Quote of the Day: Why Central Planning Fails

Here is an excerpt of Professor Don Boudreaux’s excellent piece on why central planning fails.

Attempts to centrally plan economies are very much like attempts to fly by dressing like and flapping like a bird: utterly futile because the most that can be observed of any successful economy are a handful of large details (“assembly lines,” “retail outlets”…..). The vast majority (99.99999999999…9 percent) of the details that must work reasonably well aren’t observed by the would-be central planner. What Hayek called “knowledge of the particular circumstances of time and place” – knowledge of details spread today across the globe and across billions of different human minds – is not incidental to the successful operation of a modern economy. Utilizing that knowledge – vast, deep, changing, incredibly fine-grained detailed knowledge – is the very key to a successful market economy.

Central planning is as futile as trying to strap on wings and fly like a bird – and potentially as calamitous.

Of course, few people today advocate full-scale central planning of economies. But smaller-scale interventions suffer the same problems as do attempts at central planning: inevitably inadequate knowledge of how to intervene. Asserting, for example, that the key to economic recovery is to “increase aggregate demand” is a fiction borne from observing a true, but only large and inadequate, fact about successful economies: most producers, at any given time, are able to sell most of what they plan to sell. But to leap from this observation to the conclusion that “therefore, government can stimulate economic recovery by increasing aggregate demand” is akin to a human being costumed-up as a bird and leaping off of a mountaintop, flapping away, hoping, hoping, hoping to fly.

The failure of central planning all boils down to one thing: the limits of knowledge.

Earth Hour Myth: Life in Medieval Europe

For earth hour enthusiasts, take into account the lifestyles of the 14th & 15th centuries in Europe [quoted from Will Durant’s 1957 volume The Reformation by Professor Don Boudreaux]

Social and individual hygiene hardly kept pace with the advances of medicine. Personal cleanliness was not a fetish; even the King of England bathed only once a week, and sometimes skipped…. In all Europe – not always excepting the aristocracy – the same article of clothing was worn for months, or years, or generations. Many cities had a water supply, but it reached only a few homes; most families had to fetch water from the nearest fountain, well, or spring. The air of London was befouled by the odor of slaughtered cattle, till such carnage was forbidden in 1371. The smell of latrines detracted from the idyllic fantasies of rural life. London tenements had but one latrine for all occupants; many houses had none at all, and emptied their ordure into the yards or streets. Thousands of privies poured into the Thames; a city ordinance of 1357 denounced this, but the practice continued.

No electricity, no fossil fuels, no automobile (as well as no consumer gadgets iPad, mobile phones, computers etc...), no industries and basically little infrastructure and economic progress-- but looks very earth friendly, no? Or is it?

Yet is this the life that we desire?

Or is the environmental politics of earth hour all about the promotion of social control by would be tyrants and the advancement of the economic and financial interests of a few?

Quote of the Day: The Arbitrariness of Taxation

the very existence of taxation – any taxation – opens the door wider to those who wish to use the state to butt further into other people’s business. It’s true that we can marshall theories and arguments about the analytical primacy of the private; the analytical (and in some cases also temporal) primacy of private property; and the analytical (and also sometimes temporal) primacy of social order. That is, we can (in the tradition dating back at least to the Scottish Enlightenment and running up through recent scholars such as Mises, Hayek, Bruno Leoni, Milton Friedman, Vernon Smith, Harold Demsetz, Robert Ellickson, Deirdre McCloskey, Anthony de Jasay, and Bruce Benson) offer evidence and argument that the state is not the prime mover of society and, therefore, that the state does not deserve the widespread modern presumption that bestows upon it an open-ended claim – one bounded only by its own choices – on society’s wealth and resources.

But the fact remains that there is no method of taxation that avoids significant arbitrariness in its application and consequences. (“If X is taxed, why not tax Y, too?!”) It’s this arbitrariness – which is practically inseparable from the fiat that is legislation – that opens the door wider to those who claim, in one breath, not to wish to mind other people’s private business but, in a second breath, insist that much of what looks to non-”Progressives” as private is, alas, really public and, therefore, the business of us all.

