Harvard’s Greg Mankiw Channels F.A. Hayek

It’s rare to see experts of high stature exhibit meekness.

Harvard Professor and former chairman of President Bush's Council of Economic Advisors Greg Mankiw writing in a New York Times column channels F.A. Hayek. (pointer to Professor Russ Roberts) [bold emphasis mine]

AFTER more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers.

Now, if you follow economic commentary in the newspapers or the blogosphere, you have probably not run into many humble economists. By its nature, punditry craves attention, which is easier to attract with certainties than with equivocation.

But that certitude reflects bravado more often than true knowledge.

This exactly is the knowledge problem as Hayek pointed out long ago, which I keep talking about in this space.

F. A. Hayek in The Use of Knowledge in Society wrote, (bold emphasis mine)

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

My salute to Mr. Mankiw.

Blessed are the meek for they shall inherit the earth.

Canada’s Politics: It’s Hayek Over Keynes As Harper Conservatives Win Majority

As I earlier noted, Keynesians have been on a losing streak.

Now we seem to be seeing this phenomenon percolate even in the realm of politics, a traditional Keynesian bastion.

This from Bloomberg, (bold highlights mine)

Canadian Prime Minister Stephen Harper won a majority of seats in Parliament for the first time, giving him a mandate to fund corporate and personal income tax cuts with curbs on spending.

Harper’s Conservatives were ahead or leading in 166 districts, according to preliminary results from Elections Canada. Jack Layton’s New Democratic Party was leading in 103 seats and will form the official opposition for the first time, followed by 34 for the Liberal Party led by Michael Ignatieff. The separatist Bloc Quebecois led in four seats with the Green Party ahead in one. The Conservatives held 143 seats in the 308- seat legislature before the vote was called in March.

The victory in the national election yesterday ends seven years of minority governments that have fueled government spending, and may make it easier for Harper to open up industries to foreign investment. Throughout the campaign, Harper said he needed a majority to secure the country’s economic recovery.

Stephan Harper grew up on Hayekian ideals, as this report from Canadianbusiness.com shows...

The government’s sudden embrace of Keynesian economics — the theory that you can spend your way out of a recession — is pretty much the mirror image of everything Harper has fought for over the past two decades. He complained bitterly about big government, high taxes and profligate spending during his time at the Reform Party (1987–1997), NCC (1997–2001), as leader of the Opposition (2002–2006), and even as prime minister, since he was first elected on Feb. 6, 2006. During the latest election campaign, Harper routinely criticized the tax-and-spend policies of his opponents, and as recently as October, he declared matter-of-factly: “I know economists will say we could run a small deficit, but the problem is that once you cross that line, as we see in the United States, nothing stops deficits from getting larger and larger and spiralling out of control.”

Few of Harper’s friends or supporters believe he honestly thinks the massive stimulus spending outlined in his latest budget will rescue Canada’s slowing economy. The measures, they say, are merely an attempt to stave off a non-confidence vote, like the one that loomed after Finance Minister Jim Flaherty threatened to remove the multimillion-dollar subsidy opposition parties have come to depend on in his economic statement in November. “Stephen Harper didn’t suddenly wake up and become a Keynesian,” says Frank Atkins, an economics professor at the University of Calgary who once taught the prime minister. “This is nothing more than a political budget.”...

Returning to the University of Calgary to work on his master’s degree, Harper began reading the works of Austria’s Friedrich Hayek, the influential conservative economist. Hayek vehemently disagreed with the Keynesian notion that government spending could limit economic downturns, and instead warned that intervention in the marketplace would merely prolong suffering and create unintended, and harmful, consequences.

(hat tip Greg Ransom)

George Soros Misrepresents F.A. Hayek

Billionaire and philanthropist George Soros attempts to pander to followers of the great F. A. Hayek, he writes,

Human beings act on the basis of their imperfect understanding — and their decisions have unintended consequences. That makes human affairs less predictable than natural phenomenon. So Hayek was right in originally opposing scientism.

At the time of the Economica articles, Popper was between Hayek and the socialist planners. He was just as opposed as Hayek to communism’s threat to individual liberty, but he advocated what he called piecemeal social engineering rather than laissez-faire.

Here I sided with Popper. But Popper and Hayek were not that far apart. I was influenced by both — and I also found fault with both.

By identifying Hayek’s inconsistency and political bias, I do not mean to demean him — but to improve our understanding of financial markets and other social phenomena.

When F. A. Hayek posited of a society that emerges from spontaneous order, what he meant was that there is no specific social or economic outcome set by anyone most especially by central planners, but of a system that emerges from interactions done by individuals.

To quote Hayek, (bold emphasis mine)

A spontaneous order is a system which has developed not through the central direction or patronage of one or a few individuals but through the unintended consequences of the decisions of myriad individuals each pursuing their own interests through voluntary exchange, cooperation, and trial and error.

Thus, it is plain nuts to say that Hayek has been plagued by political bias.

Political bias represents ideology which sees political and economic order as having specific socio-economic outcomes designed by various schools of thought on central planning, which is the opposite of what Hayek or his followers stand for.

