Why Small is Beautiful

At the Daily Reckoning, Dominic Frisby has a splendid article on why small societies have mostly been prosperous

First Mr. Frisby notes of the role played by decentralization and centralization in shaping Italy's present conditions

In the story of man, Italy has twice been the global center of innovation and invention — once under the Romans, and then again during the Renaissance, when it produced such great men as Leonardo da Vinci, Michelangelo and Galileo. No other part of the world can claim such an emphatic double — not China, not Britain, not the USA. You cannot doubt the potential of the Italian people. You cannot doubt their talent.

Yet throughout the 20th century, Italy has been (and still is) a cradle of corruption, political infighting, bureaucracy, crime (think Mafia and Camorra), corruption, rent-seeking, inflations, division, fascism, communism and goodness knows what else. Its state is bloated, its political system dysfunctional. The country might be nominally unified, but in reality it is anything but.

Where did Italy go wrong? The answer: It unified.

Admittedly, this unification was forced on it. As the city-states lost their independence, it came under foreign domination, first under Spain (1559-1713), then Austria (1713-1796), then France, then the Austrians again. Finally, in the mid-19th century, came the Italian Wars of Independence, unification, and birth of the Italy we know today.

Next he narrates a short history of "small is beautiful" in the global context.

Small is beautiful. In A.D. 1000, Europeans had a per capita income below the average of the rest of the world. China, India, and the Muslim world were richer and had superior technology: China had had the printing press for 400 years. Her navy “ruled the waves.” Even as late as 1400, the highest standards of living were found in China, in the robust economies of places like Nanjing. But the empires of the East became centralized and burdened with bureaucracy and taxes.

In Western Europe, however, made up of many tiny nation-states, power was spread. There was no single ruling body except for the Roman Catholic Church. If people, ideas, or innovation were suppressed in one state, they could quickly move to another, so there was competition. The cities, communes, and maritime republics that made up what we now call Italy — Genoa, Rome, and Florence, for example — became immensely prosperous. Venice in particular showed great innovation in turning apparently useless marsh and islands into a unique, thriving metropolis that would become the wealthiest place in the world.

In the 16th century, the repressive forces of Roman Catholicism, which was becoming corrupt, began to be overturned in Northern Europe. The Bible was translated into local vernacular. The Protestant movement saw deregulation and liberalization. Gutenberg’s printing press, invented a century earlier, was furthering the spread of knowledge and new ideas — and thus the decentralization of power.

Over the next two hundred years, Northern Europe caught up with Southern Europe, which remained Catholic, and then overtook it. First, it was the Dutch, also made up of many small states. Then, in the 18th century, it was England, which, in spite of its union with Scotland and its later empire building, had further dispersed centralized power by reducing the authorities of the monarch after the civil war of 1642-51 and by linking its money to gold.

Meanwhile, out East, the Ottoman Empire and China went into a relative dark age, centrally governed by autocratic or imperial elites, burdened with heavy taxes and slow to react and unable to cope with the plagues and wars that befell them. By 1950, the average Chinese, according to author Douglas Carswell, was as poor, if not poorer, than someone living there a thousand years before.

Third, Small is beautiful exists until today…

Nothing changes… The success of small nation-states continues even today. If you look at the World Bank’s list of the richest nations in the world (as measured by GPD per capita at purchasing power parity), you see Luxembourg, Qatar, Macau, Singapore, Norway, Kuwait, Brunei, Switzerland, and Hong Kong. Perhaps Macau and Hong Kong, as parts of China, should not be included, in which case you add the U.S. and the United Arab Emirates (similar nations appear on the International Monetary Fund’s list).

Why is being small beautiful?

In a small state, there is less of a gap between those at the top and bottom, there is more transparency and accountability, it is harder for the state to hide things, there is more monitoring, less waste and more dynamism. Small is flexible, small is competitive — small really is, as economist E.F. Schumacher said, beautiful.

Read the rest here

Small is beautiful because of decentralization. Decentralization promotes a culture of spontaneous diversity, heterogeneity, specialization, tolerance of failure, trial and error, and competition necessary for greater efficiency in the allocation of resources and innovation.

Decentralization thus extrapolates to individual advancement that accrues to, and reflects on the society level.