That’s from Professor Donald J. Boudreaux.

Quote of the Day: Pedestrian Economics

Keynesianism is itself adorned in magnificent scientific costume and make-up, and its practitioners have built for themselves elaborate games to play that cause them to think that they’re engaged in something more than pedestrian economics. They can shift IS-LM curves, as well as aggregate-demand curves; they can calculate multipliers (“balanced budget” and otherwise); they can impress hoi polli with mysterious terms such as “liquidity trap,” “marginal efficiency of capital,” and “marginal propensity to consume.” But through it all, they – at least when doing Keynesian economics – ignore the very heart of the economy, namely, the goo-gob-gillions of daily adjustments that individuals make to changes in their knowledge, and the smaller – yet still large – number of creative acts that people do daily in hopes of improving their economic prospects. Paying far too little attention to these micro-level matters (or – what is the same thing – assuming these micro-level matters to be fixed and given in ways that, by assumption, leave demand as the only available variable to affect the economy), Keynesians of course can build impressive models that show how exogenous changes in demand will do this or that to the economy.

But these models miss 99 percent of the relevant action – and they miss all of the action that pedestrian economists never become aware of. No pattern of sustainable specialization and trade was ever created by aggregate demand. And no such pattern can be explained or understood by using a method of analysis that focuses only on what, in the final analysis, are largely the consequences of people’s success or failure at establishing patterns of sustainable specialization and trade.

Professor Donald J. Boudreaux expounds on the structural flaws of the Keynesian methodology.

I’d further add that pedestrian economics is in reality, heuristics (mental short cuts) paraded as economic reasoning that has been clothed with math models (mostly used or intended to justify an underlying uneconomic political belief.)

Video: Statistical Trickery on US Wage Stagnation

Professor Don Boudreaux exposes on how statistics can be subject to analytical prestidigitation. Statistical legerdemain has frequently been used to mislead the public in order to justify certain policy preferences. In the following video, Professor Boudreaux rebuts the twisted use of statistics to argue the case of US wage stagnation. (hat tip: Dan Mitchell)

Statistics are frequently used as an intellectual cover to what are truly (political or economic) biases founded on heuristics.

Quote of the Day: Limits of Knowledge

time is too short to worry about what’s merely possible. Nearly everything that is possible will never occur. The range of the possible is enormously larger than is the range of the plausible; the range of the plausible is larger than is the range of the probable; and the range of the probable is bigger than what (if we’re speaking of the past) has actually occurred or (if we’re speaking of the future) what will actually occur.

Part of what separates good thinkers (including those who are formal scholars) from poor thinkers is their wisdom in sensing what is relevant enough for analysis. Beyond an exposure to history and wide reading, I know of no recipe for instilling such wisdom. And I realize that if you lack such wisdom you necessarily lack the ability to understand that you lack such wisdom. We all think we have that wisdom; we all understand – correctly – that not everyone does have that wisdom.

From Professor Don Boudreaux.

The short version of this comes from Confucius

Real knowledge is to know the extent of one's ignorance.

Quote of the Day: Differentiating Law from Legislation

Legislators produce legislation, not law (although they do sometimes codify law). And the confusion of legislation with law – a confusion fueled daily in common talk – is one of the most pernicious occurrences that bestows upon the state more authority and respect than it has earned and that it deserves. This ‘man of system’ error reflects a widespread and profound failure of too many people – even many in the genuinely liberal camp – to reflect seriously upon the sources of order in society.

That’s from Professor Donald J. Boudreaux

Video: Understanding Subjective Value

Professor Don Boudreaux explains subjective value (hat tip Professor Art Carden; Mises Blog)

Quote of the Day: Anatomy of Crony Capitalism and Inequality

Increases in government power expand, rather than shrink, producer-groups’ access to unwarranted privileges – privileges that are unavailable in competitive markets. As the economist and historian Deirdre McCloskey notes on page 35 of her 2006 book The Bourgeois Virtues: “When American steel producers get tariffs or when sugar beet growers get import quotas it is not because of their market power but because of their political power, their access to an all-powerful state.”