Moreover, Soros says he is influenced by Hayek. But as Greg Ransom aptly points out,

Soros calls for a middle ground between Popper and Hayek, between the far left and Hayek. What Soros doesn’t explain is why there is no middle ground in his political activities — or why he funds so many fundamentally dishonest and hard left “Think Tanks”, people who have no problem mischaracterizing or even smearing the ideas of Hayek — and those who teach them — at the drop of a hat.

In short, what Soros says and what he does conflicts. It is Mr. Soros who seems to be plagued by inconsistencies and not Hayek.

Moreover, like typical believers in central planning, the common argument begins with a cart before the horse “strawman” argument; Soros favorite is to use “market fundamentalism” to typify Hayek’s supposed ideology.

Bob Wenzel exposes this fallacy,

The fact of the matter is that free market advocates understand that the free market system is about profits and losses, and that losses are just as important in directing an economy in a better direction as are profits. There is no belief that there are no errors in a market system.

In addition, to pin the blame on “inherent market instability” as the work of “market fundamentalism” or free market forces is totally misguided.

For instance, bubble cycles won’t occur without interventionism (inflationism), most especially from Central Banks. Since policies and regulations affect people's behavior and actions, the stimulus response mechanism constituting Soros' reflexivity theory comes to play.

In short, people respond to incentives which policies or regulations shape.

I would partly agree with Soros for his view on human action via the reflexivity theory (which I also use in analyzing the markets), but I think he has either misunderstood or misrepresented Hayek.

Video: Fight of the Century: Keynes vs. Hayek Round Two

Below is the sequel to the marvelous 'Fear The Boom And Bust- Keynes versus Hayek Rap Video' produced by John Papola and Professor Russ Roberts.

The 'Fight of the Century: Keynes vs. Hayek Round Two' is themed on Keynes-Hayek debate over government spending (source: Cafe Hayek)

Social Media Is Hayek’s Knowledge Theory At Work

Anyone who says or writes about social media and claims that today’s digital age is NOT about or related to Hayek’s Knowledge theory is dead wrong. They are either misrepresenting Hayek or have not read Hayek but has the chutzpah to make unfounded derogatory remarks.

The information age (third wave) is very much about the growing realization of Hayek’s Knowledge theory.

Proof?

Friedrich von Hayek wrote, (bold emphasis mine)

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Well here is how technology enabled information gathering has been benefiting businesses, according to the New York Times, (bold highlights mine)

INFORMATION overload is a headache for individuals and a huge challenge for businesses. Companies are swimming, if not drowning, in wave after wave of data — from increasingly sophisticated computer tracking of shipments, sales, suppliers and customers, as well as e-mail, Web traffic and social-network comments. These Internet-era technologies, by one estimate, are doubling the quantity of business data every 1.2 years.

Yet the data explosion is also an enormous opportunity. In a modern economy, information should be the prime asset — the raw material of new products and services, smarter decisions, competitive advantage for companies, and greater growth and productivity.

Is there any real evidence of a “data payoff” across the corporate world? It has taken a while, but new research led by Erik Brynjolfsson, an economist at the Sloan School of Management at the Massachusetts Institute of Technology, suggests that the beginnings are now visible.

Mr. Brynjolfsson and his colleagues, Lorin Hitt, a professor at the Wharton School of the University of Pennsylvania, and Heekyung Kim, a graduate student at M.I.T., studied 179 large companies. Those that adopted “data-driven decision making” achieved productivity that was 5 to 6 percent higher than could be explained by other factors, including how much the companies invested in technology, the researchers said.

In the study, based on a survey and follow-up interviews, data-driven decision making was defined not only by collecting data, but also by how it is used — or not — in making crucial decisions, like whether to create a new product or service. The central distinction, according to Mr. Brynjolfsson, is between decisions based mainly on “data and analysis” and on the traditional management arts of “experience and intuition.”

Essentially this means that businesses don’t rely on top down flow of information. Instead, supported by the rapidly advancing computing capacity of the current generation of computers, data gathering has been decentralized—“increasingly sophisticated computer tracking of shipments, sales, suppliers and customers, as well as e-mail, Web traffic and social-network comments”—which operates on real time basis that allows the businesses to rapidly store and process data “how it is used” and thus employ a “data-driven decision making”

Not Hayek?

More from the late great Hayek,

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. But the "man on the spot" cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.

Again Hayek’s Knowledge Theory extrapolated in today’s social media setting, from the New York Times anew (bold emphasis mine)

STILL, the software industry is making a big bet that the data-driven decision making described in Mr. Brynjolfsson’s research is the wave of the future. The drive to help companies find meaningful patterns in the data that engulfs them has created a fast-growing industry in what is known as “business intelligence” or “analytics” software and services. Major technology companies — I.B.M., Oracle, SAP and Microsoft — have collectively spent more than $25 billion buying up specialist companies in the field.

Well when Hayek said “further information as he needs to fit his decisions into the whole pattern of changes”, applied in today’s lingo they are called “business intelligence” or “analytics” software and services.

Get it? This is very much Hayek’s theory at work.

Experts who pretend that they know, don’t really know.

The presume superior knowledge out of self importance and deceptive conceit by relying on false theories and flawed models from which they extrapolate as foundations for their preferred political theory. (Let them bet on markets and see how they can predict them with consistency. I'll bet they'll be consistently wrong)

Again as Hayek once wrote,

All political theories assume, of course, that most individuals are very ignorant. Those who plead for liberty differ from the rest in that they include among the ignorant themselves as well as the wisest.