In short, small is beautiful because it is a bottom up dynamic where commerce or free markets drive real (not statistical) prosperity

Importantly decentralization disperses risks and promotes legal institutions which have mostly been attuned with local customs, traditions and grassroots social interactions.

Decentralization also is an optimum way for people to convert localized knowledge into productive activities.

As the great Austrian economist Friedrich von Hayek wrote: (bold mine)

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. 

In centralized political systems, “small is beautiful” can be seen in the informal economy.

And with the fast advancing information age, the world will eventually evolve towards decentralization. But the transition will not be smooth as the friction from the resistance to change by 20th century based centralized political systems vis-à-vis technology based decentralization have only intensified.

Austrian Capital Theory and the Market Process

The beauty of Austrian economics is of its emphasis on the nitty-gritty of the market process. And capital theory, which has largely ignored by the mainstream, plays a sine qua non role in the market process

Professor Peter Lewin eloquently discusses the Austrian Capital Theory at the Freeman Online (outside titles, all bold emphasis are mine; green brackets my comments)

The Austrian Theory

The best known Austrian capital theorist was Eugen von Böhm-Bawerk, though his teacher Carl Menger is the one who got the ball rolling, providing the central idea that Böhm-Bawerk elaborated. Böhm-Bawerk produced three volumes dedicated to the study of capital and interest, making the Austrian theory of capital his best-known theoretical contribution. He provided a detailed account of the fundamentals of capitalistic production. Later contributors include Hayek, Ludwig Lachmann, and Israel Kirzner. They added to and enriched Böhm-Bawerk’s account in crucial ways. The legacy we now have is a rich tapestry that accords amazingly well with the nature of production in the digital information age. Some current contributors along these lines include Peter Klein, Nicolai Foss, Howard Baetjer, and me.

The Austrians emphasize that production takes time: The more indirect it is, the more “time” it takes. Production today is much more “roundabout” (Böhm-Bawerk’s term) than older, more rudimentary production processes. Rather than picking fruit in our backyard and eating it, most of us today get it from fruit farms that use complex picking, sorting, and packing machinery to process carefully engineered fruits. Consider the amount of “time” (for example in “people-hours”) involved in setting up and assembling all the pieces of this complex production process from scratch—from before the manufacture of the machines and so on. This gives us some idea of what is meant by production methods that are “roundabout.”

(The scare quotes around time are used because in fact there is no perfectly rigorous way to define the length of a production process in purely physical terms. But, intuitively, what is being asserted is that doing things in a more complicated, specialized way is more difficult; loosely speaking it takes more “time” because it is more “roundabout,” more indirect.)

More Roundabout Production

Through countless self-interested individual production decisions, we have adopted more roundabout methods of production because they are more productive—they add more value—than less roundabout methods. Were this not the case, they would not be deemed worth the sacrifice and effort of the “time” involved—and would be abandoned in favor of more direct production methods. What are at work here are the benefits of specialization—the division of labor to which Adam Smith referred. Modern economies comprise complex, specialized processes in which the many steps necessary to produce any product are connected in a sequentially specific network—some things have to be done before others. There is a time structure to the capital structure.

[my comment business people or entrepreneurs specialize on the products and services they provide and the markets they sell into]

This intricate time structure is partially organized, partially spontaneous (organic). Every production process is the result of some multiperiod plan. Entrepreneurs envision the possibility of providing (new, improved, cheaper) products to consumers whose expenditure on them will be more than sufficient to cover the cost of producing them. In pursuit of this vision the entrepreneur plans to assemble the necessary capital items in a synergistic combination. These capital combinations are structurally composed modules that are the ingredients of the industry-wide or economy-wide capital structure. The latter is the result then of the dynamic interaction of multiple entrepreneurial plans in the marketplace; it is what constitutes the market process. Some plans will prove more successful than others, some will have to be modified to some degree, some will fail. What emerges is a structure that is not planned by anyone in its totality but is the result of many individual actions in the pursuit of profit. It is an unplanned structure that has a logic, a coherence, to it. It was not designed, and could not have been designed, by any human mind or committee of minds. Thinking that it is possible to design such a structure or even to micromanage it with macroeconomic policy is a fatal conceit.

[my comment:

The term “economy” has truly been a misrepresentation.

In the real world, there are millions of heterogeneous interactions, distinctive moving parts, and complex and variegated supply chains, which means commercial activities represent mass spontaneity of people’s actions. They are not centrally organized actions as the word “economy” projects.