That’s from Professor Donald J. Boudreaux. Said differently, worshippers of the state implicitly endorse crony capitalism and social inequality.

Quote of the Day: Law Differs from Legislation

Today’s quote of the day comes from Professor Don Boudreaux

law is not at all the same thing as legislation. Law deserves far more respect (although, still, not respect given mindlessly) than does legislation; indeed, legislation, by its very nature, is frequently used to break the law. For example, Jim Crow legislation in the late 19th-century American south broke the law that effectively enforced racial desegregation on streetcars.

One of the greatest dangers unleashed by modern language is the treatment of “legislation” and “law” as synonyms for each other – and, hence, the bestowal on legislation of the genuine respect that is due to law.

Video: Don Boudreaux on Subjective Value

Professor Don Boudreaux explains subjective value (from Learn Liberty)

Quote of the Day: The Morality of Classical Liberalism

...has been best encapsulated by this noteworthy excerpt from Professor Don Boudreaux, who writes a splendid book review of James Buchanan’s “Why I, Too, Am Not a Conservative: The Normative Vision of Classical Liberalism” (bold emphasis mine, italics original)

The modern "liberal" fancies himself to be enlightened and caring because he seeks to use government to improve the lives of others even when this involves forcing others to act differently than they freely choose to act. Although the true conservative's motives for constraining others' actions might (or might not!) differ from those of the modern "liberal," at root both conservatives and modern "liberals" disdain and distrust ordinary men and women. True liberals do not.

One result is that true liberals willingly allow peaceful adults do whatever they please. This willingness grows not from the liberal's lack of concern for his fellow man, but from his respect for his fellow man - from the true-liberal's mature recognition that his fellow man is, like himself, an adult with his own unique history, needs, and dreams. And when we treat others as adults, we accord them not only the freedom to pursue whatever peaceful paths they choose, but we also recognize them to be responsible.

We are Living in the Best Years in over Two Thousand Years

The Economist has this interesting population weighted chart which shows that much of human history and progress has been happening during the 20^th century up to the present.

The Economist writes, (bold emphasis mine)

Since there are almost 7 billion people alive today, it follows that they are making seven times as much history as the 1 billion alive in 1811. The chart below shows a population-weighted history of the past two millennia. By this reckoning, over 28% of all the history made since the birth of Christ was made in the 20th century. Measured in years lived, the present century, which is only ten years old, is already "longer" than the whole of the 17th century. This century has made an even bigger contribution to economic history. Over 23% of all the goods and services made since 1AD were produced from 2001 to 2010, according to an updated version of Angus Maddison's figures.

The chart reveals how growth in population has coincided with economic output expansion.

And second and most importantly, that human progress from the last century through the current millennium has been exponential.

Perhaps Professor Deirdre McCloskey’s “Bourgeois Revaluation” accounts for as the pivotal factor for such astounding acceleration in the rate of progress.

As Professor Don Boudreaux writes of Professor McCloskey’s thesis, (bold emphasis mine)

Only when merchants, tinkerers and practical seekers of profit in markets came to be respected -- and to be widely spoken of with respect, even with admiration -- did the social status of the bourgeoisie increase enough to make membership in that group desirable to large numbers of people. And when this Bourgeois Revaluation happened, innovation skyrocketed.

It's this innovation -- mad, fevered, historically off-the-charts amounts of innovation -- that really is what we today call "capitalism."

I am glad to have lived in this generation and to be a part of and witness such magnificent phenomenon unfold before our eyes.

And I guess that despite all the risks and the prospective afflictions which could interrupt or disrupt on such trends, the best is yet to come. I think that we are transitioning towards the information age that should characterize even faster rate of innovations under more decentralized settings (governance included).