And that’s where the Hayek and statists camp differ. It’s in the admission of the knowledge problem.

Markets Operate Under The Hayekian Knowledge Framework

Markets, acting on and coordinated by information, are likewise distinct, dispersed and localized.

Winnie Phua of Matthews International Capital Management, LLC writes about the recent closure of the popular Barbie in China, (bold highlights mine)

The sudden closure of the Barbie store left many consumers baffled. The U.S. toy maker has stated that it is reorganizing its China strategy. Others, however, argue that the store is closing because Barbie’s classic western appeal has not caught on in China where girls tend to prefer cute animated characters, such as Hello Kitty, over a womanly life-like doll. Barbie’s price point (US$15 to US$30) has also been criticized as too high, particularly for a toy with limited brand recognition or nostalgic factor for parents who hold the purse strings. Other similar dolls can be purchased online with complete wardrobe sets for as little as US$8.

Mattel’s closure of the store highlights the fact that brand power enjoyed by well-known brands in the West may not always guarantee their success in the East. It also reiterates the importance of localizing products and services when expanding in new markets. Home Depot, the U.S. retailer of home improvement and construction products, for example, entered China in 2006 but has been shuttering stores due to low demand from local residents. The “Do-it-Yourself (DIY)” concept apparently has not resonated well with Chinese consumers as migrant laborers offer easily available and cheap construction needs for many urban residents.

This reminds me of the great Friedrich von Hayek who wrote of the "The Use of Knowledge in Society" (bold highlights mine)

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Bottom line: Today’s marketplace emphasizes on the importance of dispersion, uniqueness or specialization and its localized nature. This means that fundamental corporate marketing strategies must be designed around Hayek’s Knowledge framework.

The Web As Foundation To The Knowledge Revolution

``The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.”- Friedrich von Hayek

Dictators of Tunisia and Egypt have recently been toppled. Autocratic leaders of Yemen, Jordan and Algeria have likewise been under political pressure.

The web’s real time connectivity coursed through social media has allowed for a widespread diffusion of information...and knowledge. And this has lowered the cost of organization and mobilization that has apparently increased the demand for political spontaneous actions in the form of “people power” political movements.

In short, the economics of the web has been transforming the political order[1].

But when we read social media sceptics like such as Stratfor’s Marko Papic and Sean Noonan, who writes[2]... (bold highlights mine)

Social media alone, however, do not instigate revolutions. They are no more responsible for the recent unrest in Tunisia and Egypt than cassette-tape recordings of Ayatollah Ruholla Khomeini speeches were responsible for the 1979 revolution in Iran. Social media are tools that allow revolutionary groups to lower the costs of participation, organization, recruitment and training. But like any tool, social media have inherent weaknesses and strengths, and their effectiveness depends on how effectively leaders use them and how accessible they are to people who know how to use them...

The key for any protest movement is to inspire and motivate individuals to go from the comfort of their homes to the chaos of the streets and face off against the government. Social media allow organizers to involve like-minded people in a movement at a very low cost, but they do not necessarily make these people move.

...we understand that such objections have been founded on superficial premises-mostly from underrating the importance of knowledge and the continued the expectations that political developments flow from top-down dynamics.

Hayek’s Knowledge Revolution

Knowledge, according to the great Friedrich von Hayek[3], never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

This simply means that everyone’s unique perspective represents as dispersed knowledge. When dispersed knowledge are combined, exchanged, mimicked and improved upon these interactions result to fresh or innovative ideas.

Prolific author and writer Matt Ridley calls such phenomenon as Ideas having Sex[4].

Professor Don Boudreaux expounds[5] on Matt Ridley’s intellectual intercourse.

The easier it is for ideas to get together, check each other out, and jump into bed with each other, the greater will be the number of newly created ideas — ideas that would not otherwise be conceived.

Copulating ideas has also another very important role: coordination of diversified information into the production of goods and services. And this has been the path to our (human) progress.

Matt Ridley, author of the very impressive book the Rational Optimist writes[6]

``the sophistication of the modern world lies not in individual intelligence or imagination. It is a collective enterprise. Nobody—literally nobody—knows how to make the pencil on my desk (as the economist Leonard Read once pointed out), let alone the computer on which I am writing. The knowledge of how to design, mine, fell, extract, synthesize, combine, manufacture and market these things is fragmented among thousands, sometimes millions of heads. Once human progress started, it was no longer limited by the size of human brains. Intelligence became collective and cumulative.

And that’s exactly what the web has been facilitating—an unlimited orgy of ideas—Hayek’s knowledge revolution is essentially being realized through social media.

From Vertical To Horizontal Flow

In the past the flow of information reflected on how economic production had been organized: the industrial age marked by mass production and thus a top to bottom dynamic. This holds true even with the political framework. From the top down economic structure emerged the grand experiments with centralized form of governance in the form of communism, socialism, autocracy, fascism and totalitarianism.

The traditional medium of information for the consuming public had been mostly through TV, radio and newspapers. Because of the limited networks, these institutions discriminated on the information it chose to broadcast, thus the exchange of ideas had largely been constrained.