Think of it, does the government tell you whom to sell? Does the government dictate upon you on what (and how many) to produce or what services to provide? Does the government tell you which stock to buy or which investment to take?

If none of this applies, then why the heck, the popular impression that government “runs the economy”? Well the answer is that these have long been impressed upon to us by current political institutions meant to ensure our docility to our political masters]

The division of labor reflected by the capital structure is based on a division of knowledge. Within and across firms specialized tasks are accomplished by those who know best how to accomplish them. Such localized, often unconscious, knowledge could not be communicated to or collected by centralized decision-makers. The market process is responsible not only for discovering who should do what and how, but also how to organize it so that those best able to make decisions are motivated to do so. In other words, incentives and knowledge considerations tend to get balanced spontaneously in a way that could not be planned on a grand scale. The boundaries of firms expand and contract, and new forms of organization evolve. This too is part of the capital structure broadly understood.

[my comments:

Statistics signify as information based on aggregates. They do not account for the “knowledge of circumstances” that are “dispersed” “incomplete” or often “contradictory knowledge” or knowledge why people people have chosen through “incentives” to take such actions. Knowledge acquired from interpreting statistics constitute as presumptions and are manipulable to suit veiled agendas.

Statistics and econometrics are instruments mainly used to bamboozle or to overwhelm on the ignorant and the gullible public of the supposed omniscience of central planners. The only thing political actors know is to gorge and lavishly spend on other people’s money, as well as to exercise control over the population under the cover of the farcical “social justice”].

Division of Knowledge

In addition, the heterogeneous capital goods that make up the cellular capital combinations also reflect the division of knowledge. Capital goods (like specialized machines) are employed because they “know” how to do certain important things; they embody the knowledge of their designers about how to perform the tasks for which they were designed. The entire production structure is thus based on an incredibly intricate extended division of knowledge, such knowledge being spread across its multiple physical and human capital components. Modern production management is more than ever knowledge management, whether involving human beings or machines—the key difference being that the latter can be owned and require no incentives to motivate their production, while the former depend on “relationships” but possess initiative and judgment in a way that machines do not.

The foregoing provides the barest account of the rich legacy of Austrian capital theory, but it should be sufficient to communicate the essential differences between the Austrian view of the economy and that of other schools of thought. For Austrians the whole macroeconomic approach is problematic, involving, as it does, the use of gross aggregrates as targets for policy manipulation—aggregates like the economy’s “capital stock.” For Austrians there is no “capital stock.” Any attempt to aggregate the multitude of diverse capital items involved in production into a single number is bound to result in a meaningless outcome: a number devoid of significance. Similarly the total of investment spending does not reflect in any accurate way the addition to value that can be produced by this “capital stock.” The values of capital goods and of capital combinations, or of the businesses in which they are employed, are determined only as the market process unfolds over time. They are based on the expectations of the entrepreneurs who hire them, and these expectations are diverse and often inconsistent. Not all of them will prove correct—indeed most will be, at least to some degree, proven false. Basing macroeconomic policy on an aggregate of values for assembled capital items as recorded or estimated at one point in time would seem to be a fool’s errand. What do the policymakers know that the entrepreneurs involved in the micro aspects of production do not?

[my comment:

Macro economics has truly been about heuristics and or of our innate biases that have been embellished by mathematical formalism than about law of scarcity and opportunity costs or about economic reality.

Macro economics understates the ‘economic’ value provided by the market process.

On the other hand, macro economics overstates the illusion of hydraulically driven “economy”.]

Capital and Employment

The folly is compounded by connecting capital and investment aggregates to total employment under the assumption that stimulating the former will stimulate the latter. Such an assumption ignores the heterogeneity and structural nature of both capital and labor (human capital). Simply boosting expenditure on any kind of production will not guarantee the employment of people without jobs. How else to explain that our current economy is characterized by both sizeable unemployment numbers and job vacancies? Their coexistence is a result of a structural mismatch: The structure (that is, the pattern of skills) of the unemployed does not match those required to be able to work with the specific capital items that are currently unemployed.

