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Quotation of the Day…

… is from my colleagues Peter Boettke’s and Virgil Storr’s Foreword to the 2015 Mercatus Center edition of the late Don Lavoie’s insightful 1985 book Rivalry and Central Planning:

Central planners in a socialist society simply lack the tools that they need to do their jobs. Absent private ownership of the means of production, there can be no market for the means of production. If there is no rivalry over the means of production, no money prices that reflect relative scarcities will emerge. Without money prices that reflect relative scarcities, it is impossible to determine whether or not economic projects are profitable (i.e., whether the benefits associated with a project are higher than the [value of] the resources that must be expended pursuing that project).

DBx: Notice the relevance of prices set by competition – what Lavoie calls economic “rivalry.”

The principal economic problem that springs from the elimination of private property rights in land, factories, forklifts, inventories, and other means of production is that there emerge no market prices of the means of production. Without such prices, there is no way for anyone, including government officials, to identify – from among the myriad possible methods of production and distribution – those relatively few methods that result in outputs the values of which exceed the costs of their production and distribution.

Obviously, with no prices at all this problem is most severe. Full-on socialism, which completely eliminates market prices in the means of production, would quickly ruin any economy. But the problem described above by Boettke and Storr does not only and suddenly appear with full-on socialism. Any obstruction of economic competition reduces the information content of prices.

Tariffs, for example, tell lies about the value of domestically produced outputs relative to the value of foreign-produced alternatives. Tariffs give the false impression that using domestically owned resources to produce the protected products is more economically justified than such resource use really is. Ditto for subsidies.

An economy as dynamic, large, and still relatively free – such as that of the United States – can endure a handful of such tariffs and subsidies without encountering easily noticeable problems. How many of us Americans notice the few extra dollars that we pay each year because of the cronyist protection of American sugar growers?

Nevertheless, a problem unseen and not lethal is nevertheless a problem. The economy – or, rather, the bulk of the denizens of the economy – would be better off without this problem.

But industrial policy of the sort advocated by the likes of Oren Cass, Julius Krein, Marco Rubio, and Elizabeth Warren would scale-up the information problem. By putting a significantly larger chunk of resource-allocation decisions into the hands of state officials, prices become more incomplete and filled with larger lies. Officials given the discretion to choose ‘winners’ have no way to know if the ‘winning’ goods and services they somehow divine Americans ‘should’ produce really are ones for which it would best for Americans to gain a comparative advantage at producing.

The more extensive and longer-lived is the industrial policy, the more distorted and unreliable become prices. Not only do the quantity and quality of the information available to industrial-policy mandarins decrease, so, too, do the quantity and quality of information available to market participants.

This truth cannot be said too often: Despite their confident assertions to the contrary, there is no way for Oren Cass, Julius Krein, Marco Rubio, Elizabeth Warren, or any other human being or collection of human beings to know what they claim to know. They cannot possibly know that the market process has ‘failed’ by resulting in Americans now having a comparative advantage at producing, say, the amount of banking services now supplied in America rather than at producing more steel or textiles or microprocessors.

These industrial-policy advocates assert; they are excellent asserters of this, that, and the other thing. But to earn the right to be taken seriously, industrial-policy advocates must explain how government officials would, on the whole, gain more reliable information about consumers’ demands and about relative resources scarcities than is conveyed to private market participants by competitive market prices.

It isn’t that today’s proponents of industrial policy offer any such explanation that is then challenged and either confirmed or debunked. No. These proponents of industrial policy don’t even bother to offer any such explanation. They think themselves to have made their case by slaying straw-man champions of free trade and free markets. And they fancy that they score decisive points by tisk-tisking the alleged ‘epistemic nihilism’ of those of us who call them out.

Yet those of us who call out the proponents of industrial policy are emphatically not epistemic nihilists. We have a long-standing, coherent, substantive, and empirically supported account of how free markets elicit, transmit, and use the vast amounts of knowledge the use of which is necessary for the successful operation of modern economies. And we do not become guilty of ‘epistemic nihilism’ by demonstrating that the obstruction of market processes reduces the amount of knowledge that is used in economic affairs.

The true epistemic nihilists are the proponents of industrial policy: by way of an explanation of how government will acquire the knowledge necessary for industrial policy to succeed these proponents have only a void; they offer absolutely nothing.