Governments easily resorted to information control via political censorship in order to regulate “the moral and political life of the population[7]” or when political leaders felt the need to advance their interests.

Controlling the flow of information meant controlling the medium. Thus, political leaders throughout history have attempted to control the medium to preserve political power.

This time is proving to be different.

Today information flows real time and horizontally, enabled by the web.

People can simply self publish their thoughts, unedited, via the blogsphere (which incidentally accounts for an estimated 133 million[8] bloggers and growing) or through privately owned websites.

People can send messages via email or even by text messages via mobile phone.

People can also air blips of short messages or comments via the online community as Facebook and Twitter.

Or produce videos via podcasting and youtube that are being broadcasted via blip.tv or vimeo or video aggregators which has been posing a threat to TV.

And investors have been following the money trail.

As more and more people get wired or become netcitizens AD money spent on the internet has substantially been growing[9] see figure 6.

Figure 6: AD Spending Follow the Money Trail (Morgan Stanley)

Morgan Stanley’s Mary Meeker predicts of the explosion of mobile internet as the major source of growth for the web[10].

Even some TV programs today try to interact with the web by publishing tweets or facebook comments of audiences on air!

The democratization of information from the web or cyberspace has dramatically altered the complexion of knowledge distribution.

Gossip And The Transition To A Horizontally Based Political Order

In the hunter gatherer society, where our ancestors wandered in small tightly knit groups, gossips were used as a tool to evaluate relationships and as form of social discipline.

Aside from useful information, gossips, according to David Brooks of the Biorational[11], served to ``maintained social bonds and enforced social norms. In small groups like our ancestors' hunter-gatherer bands, in which everyone talks to everyone else regularly, liars and social cheats were found out quickly and were dealt with quickly. So lying and social cheating were relatively rare.”

The introduction of the web has basically brought back the traditional role of gossip.

For instance, Wikileaks has spilled the beans on many stealth government activities, and wikileaks has been instrumental in unleashing the popular “Jasmine” revolt in Tunisia[12].

Despite governments attempt to harass and control the founder of wikileaks, the success wikileaks has prompted for the broadening of competition.

As Professor Gary North rightly observes[13],

WikiLeaks has taken this to a new level. Now a disgruntled former WikiLeaks employee is branching out on his own. He has started a new organization, OpenLeaks. This is the kind of competition I love to see. A Reuters story describes what is about to happen. "All across Europe, from Brussels to the Balkans, a new generation of WikiLeaks-style websites is sprouting."...

As the number of these sites increases, it will become more difficult for governments to contain the leaks. The desire of leakers to become important overnight will grow.”

Of course governments can initiate countermoves such as instituting “firewalls” (as in the case of China) or kill-switch strategy[14] or the shutdown of ISP providers or disseminate counterpropaganda.

Cuba’s government for instance has designed a campaign to counter the web. Unfortunately this was again exposed, according to Wall Street Journal’s Mary O’Grady[15]

Last week a leaked video of a Cuban military seminar on how to combat technology hit the Internet. It demonstrates the dictatorship's preoccupation with the Web. The lecturer warns about the dangers of young people with an appealing discourse sharing information through technology and trying to organize.

As in the case of Egypt, the kill switch strategy has ultimately failed[16].

Circulating political propaganda or spreading disinformation can easily neutralized by “local based” knowledge or by speciality sites (e.g. snope.com).

One important development from the web is that it has altered the way governments have been behaving, as governments seemingly become more cautious and possibly less repressive in dealing with transgressors or with the political opposition, as in the case of China.

Borje Ljunggren of Yale Global notes of several incidences and sees[17] that

In case after case since 2004, the internet has dramatically changed the course of an event, forcing the party to maneuver between response and repression.

Mr. Ljunggren further notes that Chinese state control of information has also been under pressure,

He further writes, (bold emphasis mine)

Censorship is an organic part of the party-state and will no doubt remain a crucial weapon, but its usage is increasingly exposed as the Chinese internet society becomes aware of the extent to which entrenched party interests determine their access to information. As a consequence, an idea of a “right to know” is taking shape in China’s rapidly growing online civil society and this could, in Shirk’s analysis, become “the rallying cry of the next Chinese revolution.

While internet freedom clearly is not about to be declared, civil society and new technology will over time push limits beyond the axiomatic boundaries of the party-state.”

As one would notice the vertical-hierarchal structure of governments are constantly held under pressure by the democratization of knowledge.

And this should apply with political ideology too.

Political and economic ideology latched on a vertical top-bottom flow of power will be on a collision course with horizontal real time flow of democratized knowledge.

This would likely result to less applicability of ideologies based on centralization, which could substantially erode its support base and shift political capital to decentralized structure of political governance that would conform with the horizontal structure of information flows.

People will know more therefore control from the top will be less an appealing idea.

The final word from futurist Alvin Toffler[18], who predicted this Hayekian Knowledge Revolution which he molded through as his Third Wave concept.

``Computers can be expected to deepen the entire culture’s view of causality, heightening our understanding of the interrelatedness of things, and helping us to synthesize meaningful “wholes” out of the disconnected data whirling around us....The intelligent environment may eventually begin to change not merely the way we analyze problems and integrate information but even the chemistry of our brains.”