In fact the current enduring recession is basically structural in nature. It is the bust of a credit-induced boom-bust cycle, augmented by far-reaching production-distorting regulation. The Austrian theory of the business cycle was developed first by Ludwig von Mises, combining insights from the Austrian theory of capital with the nature of modern central-bank-led monetary policy. The theory was later used, with some differences, by Hayek in his debates with Keynes. Over the years its popularity and acceptance have waxed and waned, but it appears to be highly relevant to our current situation.

[my comment:

The market process represents the immensely intertwined and deeply interdependent relationships of methodological individualism, profit-loss tradeoffs, capital theory, consumer sovereignty, property rights, coordination-discoordination of resource allocation, division of labor, specialization and roundabout production, division of knowledge, entrepreneurship, speculation, voluntary exchange, pricing system, spontaneous order, rule of law, market institutions and everything else under the capitalistic or classical liberalism order.

Whereas boom bust cycles signify as symptoms of imbalances brought upon by government inflationism, as well as, distortions emergent or as consequence from various production regulations and mandated proscriptions]

Glancing at the political prescriptions for today’s crisis management, one would notice that “capital” for the mainstream represents a homogenous lump called currency. Print money and everything is supposedly solved. Unfortunately after trillions of printed money, the global crisis has been worsening instead of abating.

Yet little is understood that money is NOT wealth, but a medium of exchange.

And wealth is about purchasing power of money. From this we understand that popular prescriptions of money printing have been economically unrealistic or unfeasible, and therefore, are bound for failure.Worst they are redistributive which favors political actors and their clients (the cronies).

It is not what gullible masses think that matters, rather it is the limitations of economic reality. That’s what Austrian Capital Theory talks about.

Entrepreneurial Knowledge and Failure as Virtue

Entrepreneurial knowledge and the societal acceptance of failure should be seen as stepping stones or building blocks to economic progress.

From the Wall Street Journal Blog (bold emphasis mine)

Economists at Harvard University and Massachusetts Institute of Technology have just released what they claim to be the crystal ball of economics: a model for predicting a nation’s future growth more accurately than any other techniques out there.

“The Atlas of Economic Complexity” ranks 128 nations based on their “productive knowledge” — the skills, experience and general know-how that a given population acquires in producing certain goods. Countries with a high score in the report’s “economic complexity index” have acquired years of knowledge in making a variety of products and goods and also have lots of room for growth. Essentially, the more collective knowledge a country has in producing goods, the richer it is — or will be.

The 364-page report, a study led by Harvard’s Ricardo Hausmann and MIT’s Cesar A. Hidalgo, is the culmination of nearly five years of research by a team of economists at Harvard’s Center for International Development.

“The essential theory … is that countries grow based on the knowledge of making things,” Mr. Hausmann said in a phone interview. “It’s not years of schooling. It’s what are the products that you know how to make. And what drives growth is the difference between how much knowledge you have and how rich you are.”

The above seems quite applicable to the Philippines. As I have been pointing out, four out ten college graduates are unemployed and about 13% of college graduates emigrate.

The Philippine economic predicament has hardly been about the lack of education but mainly the inadequacy of the relevant entrepreneurial knowledge or “knowledge to make things”. And most importantly, a conducive environment for entrepreneurs to underwrite on such risks.

And because risk-taking is an integral part of the market economy, the outcome of either success or failure is indispensable. Failure should also be seen as capitalist virtue from which entrepreneurs can build on, learn and innovate from.

This excerpt from an insightful article by Professor Steve Horwitz and Jack Knych at thefreemanonline.org (bold emphasis mine)

Economists, especially those of the Austrian school, often emphasize how entrepreneurs discover new knowledge and better ways of producing things. But entrepreneurial endeavors frequently fail and the profits thought to be in hand often don’t materialize. According to the U.S. Small Business Administration, over half of small businesses fail within the first five years. But failed entrepreneurial activity is just as important as successful entrepreneurial activity. Markets are desirable not because they lead smoothly to improved knowledge and better coordination, but because they provide a process for learning from our mistakes and the incentive to correct them. It’s not that entrepreneurs are just good at getting it right; it’s also that they (like all of us) can know when they’ve got it wrong and can obtain the information necessary to get it right next time.

On this view failure drives change. While success is the engine that accelerates us toward our goals, it is failure that steers us toward the most valuable goals possible. Once failure is recognized as being just as important as success in the market process, it should be clear that the goal of a society should be to create an environment that not only allows people to succeed freely but to fail freely as well.