Remember, such feat came in spite of the 2 World Wars and the gruesome tragedies of the failed experiment of communism in the 20^th century.

The above should serve as good tidings for our progenies.

Environmental Apocaplytics: Put Money Where Your Mouth Is

Professor Don Boudreaux at the Wall Street Journal does a Julian Simon (free market economist Julian Simon made a famous wager against Malthusian Paul Elrich over the false notion of resource scarcity and handily won)

Writes Don Boudreaux, (bold emphasis added)

I reject this pessimism. I do so because economics and history teach that human beings in market economies have proven remarkably creative and resourceful in overcoming challenges. And there's no reason to think that this creativity and resourcefulness will fail us in the face of climate change.

Since 1950 there have been 57 confirmed F5 tornadoes, with winds between 261–318 miles per hour, in the U.S. Of those, five struck in 1953; six in 1974. So far this year there have been four F5 tornadoes in the U.S., including the devastating storm that killed more than 130 people in Joplin on May 22. F5 tornadoes are massive, terrifying and deadly. But they generally touch down in unpopulated areas, thus going unnoticed. The tragedy of Joplin and other tornadoes this year is that they touched down in populated areas, causing great loss of life. Yet if these storms had struck even 20 years ago there would have been far more deaths.

So confident am I that the number of deaths from violent storms will continue to decline that I challenge Mr. McKibben—or Al Gore, Paul Krugman, or any other climate-change doomsayer—to put his wealth where his words are. I'll bet $10,000 that the average annual number of Americans killed by tornadoes, floods and hurricanes will fall over the next 20 years. Specifically, I'll bet that the average annual number of Americans killed by these violent weather events from 2011 through 2030 will be lower than it was from 1991 through 2010.

If environmentalists really are convinced that climate change inevitably makes life on Earth more lethal, this bet for them is a no-brainer. They can position themselves to earn a cool 10 grand while demonstrating to a still-skeptical American public the seriousness of their convictions.

But if no one accepts my bet, what would that fact say about how seriously Americans should treat climate-change doomsaying?

Do I have any takers?

Economic Freedom and the Free Trade Exceptionalism

What distinguishes today’s quality of living conditions than from the past?

It’s not that political order has changed so much to improve society, i.e. democracies doesn’t automatically translate to economic betterment.

It’s not about killing high target fugitives either...

As Professor Don Boudreaux wonderfully writes,

Secular and spiritual authorities have killed people for millennia. And these authorities have often employed impressive organizational talents and state-of-the-art techniques both to gather intelligence on the whereabouts of their prey and to perform the actually killings. In taking down Bin Laden, the U.S. government did what governments throughout the ages have regularly done. Success at this task does nothing to distinguish America from any of hundreds of other societies – societies present and past, good and bad, great and contemptible, civil and uncivil...

Our civilization is vindicated by our supermarkets full of food, by our shopping malls full of clothing, by our homes with solid floors and solid roofs and air-conditioning and automatic dishwashers, by iPads and smart phones and aspirin and antibiotics and Amazon.com, by the globe-spanning cooperation that makes these things real – and by the freedom from central direction and mind-numbing, soul-shriveling superstitions that have made so many other ‘civilizations’ sanguinary and hellish.

It is free trade (and the innovations derivative of trade) and economic freedom that has made that remarkable difference.

Video: Don Boudreaux On Understanding Trade Deficits

Professor Donald Boudreaux explains why trade deficits shouldn't be feared (HT: Mark Perry)

Celebrating The Declining Influence of Luddism and Blogging

I will be blogging a little lot less over the coming days as two of my children will be having their graduation rites and I will be entertaining my mother who is a resident of Hong Kong and who also came to attend these ceremonies.

