No problem. We can make it more appealing by having the state seize income or wealth from some people and then “redistribute” this income or wealth to other people. Easy peasy.
How about the observed origins of our imports? Does the pattern of these imports appear to show that we import too much overall? Or that we import too many ‘vital’ goods? No problem. All government must do is to use tariffs and subsidies – or more ‘comprehensive’ industrial policy – designed (scientifically!) to result in a more appealing pattern of international trade. It’s a snap!
Does it appear to you that too few workers have paid leave as part of their employment contracts? Well, your interpretation of observed reality must be accurate because you, after all, are motivated by excellent intentions and you perhaps even boast a Ph.D. or a J.D. And so the solution is objectively clear: Have the state command that more workers receive paid leave as part of their employment contracts. What could be simpler?!
This pseudo-scientific arrogance is destructive.
Here’s a letter to frequent and valued Café Hayek commenter Richard Fulmer:
Mr. Fulmer:
Your comments at Café Hayek are always valued. Thank you for them.
In your comment on this post you understandably point to the national-defense exception to the case for free trade. This exception is real, yet one must take care to avoid embracing it too quickly. Politicians and pundits who call for restricting trade in the name of national defense often forget trade’s mutuality.
It’s true that the freer is American trade with the Chinese the more enriched are the Chinese. And this enrichment of the Chinese people indeed makes available to the Chinese government more resources to put to military use. But this trade also enriches us Americans and thus makes available more resources for our military use. Therefore, trade restrictions imposed by our government, while denying some resources to Beijing’s military, denies some resources also to the Pentagon. The same trade obstructions that decrease wealth in China decrease wealth here.
It follows that one cannot say in the abstract that reducing America’s trade with the Chinese will weaken China’s military relative to America’s military. Perhaps a general restriction of trade with the Chinese will have this effect. But perhaps it will have the opposite effect – namely, it might weaken our military relative to China’s. There’s no way to tell in the abstract.
The national-defense exception to free trade becomes downright illogical when offered by the likes of Donald Trump, Peter Navarro, and other vocal protectionists. Such protectionists would have us believe that when foreigners are denied real goods and services by American trade restrictions their countries are economically weakened, but that when Americans are denied real goods and services by American trade restrictions the U.S. is economically strengthened. It’s bizarre.
Sincerely,
Don
… is from page 208 of Philipp Blom’s superb 2010 book, A Wicked Company:
The first problem with Rousseau’s concept of the social contract is that the “general will” he posits has, like God, no voice to make itself heard directly. For its expression and interpretation, it must rely on particular, wise individuals to lend it theirs.
DBx: Surely among the top three greatest fallacies of the modern age – the age that was only beginning to form when Rousseau and his contemporaries were on the scene – is the notion that a group of people has a will and that this will of the People is only, or at least most reliably, revealed in the results of majoritarian democracy.
If this notion were true, it would indeed be obnoxious to impose restraints upon the expression of this ‘will’ and on it being carried out. But there is no will of the People. No group of people has a will because no group of people has a mind. A group of people is a group of different wills and different minds. These different minds might well share many preferences. Each of these minds – being human – certainly is influenced in its thoughts and preferences by what that mind imagines the other minds think of it. But a group of people, as such, has no will.
And that which doesn’t exist cannot be discovered or put into action.
There are many goods and services that are best supplied simultaneously to a group of people in a manner that makes it impossible, or too costly, to exclude particular individuals from being able to consume the good or service. An example is the reduction of air pollution in the Los Angeles basin. Every person in the basin gets to breathe the cleaner air whether or not he or she contributed to the effort to cleanse it. This inability to exclude non-payers creates obvious challenges to those who would, through private initiative, provide the service of cleansing the air.
Some group effort to cleanse the air, therefore, is likely appropriate. And individualist principles counsel that every individual who will plausibly be significantly affected by the collective effort cleanse the air have a say into whether or not, and how, that effort is carried out. Majoritarian democracy is one such way, and this way might be, all things considered, the best way.
Yet the result of majoritarian voting ought not be sold as being more than it is. The result of majoritarian voting – or, indeed, of any sort of voting or of any collective-choice process – is simply the result of that collective-choice process. This result is categorically different from the result of an individual choosing some course of action from among perceived alternatives. The latter can with accuracy be said to reveal the individual’s will; the former cannot be accurately said to reveal the will of the group or of the voters.
Among the practical and important implications of the above reality is that anyone who asserts that he or she is the voice of ‘the people’ or is carrying out ‘the will of the People’ is either delusional or lying, and in either case is not to be trusted.
