In the October 13th, 2014, edition of the Wall Street Journal, Todd Zywicki and I commemorated the 40th anniversary of the award to F.A. Hayek of the Nobel Prize in economics. You can read beneath the fold my and Todd’s appreciation of Hayek.
A Nobel Economist’s Caution About Government
Friedrich Hayek warned that intervening can make things worse. ObamaCare and Dodd-Frank, anyone?
By Donald J. Boudreaux And Todd J. Zywicki
Oct. 12, 2014 5:51 pm ET
Forty years ago the Nobel Prize in Economic Science was awarded to a scholar who believed the prize perhaps should not exist. As he graciously accepted the distinction in 1974, Austrian-British economist Friedrich A. Hayek worried aloud that thinking of economics as a science might fuel what he called “the pretense of knowledge”—the idea that anyone could know enough to engineer society successfully. He was right to fret.
Hayek’s greatest contribution to economics was to show that society is far more complex than we realize, with little pieces of knowledge dispersed among millions of individuals. “The curious task of economics,” he famously wrote in “The Fatal Conceit,” which he published in 1988, “is to demonstrate to men how little they really know about what they imagine they can design.”
Recent government interventions suggest that politicians and bureaucrats today think they can design just about anything. This ignorance has backfired, as it always does, bringing with it what economists call “unintended consequences.”
Consider the Affordable Care Act. The law’s mandates, restrictions, prohibitions, taxes and subsidies are meant to make health insurance universally available. Yet since its passage in 2010, the proportion of Americans lacking health insurance has fallen only to 13% from 16%, according to a recent study by the Centers for Disease Control and Prevention. Millions of Americans have faced higher premiums, often losing their preferred doctors, contrary to what President Obama predicted and promised.
Thanks to the hastily written law’s incentives, ObamaCare also has been a drag on employment. About 18% of employers surveyed by the Federal Reserve Bank of Philadelphia in August said that the ACA caused them to reduce the number of workers they employ. Only 3% of employers credit the ACA with enabling them to hire more workers. Those who are being hired often find their workweek capped at 29 hours, not coincidentally just one hour less than the definition of “full time” under the ACA.
Or take the 2010 Dodd-Frank law, the financial reform legislation enacted after the 2008 meltdown. The law empowers the federal government to centrally manage the risks of the American financial system, as it seeks to prevent another crisis and eliminate the problem of too-big-to-fail banks. Yet large banks still reap a $70 billion annual subsidy from the continued market perception that they will be rescued if trouble arises, according to a March report from the International Monetary Fund.
Enter the unintended consequences. Dodd-Frank has created nearly 400 new regulations, slapping the industry with more than $20 billion in new compliance costs, according to research from the American Action Forum. Even worse, these regulations tend to fall more heavily on small banks that cannot absorb the new costs as easily as their giant rivals that were the supposed risks to the economy should they flounder.
In addition, many of Dodd-Frank’s costs are passed on to consumers in the form of higher bank fees and reduced bank services. Expensive bank fees then drive many consumers out of the mainstream financial system and into the arms of payday lenders. The Federal Deposit Insurance Corp. estimates that the number of “unbanked” consumers in America rose by one million from 2009 to 2011, while payday lending has boomed during the same period. That was not the plan.
Such hubris and its inevitable results would not have surprised Hayek. In the 1970s, he saw government policies create the inflation they were designed to avoid. Government has shown again and again the folly of efforts to centrally direct complex systems.
What does Hayek recommend? A little humility. “We shall not grow wiser before we learn that much that we have done was very foolish,” he wrote in his 1944 masterpiece, “The Road to Serfdom.” It was the book’s central lesson that hubris makes us not only poorer but also less free. Today’s leaders would be wise to become better students of the late Nobel laureate.
Mr. Boudreaux is professor of economics at George Mason University, where Mr. Zywicki is a professor of law. Both are senior fellows at the Mercatus Center’s Hayek Program for Advanced Study in Philosophy, Politics and Economics.