Nevertheless here is a quote from Professor Don Boudreaux on the declining influence of Luddism (bold emphasis mine)

This year marks the 200th anniversary of the birth of Luddism. In the early 19th century, many Brits worried that increasing mechanization of the textile industry posed an unfair disadvantage to flesh-and-blood workers. Many of these technology skeptics, known as "Luddites," destroyed machinery in an effort to protect flesh-and-blood workers from the competition of Technologia's workers.

Luddism, thankfully, is today embraced only by a small group of delirious romantics longing for imaginary pastoral bliss.

Hopefully, protectionism will soon go the way of Luddism, freeing us from the superstition that trade with foreigners is less enriching than is trade with fellow citizens.

As people get to realize and adapt more of what represents as a genuine workable way to prosperity via free trade, protectionism grounded on the fantasies of Luddism will hopefully fade away too.

Quote of the Day: Innovation Drives Productivity Growth

Again here is another of Professor Donald Boudreaux’s provocative wisdoms, which makes my quote of the day... (bold emphasis mine)

Economic growth is overwhelmingly the proximate result of innovations that allow fewer workers to produce more output – thereby releasing that most precious of all resources, human labor, for use in producing goods and services that earlier were too costly to produce.

Free Trade As Unilateral Policy

A popular objection to free trade is when a nation's trading partner is perceived as having to apply mercantilist policies, then trade relations is seen as uneven. Thus the popular oversimplified political justification is to go tit-for-tat via "fair or managed trade" which is euphemism for implied protectionism.

This we say is wrong. Even under such conditions Free Trade should be a unilateral policy. Why?

As Professor Don Boudreaux lucidly explains, (bold highlights mine)

By erecting tariffs that dampen competition, mercantilism encourages home producers to become unresponsive and uncreative. By issuing subsidies paid for with higher taxes, government debt, or distortionary monetary policies, mercantilism helps exporters only by inflicting more-sizable damages on the nation’s economy writ large. By turning the national government into a bazaar for the buying and selling of monopoly privileges, mercantilism deflects entrepreneurial energies away from building better mousetraps and into building politically advantageous political connections. And by raising prices in the home market, mercantilism makes consumers poorer as well as makes producers who rely upon imported inputs less efficient.

Well said.

[update: Earlier what I thought as saving as in a draft, I mistakenly published-thus the garbled commentary]

Quote Of The Day: Gold Standard Is The Most Credible Form Of Commitment To Prudent Fiscal And Monetary Policies

Cafe Hayek’s Professor Don Boudreaux quotes Benn Steil and Manuel Hinds in Money, Markets & Sovereignty:

There are many reasons why economies became dramatically more integrated after 1870, both within and across countries. Among these are tremendous technological advances in transportation and communication, particularly the railroad, steamship, telegraph, cable, and refrigeration. The spread of free-trade thinking from Britain to the European continent, underpinned by vested interests in Germany and France which saw greater export opportunities afforded through trade liberalization, also contributed to large declines in some import tariffs. But the disintegration of markets internationally, particularly capital markets, coincided strongly with the tribulations and eventual collapse of the classical gold standard after 1914. The heyday of globalization was an historical period in which monetary nationalism was widely seen as a sign of backwardness; adherence to a universally acknowledged standard of value a sign of abiding among the civilized nations. And those nations that adhered most reliably to the gold standard (such as Canada, Australia, and the United States) paid lower borrowing rates in the international capital markets than those which adhered less (such as Argentina, Brazil, and Chile). The gold standard not only reduced exchange risk, but country default risk. The evidence suggests strongly that being on the gold standard represented the most credible form of commitment to pursuing prudent fiscal and monetary policies over time, given the ever-present temptation to inflate away the burden of debt and manufacture seigniorage revenues.

The other way to say it is that proof of such commitment will always be reflected on the currency, the US dollar. This means that the US dollar would retain its purchasing power which was true for most of 1800-1913.

Since 1913, the advent of the US Federal Reserve, the US dollar gradually and steadily lost her purchasing power. Today, $100 US dollar in 1913 buys only $4.54 or a decline of over 95% according to the US Bureau of Labor and Statistics’ inflation calculator.