---

[1] See The Web Is Changing The Global Political Order, January 29, 2010

[2] Papic Marko and Noonan Sean Social Media as a Tool for Protest, stratfor.com February 3, 2010

[3] Hayek, Friedrich August von The Use of Knowledge In Society, Individualism and Economic Order, Mises.org, p.77

[4] See Matt Ridley: When Ideas Have Sex, August 11, 2011

[5] Boudreaux Donald J. Promiscuous, Productive Ideas, CATO Unbound, September 10, 2010

[6] Ridley Matt, Humans: Why They Triumphed, Wall Street Journal, May 22, 2010

[7] Newth, Mette Newth The long history of censorship Beacon for Freedom of Expression, 2001

[8] Bradley Phil, Great Blog statistics, Phil Bradley’s Weblog

[9] See The Deepening Of The Information Age: News Sources And Ad Spending, January 7, 2011

[10] Meeker, Mary Internet Trends 2010 by Morgan Stanley Research, slideshare.net 2010

[11] The Bio-Rational Institute Pleistocene brain, mobile phone, May 26, 2006

[12] International Business Times, Wikileaks helped spark Tunisia revolt : FPJ January 29, 2011

[13] North Gary When the Insiders Lose Control, February 3, 2011

[14] Cowie James, Can the Internet Tame Governments? – Part I, Yale Global, February 9, 2011

[15] O’Grady, Mary Anastacia Will Cuba Be the Next Egypt?, Wall Street Journal February 7, 2011

[16] See Egyptian Revolt: Web Censorship Fails, February 1, 2011

[17] Ljunggren Borje Can the Internet Tame Governments? – Part II, Yale Global February 11, 2011

[18] Toffler, Alvin The Third Wave p 175

Competition Brings About Economic Growth

In an article, “Greater competition in mobile providers accelerates business growth in Solomon Islands” the World Bank writes, (bold highlights mine)

The introduction of a new mobile phone provider earlier this year has significantly reduced call costs in Solomon Islands.

More people now have access to cheaper telecommunications services, resulting in business growth due to better access to market information.

The multilateral 'government' institution admits that competition is the essence of business and or economic growth.

As Friedrich A. Hayek wrote in The Meaning of Competition

Competition is essentially a process of the formation of opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market. It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do. It is thus a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant

In a competitive society, everybody’s opinion counts because they are expressed through the markets. And competition brings out the best in men, mostly for the benefit of society.

Hayek’s Ideas As Marketing Strategy

In McKinsey Quarterly’s latest paper, “Capturing the world’s emerging middle class”, authors David Court and Laxman Narasimhan recommends several strategic steps for companies to capture and profit from the rapidly growing and huge middle class markets in emerging economies.

It occurred to me that the gist of the proposals have been latched upon harnessing local knowledge which appears no less than F. A. Hayek’s ideals.

From McKinsey, (all bold highlights mine)

``Another tack is to work at a more local level, gaining scale in specific regions and categories by teaming up with deeply knowledgeable on-the-ground partners. They can help not only in product development but also in distribution and market positioning—the crucial final steps to reaching highly local consumer markets.”

More...

``Other strategies for penetrating this affordable, accessible, and local market are to use celebrity endorsements and to leverage local knowledge, either selectively, in areas such as distribution, or through more comprehensive alliances...

