Tuesday, August 18, 2009

Politicians Don't Grow The Economy

An article from the Wall Street Journal provides evidence which separates facts from fiction.

The popular myth, being that espoused by the mainstream, particularly advocated by politicians, the media, leftwing academics, or self-righteous welfare interest groups or even the
Pope, is that governments “manages” the economy.

From Wall Street Journal, (all bold highlights mine)

``We witnessed that rarest of things last week—a politician's public humility. When France, along with Germany, reported an unexpected uptick in economic growth for the second quarter, French Finance Minister Christine Lagarde called the return to growth "very surprising." Imagine that—a major global economy stops shrinking, without the benefit of trillion-dollar stimulus packages or major reforms, and a politician doesn't rush to claim credit for the achievement.

``Politicians don't "grow" an economy like a vegetable garden, and the reasons behind economic growth in the global economy are at least as mysterious to our political class, if not more so, than they are to the rest of us. Ms. Lagarde, who spent decades in the private sector, is perhaps better placed than many politicians to appreciate this fact. A single quarter of 0.3% growth hardly means it's off to the races for France or Germany, and the euro zone's economy as a whole still shrank in the quarter, by 0.1% of GDP.

``But at a time when politicians around the world are desperate for any sign of a turnaround, it's refreshing to hear the minister responsible for France's economy speak the truth about growth. It is the product of literally millions of decisions made by millions of people about what to produce, buy and sell. Politicians can influence all that decision making, especially by increasing or decreasing the incentives to produce, work and innovate. But they can't control today's multi-trillion-dollar economies, no matter how much they'd like to take credit for doing so when things start looking better.

``France did pass a modest stimulus package earlier in the year, and it has joined the cash-for-clunkers craze that has swept the Western world. But France and Germany were among the countries in Europe that resisted Treasury Secretary Tim Geithner's imprecations to join the U.S. on the megastimulus bus, and on present evidence this fiscal restraint does not appear to be hurting their chances for recovery.”

Here's my take...

The fundamental reason why governments CANNOT manage an economy is because economies are vastly too diverse and too complex- from which are driven by the continuous changes in the human mind adapting to the rapidly evolving conditions or circumstances- to be accurately predicted or modeled which are the requisites of control or management.

Mario Rizzo on predictions, (emphasis added) ``This is because there are many radically unpredictable (in the lay sense) elements in human decisionmaking.

``One important argument in this regard was made by Sir Karl Popper in The Poverty of Historicism (also endorsed by economists George Shackle and Ludwig Lachmann). Adapting the argument for our current purposes:

``1. The course of economic events is strongly influenced by changes in the contents of the human mind that is, the future course of knowledge. This includes what we would call knowledge of the external world and of ourselves.

``2. We cannot predict, by rational or scientific methods, the future course of knowledge (in the sense of reasonable conjectures that we will have in the future or even in the sense of our moods – animal spirits).

``3. This is because if we could predict future knowledge it would not be future, but present. No one believes that we know now everything we will know in the future.

``4. Therefore, we cannot predict the future course of economic events.”

Hence, economic progress will always emanate from the entrepreneurs, because entrepreneurs operate on local [specialized and detailed] knowledge and values that allows for the coordination of the fulfillment of the needs and wants of a society through the marketplace.

As Ludwig von Mises wrote ``The vehicle of economic progress is the accumulation of additional capital goods by means of saving and improvement in technological methods of production the execution of which is almost always conditioned by the availability of new capital. The agents of progress are the promoting entrepreneurs, intent upon profiting by means of adjusting the conduct of affairs to the best possible satisfaction of the consumers. In the performance of their projects for the realization of progress they are bound to share the benefits derived from progress with the workers and also with a part of the capitalists and landowners and to increase the portion allotted to these people step by step until their own share melts away entirely."

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