The seeming preference by the Philippine society to focus on mass ‘public’ education and on the growing web of regulations will serve as constant source of perpetual socio-economic frustrations because these policies have not been dealing with the fundamentals of the problem: Mass graduates in a political environment that seems unfriendly to business or to entrepreneurship which only places additional strains on current unemployment figures.

Yet fear of failure converted into public policies known as public goods or safety nets encourages political dependency, abdication of personal responsibility, indolence and importantly the curtailment of civil liberties.

From the economic dimension, this implies diversion of scarce resources from productive activities. The obverse side of each safety net underwritten or regulation imposed means employment losses somewhere.

In focusing on the wrong factors evidently we get the wrong outcomes. Worst, since current woes reflect on the failures of political policies, the effect has been noticeably widespread. Yet politicians tend to pass the blame on someone else.

Unfortunately, accountability from these policy failures has practically been absent or are imperceptible from the public’s perspective. In other words, the opportunity cost from each political action have been intangible, unseen or unnoticed by the public.

Thus, the underlying populist tendency to the current social ills has been to ask for more of the same wrong prescriptions or ‘doing the same thing and expecting different results’ a quote on insanity prominently attributed to Albert Einstein.

In politics, a culture of ‘insanity’ seems to be the norm.

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.

Video Interview: Macro Economist Kenneth Rogoff Versus 'Enterpreneur' Tom Gloser On The Global Economy

This is an interesting video interview by CNBC of Harvard's Ken Rogoff and Tom Gloser of Thomson Reuters in Davos.

It is interesting because the message of both distinguished personalities evokes deeply contrasting views, even if they claim to represent different approaches (Mr. Rogoff-macro while Mr. Gloser-micro) in how they see the world.

Besides, CNBC's designated title "Economy to Crash if It Keeps Debt Appetite: Rogoff" seem to mislead, because Mr. Rogoff says it's gonna "get worse before it gets better" which hardly implies of a crash. Moreover, Mr. Rogoff consumed about only 5-10% of the total time interviewed, yet got the top billing for the video's title. If this is not a case of sensationalism, I don't know what is.

I say contrasting too, because while Mr. Rogoff spoke of difficult times ahead, Mr. Gloser sanguinely articulated on his ex-US "cautious" but manifold expansions, primarily on the "places that are growing", particularly the BRICs in order to "stay a step ahead".

For me, this exhibits the classic informational conflict between the interpretation of statistical aggregates against that of the information from what F. A. Hayek calls as the "man on the spot" or localized knowledge in ascertaining changes in the economy.

Another very important distinction is that while one operates in the realm of theories, the other votes with risk money. I wonder who among them would be right. Interesting indeed.

The Myths Of Government’s Managing The Economy

`The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.”- Ludwig von Mises Human Action

Overheard from a recent social gathering: “We need a president that can run the economy like a corporation!”

My impression is that the alluded corporation is one of a privately run enterprise.

Nevertheless this has been a popular myth advanced by government loving liberal experts, politicians and their media adherents which have likewise been widely espoused by the public.

We cite 5 reasons why this thinking is seriously flawed.

First, it misses the fundamental nuances in the contribution of private enterprises and government to society.

A private enterprise generates revenues by producing goods and services that consumers need or want with which they pay for. In other words, the success or the failure of a private enterprise is entirely dependent on consumers voting with their money, this is known as capitalism or an economic system that thrives on profit and loss.

On the other hand, government as an institution survives mainly by taxation. It coercively takes from the pocket of Juan and gives to Pedro and keeps a share of it to finance the bureaucracy.

Essentially the government does not produce anything but consumes the nation’s resources which are funded by such taxes.

At a certain point, after the provision of basic public goods, such as police and military services, the safeguarding property rights and enforcing the sanctity of contracts, government becomes a net consumer of capital. The rate of taxation (Laffer’s Curve) which finances such increased social consumption eventually squeezes out productivity and further exacts a toll on the nation’s resources.

So if a government does not produce, and is a drain on the resources of the economy and is net consumer of capital, how can it possibly contribute by “managing” the economy?

Second, it’s all about incentives.

A private enterprise is incentivized to generate wealth by efficiently allocating scarce resources or by economizing in order to profit.