And...

```Using local vendors is critical to running a lean operation: many multinationals have found, for example, that capital outlays in emerging markets are often only 30 percent of those required for a factory in the West if they use local resources for plant and process engineering and to execute projects.

Here is Friedrich August von Hayek on “The Use of Knowledge in Society” (bold emphasis mine)

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

Bottom line: The Hayekian concept of knowledge does not just function as an economic theory, but importantly has micro applications in other fields as marketing. In short, the application of Hayek’s Knowledge problem could translate to an edge in business application.

F. A. Hayek On Keynes: I Think He Would Have Been Fighting The Inflationary Policy

Here is a short video interview of F.A. Hayek in discussion of wage rates and the deflation during the British Depression of the 20s and 30s.(Hat tip Greg Ransom)

Some important quotes,

“While I’d spent a year analyzing in great detail his earlier book the Treatise on Money and then only to hear him by the time the second part of my criticism was published “oh I no longer believe in all that”, I didn’t want to invest more effort in criticising the general theory who’s success is still a puzzle to me, because it reverted to a very primitive idea which had been clearly refuted in the nineteenth century that there is a single relation between the demand-aggregate demand for final products and employment. So much so that Leslie Steven in the 1880s had pointed out “The test of a good economist is that he does not make that particular mistake. Well Keynes revived it and gave a plausible explanation and, I should add that he did not succeed while he lived. But when he died he was suddenly raised to sainthood.”

“The very last time I saw him about six weeks before his death...and talked to him after dinner and asked him whether he wasn’t alarmed by what his pupils naming two....were agitating for more expansion. when in fact, the danger was clearly inflation. He completely agreed with me and assured me my theory was frighteningly important in the 1930s when the question was of combating deflation. If inflation ever becomes a danger, I am going to turn around public opinion like this and six weeks later he was dead and couldn’t do it. I think he would have been fighting the inflationary policy.”

The Revivalism of Friedrich Hayek's Ideas

Great stuff by Professor Russ Roberts at the Wall Street Journal on "Why Friedrich Hayek Is Making a Comeback"

(all bold highlights mine)

He championed four important ideas worth thinking about in these troubled times.

First, he and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story. Boosting aggregate demand by keeping school teachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn. If those school teachers aren't buying more houses, construction workers are still going to take a while to find work. Keynesians like to claim that even digging holes and filling them is better than doing nothing because it gets money into the economy. But the main effect can be to raise the wages of ditch-diggers with limited effects outside that sector.

Second, Hayek highlighted the Fed's role in the business cycle. Former Fed Chairman Alan Greenspan's artificially low rates of 2002-2004 played a crucial role in inflating the housing bubble and distorting other investment decisions. Current monetary policy postpones the adjustments needed to heal the housing market.

Third, as Hayek contended in "The Road to Serfdom," political freedom and economic freedom are inextricably intertwined. In a centrally planned economy, the state inevitably infringes on what we do, what we enjoy, and where we live. When the state has the final say on the economy, the political opposition needs the permission of the state to act, speak and write. Economic control becomes political control.

Even when the state tries to steer only part of the economy in the name of the "public good," the power of the state corrupts those who wield that power. Hayek pointed out that powerful bureaucracies don't attract angels—they attract people who enjoy running the lives of others. They tend to take care of their friends before taking care of others. And they find increasing that power attractive. Crony capitalism shouldn't be confused with the real thing.

The fourth timely idea of Hayek's is that order can emerge not just from the top down but from the bottom up. The American people are suffering from top-down fatigue. President Obama has expanded federal control of health care. He'd like to do the same with the energy market. Through Fannie and Freddie, the government is running the mortgage market. It now also owns shares in flagship American companies. The president flouts the rule of law by extracting promises from BP rather than letting the courts do their job. By increasing the size of government, he has left fewer resources for the rest of us to direct through our own decisions.

Hayek understood that the opposite of top-down collectivism was not selfishness and egotism. A free modern society is all about cooperation. We join with others to produce the goods and services we enjoy, all without top-down direction. The same is true in every sphere of activity that makes life meaningful—when we sing and when we dance, when we play and when we pray. Leaving us free to join with others as we see fit—in our work and in our play—is the road to true and lasting prosperity. Hayek gave us that map.

Despite the caricatures of his critics, Hayek never said that totalitarianism was the inevitable result of expanding government's role in the economy. He simply warned us of the possibility and the costs of heading in that direction. We should heed his warning. I don't know if we're on the road to serfdom, but wherever we're headed, Hayek would certainly counsel us to turn around.

The Road To Serfdom In North Korea

Max Borders at the Washington Examiner enumerates the "vital concepts" from Friedrich Hayek's legacy "The Road To Serfdom" which most recently hit the top spot in Amazon (due to Glenn Beck's promotion).

From Mr. Borders:

Spontaneous Order - Complex society and open markets cannot be planned. Period. Human beings just ain’t smart enough. Instead, the extended order emerges - unplanned and undesigned - due to humans interacting in complex ways according to simple rules. These rules do not specify certain social ends, but rather bring order to the diverse ends of billions of people pursuing happiness.

The Knowledge Problem - It is impossible for a single mind or group of minds to predict, plan or control the innumerable inputs, outputs and actions in a market. Instead, knowledge is dispersed among billions of people. Entrepreneurial opportunities are seized by individuals with particular, local insights, and/or expertise in some specific area the bureaucrate cannot possess.

Price System - Entrepreneurs also respond to information flows communicated through the price system. Bureaucratic control of an economy is impossible due to the loss of information communicated through prices, and due to the inability of one to gain the right kinds of information at the right times and right places. “Prices are signals, not marching orders.”

Competition as a Discovery Procedure - The circumstances of time and place are critical to the success of competitive market actors. The idea that we can aggregate economic data - like macroeconomic data - in order to say something meaningful about how things should to be coordinated is, well, a bad idea. Competition among market actors looking for opportunities to offer a previously unnoticed value to consumers is basically crowd-sourcing value creation. Innovators compete, you win."

And a fantastic example of how a society operates without or with little of these elements is North Korea.

This from the Washington Post, (all bold highlights mine)

Bowing to reality, the North Korean government has lifted all restrictions on private markets -- a last-resort option for a leadership desperate to prevent its people from starving.

In recent weeks, according to North Korea observers and defector groups with sources in the country, Kim Jong Il's government admitted its inability to solve the current food shortage and encouraged its people to rely on private markets for the purchase of goods. Though the policy reversal will not alter daily patterns -- North Koreans have depended on such markets for more than 15 years -- the latest order from Pyongyang abandons a key pillar of a central, planned economy.

With November's currency revaluation, Kim wiped out his citizens' personal savings and struck a blow against the private food distribution system sustaining his country. The latest policy switch, though, stands as an acknowledgment that the currency move was a failure and that only capitalist-style trading can prevent widespread famine.

"The North Korean government has tried all possible ways [for a planned economy] and failed, and it now has to resort to the last option," said Koh Yu-hwan, professor of North Korean studies at Dongguk University in Seoul. "There's been lots of back and forth in what the government has been willing to tolerate, and I cannot rule out the possibility of them trying to bring back restrictions on the markets. But it is hard for the government to reverse it now."

Because North Korea operates in secrecy and isolation, outside observers rely on informants and accounts from defectors. In this case, experts agree that the food shortage is dire. Several analysts who monitor and travel to North Korea said that in recent weeks, Pyongyang has abandoned almost all its rules about who can spend money and when. That would seem to indicate that Kim -- who once equated free-market trading with "egotism" and a collapse of social order -- now wants to rehabilitate the markets damaged in November...

``In the mid-1990s, amid a total collapse of the central planned economy, somewhere between 3 and 5 percent of the population -- perhaps 1 million people -- died of starvation. Meanwhile, North Koreans increasingly turned to small markets for trading and buying supplies."

Bottom line: The Road To Serfdom is about shortages, death and poverty. Even the North Korean leadership now recognizes that they can't subvert economic laws.

(hat tip Greg Ransom)

Buy The Philippine Mining Index And ASEAN Bourses On Record Gold Prices

``In all countries and all civilizations, two commodities have been dominant whenever they were available to compete as moneys with other commodities: gold and silver. At first, gold and silver were highly prized only for their luster and ornamental value. They were always in great demand. Second, they were always relatively scarce, and hence valuable per unit of weight. And for that reason they were portable as well. They were also divisible, and could be sliced into thin segments without losing their pro rata value. Finally, silver or gold were blended with small amounts of alloy to harden them, and since they did not corrode, they would last almost forever. Thus, because gold and silver are supremely "moneylike" commodities, they are selected by markets as money if they are available. Proponents of the gold standard do not suffer from a mysterious "gold fetish." They simply recognize that gold has always been selected by the market as money throughout history.”-Murray N. Rothbard

Aside from the lessons of how to treat bullmarkets, there are two factors to ascertain or discover from gold’s rise:

One: To identify bullmarkets pertinent to gold’s actions and

Second: The possible implications of the gold’s resurgence to domestic gold and metal mining related issues.

The Relevance Of Gold-ASEAN Bull Markets

The Phisix and most of Asian stock markets are in a bullmarket. That has been a mantra of ours for the longest time.

In the fullness of time, perhaps the 2008 US housing bubble crisis will be portrayed as an intermission to the current phase of the bullmarket cycle.

No, relative economic success isn’t the main force that will fuel this boom, although this will be the “rationalization” or “justification” which mainstream will obviously utilize.

Instead what will drive this boom is the global bubble cycle (or what can be described as the Austrian Business cycle) that continually plagues the present state of the markets. Such cycles signify as the consequences of the world inflationism or the mainstream’s “central banking-fractional reserve-deficit spending” policy framework.

Since money isn’t neutral and where collective money printing would impact relative assets relatively, the likely magnet for the tsunami of “counterfeit” money (money from thin air and are unbacked by real savings) are sectors or nations that has eluded from developing bubble conditions during the last bubble cycle. In other words, where the supply side hasn’t generated excess capacity or malinvestments, “speculative” money is likely to flow or get funnelled into these focal areas.

They will be embraced as a surge in domestic consumption, swelling middle class, wealth transfer, demographic dividends, urbanization and alot of many other pretexts for a boom, but eventually like all bubble cycle most of these will be exposed as tomfoolery or a scam. That’s because the forces that would underpin such booms will likely be characterized by ballooning domestic credit, in households or corporate or both, and by leveraged international money flows.

Though, of course, one big factor which we cheer of is the broadening of economic freedom in many emerging markets, as seen by growing globalization of trade, investments and labor.

However, economic freedom is diametrically opposed to inflationism. Hence, two forces are fiercely counteracting or grinding upon each other. And economic freedom would have to endure from the ordeals of the volatility elicited from the falsified pricing mechanism in the marketplace derived from the current collective interventionist policies. Remember, all current actions have future consequences. Economic freedom thus is a long term proposition in the face of the adversarial forces of hidden taxation.

And it would be an irony to say that rising gold prices seem to be a “boon” to stock markets and other financial assets or the economy. That’s because rising gold prices exhibits the pathology of the endemic nature of the political agents to debase currency for political goals. The reason why rising gold prices appears as a benediction for the markets today is due to the “sweetspot” of inflation[1]- as seen by low interest rates and tolerable instances of inflation.