On the other hand, the government’s incentive is to theoretically find “optimal” ways to redistribute wealth.

However, redistribution of wealth is a political issue, simply because it chooses which sectors or interests groups that would both benefit from such privilege.

Meanwhile on the opposite end, the government ascertains the interest groups and sectors that would pay for such task. In short, it plays the analogical role of God in determining who survives or not.

Say for example, because of the popularity of OFWs as our economic saviors, policymakers decide to tweak the Peso lower by printing money.

While the families of the OFWs will have additional spending power because of a lower Peso, which may also partly buttress the export sector, on the other hand the unseen costs from inflating the system is to lower the amount of goods and services (due to price increases) that could be acquired by a depreciated peso. In other words, the benefits will be temporary for a certain segment of the society but at a greater cost to the whole over the long term.

Moreover because governments are politically oriented they don’t normally operate under the economic pressures, hence the proclivity to overspend.

As the illustrious economist Milton Friedman once said, ``There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.”

Furthermore, when government decides to spend money say, for example on “stimulus” packages or the highly popular “pump priming”, not only does it spends on things that the market does not see viable or necessary, it risks spending on inefficient projects which again consumes capital.

Also such expenditure could compete with private sector for resources resulting to the crowding out effect and a loss of productivity.

Worst, government spending increases the risks of bureaucratic corruption.

So how does politicization of the allocation of resources, wastefulness, deadweight loss (inefficient allocation of resources), and corruption contribute to the meaningful managing of the economy?

Third it’s also about accountability.

A private enterprise that fails to please the consumers, because of fatally wrong decisions, ends up losing money, filing for bankruptcy and or closing shop.

Reckless policies pursued by a political leader could lead to economic devastation yet the perpetrator’s political career can remain unaffected, Robert Mugabe of Zimbabwe could serve as an example.

Moreover a political leader may keep a big segment of the voting population happy by mass redistribution of wealth (tyrannical socialism, fascism, dictatorship) by extorting the most productive sectors or by buying off voters by benefiting from crony capitalism or corruption and may yet retain his/her career on election day.

So how can a self serving politician be responsible for managing the economy when his/her interest is to remain in power by political maneuvering?

Fourth is the dearth of economic calculation.

A private enterprise is guided by market pricing signals which determines the relationship of price and costs expressed in money terms and the coordination and allocation of resources in accordance to profit and loss statements.

A government which is not a profit seeking enterprise cannot make use of any economic calculation wrote Mr. Ludwig von Mises.

For instance, to quote Ludwig von Mises anew, the ``success or failure of a police department's activities cannot be ascertained according to the arithmetical procedures of profit-seeking business. No accountant can establish whether or not a police department or one of its subdivisions has succeeded. It is precisely when a manager is rewarded by a share of the profits that he becomes foolhardy because he does not share in the losses too”. (emphasis added)

In other words, the cost of delivering most public goods by the government cannot be accounted for in money terms.

So if government cannot account for its services then how can it ascertain how to manage the economy?

Fifth is the lack of local knowledge.

A private enterprise, operating under the market process and is directed by pricing signals, needs to acquire or get updated with the local knowledge of the market, one is serving or intends to cater to, for them to be able to operate profitably.

A central authority plagued with a lack of economic calculation is likewise handicapped by deficient local knowledge. The underlying response will be to rely on inaccurate statistics which may lead to inaccurate analysis and policy blunders.

As Friedrich A. Hayek described in "The Use of Knowledge in Society" ``The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot." (bold emphasis mine)

Since regulatory policies are always imposed based on “social” motives, the economic viability of such motive needs to be established. Otherwise, such policies may lead to serious distortions in the marketplace which may result to adverse unintended consequences.

As Professor Art Carden eloquently wrote, ``Any social policy must be economically possible before it can be considered morally desirable.”

So if central planners don’t have the right information to make the strategic decisions on important aspects of the “local” economy, how can they manage?

In the 80s, as Japan went into a bubble, I recalled the much ballyhooed Japan Inc...

It was a moniker describing the relationship of Japan’s public-private sector partnership that luxuriated in the glory of easy money policies.

In looking at Investopedia.com we saw a short narrative on its miserable ending as follows, ``The high degree of collusion between Japan's corporate and political sectors led to corruption throughout the system and contributed to the downfall of the overvalued Nikkei.”