As Friedrich August von Hayek explained, (bold highlights mine)

``Now the chief effect of inflation which makes it at first generally welcome to business is precisely that prices of products turn out to be higher in general than foreseen. It is this which produces the general state of euphoria, a false sense of wellbeing, in which everybody seems to prosper. Those who without inflation would have made high profits make still higher ones. Those who would have made normal profits make unusually high ones. And not only businesses which were near failure but even some which ought to fail are kept above water by the unexpected boom. There is a general excess of demand over supply-all is saleable and everybody can continue what he had been doing. It is this seemingly blessed state in which there are more jobs than applicants which Lord Beveridge defined as the state of full employment-never understanding that the shrinking value of his pension of which he so bitterly complained in old age was the inevitable consequence of his own recommendations having been followed.[2]”

ASEAN’s Bullish Momentum

This welcome phase can vividly be seen in Figure 2.

Figure 2: Bloomberg[3]: Blossoming Bull Markets In ASEAN?

For major ASEAN nations, the marketplace seems ripe for a raging bull.

Indonesia’s Jakarta Composite Index (green line) has already transcended its 2008 high (!!), while the Philippine Phisix (yellow line), Malaysia’s KLCI (red line) and Thailand’s SET (orange line) are all within spitting distance.

If all four benchmarks manage to surpass their 2008 highs, then I’d presume that the region’s bubble cycle could only accelerate.

And following the recent market stresses within the EU zone where the European Central Bank (ECB) has already reactivated their own version of quantitative easing, coupled with the soon to be operational European Financial Stability Facility (EFSF), a combined €750 loan facility from the (€440 billion) EPSF, the IMF (€ 250 billion) and the European Financial Stabilization Mechanism (€ 60 billion), aimed at “providing financial assistance to Eurozone states in difficulty”[4], monetary conditions among major developed economies are likely to be very accommodative for an extended period especially in the light of Asian conditions.

And such disparate circumstances are likely to engender and amplify arbitrage or carry trade opportunities.

In the Philippine Phisix, market internals appear to be suggestive a looming major upside thrust (see figure 4)

Figure 4: PSE: Phisix and Advance-Decline Spread

The Advance-Decline spread (lower window) which is the daily tally of advancing issues less declining issues or a measure of market breadth or sentiment seems to be on the mend as the Phisix approaches its 29-month resistance levels (Upper window).

If the Phisix is to successfully breach the present resistance levels at about 3,350, we are likely to see a tight advance decline spread similar to the March-April pattern.

And if the present momentum extends, it won’t be far fetch that a test of the 2007 high at the 3,800 level will be the next topic of our discussion.

Meanwhile, the other major force, which we earlier we pointed out[5], is the potential ‘sustained’ rally in the Euro-US Dollar.

Philippine Mining Index Due For Yearend Fireworks

The other area which is likely to benefit from rising Gold prices is none other than the mining issues (see figure 5).

Figure 5 stockcharts.com: Gold and Global Mining Stocks

As gold has reached a new milestone, the benchmark of global mining stocks continue to trail or lag.

Of course, not all mining companies are created equal. And that’s the reason why I chose the Dow Jones US Mining (DJUSMG) and S&P/TSX Global Mining Index (SPTGM) to compare with gold. The activities of the general mining issues should smooth out the activities of gold miners (lowest pane; DJAPRT Dow Jones-UBS Precious Metals Total Return Index[6])

Dow Jones US Mining represents select US based gold and coal stocks[7] while the S&P/TSX Global Mining Index[8] is a global bellwether of Aluminium, Diversified Metals, Gold and Precious Metals and Coal and Consumable fuels. Both indices, while lagging, appear to be advancing. If the past will reprise, then the component issues of both benchmarks are going to do alot of serious catching up. But again, the performances of coal, industrial metals and others haven’t matched the performance of gold miners. Yet if we are right and eventually inflation accelerates then all these will rise, but the degree of increases will likely be different.

How should these apply to the local mining index?

The Philippine mining index is essentially a gold mining index with about two-thirds of the index weightings based on gold miners. The balance is distributed between coal (Semirara about 14% of the index as of Friday’s close), industrial metals (NIHao Mineral Resources 3.2%, Geograce 3.4%, and Atlas Consolidated 9.43%-Atlas is most diversified since it has also gold and silver) and oil (Oriental Petroleum 3.13%).

Figure 6: Philippine Mining Index And GOX

This suggests that like Dow Jones US Mining, the local mining issues appear to be far underperforming both Global diversified mining (as shown above) and conspicuously the gold miners see figure 6. Year to date, the local mining index is down 17.54% even as the Dow Jones Mining is up 3.07%.

Meanwhile, another US gold miner index, the CBOE Gold Index (gold line) seems hardly correlated with our local index or with gold related mining issues within the index. The GOX is up 10.6% on year to date.

The chart above consists of the top 5 mining issues in terms of capitalization, particularly Philex (red line), Semirara (green), Lepanto (orange), Atlas (black) and Manila Mining (violet). Since Philex made a spectacular nearly fourfold rise late last year, the Philippine Mining appears to be more inclined to reflect on Philex’s movements, given that Philex has about 43% of the index market cap.

Nevertheless, while there is no clear relationship between the US GOX and local mines to the upside, they have almost been as one to the downside during the Lehman collapse in 2008.

However one interesting observation is that the gist of the runs of many mining issues seems to occur during the last semester of the year, in 2006-2007 and in 2009. Of course this excludes the shock of 2008.

Hence, it is my impression that given gold’s recent fresh highs, combined with other factors mentioned above, along with seasonal and rotational effects, my next bet is that the far oversold mining index is likely to make a dramatic encore by the yearend.

---

[1] See Inflation’s Sweet Spot Augur For A Gold Breakout And Global Equity Market Rally, February 28, 2008

[2] Hayek, Friedrich August Can We Still Avoid Inflation? The Austrian Theory of the Trade Cycle

[3] Bloomberg.com, World Index

[4] Wikipedia.org, European Financial Stability Facility (EFSF)

[5] See Buy The Peso And The Phisix On Prospects Of A Euro Rally

[6] iPathETNs, Dow Jones-UBS Precious Metals Total Return Index

[7] Wikinvest.com Dow Jones US Mining

[8] Standard And Poors, S&P/TSX Global Mining Index