Wednesday, March 20, 2013

Free-Market Dystopia

Reply to How to Weaken an Economy, By Victor Davis Hanson, in PJ Media, 11 Mar 2013

I think Dr Hanson should stick to writing on subjects  in which he is well grounded, like Spartan infantry tactics.

The discipline of economics has evolved significantly since Frédéric Bastiat’s day. For one, there is now a vast body of research conducted in a methodical and verifiable fashion by scholars trained to avoid letting their prejudices contaminate their findings.

This does not mean that all economic debates have been settled for once and for all. But it does mean that some of the most misleading economic platitudes have been thoroughly discredited. Strangely enough, such platitudes in their heyday often seem not only plausible but self-evident, and are eventually vanquished only by dint of deep thought and solid research.

For example Lenin’s notion that “we will run the economy exactly like the post office” was based on a model of the economy that, I hasten to point out, in Lenin’s time had not yet been refuted. But shortly thereafter it was indeed refuted, and decisively so, by the epochal work of Ludwig von Mises, who pointed out that central planning provides few incentives for people to work hard and efficiently, and by Friedrich Hayek., who was the first to conceive of the price system as a tool that serves to inform participants in the economy which products and services it is most profitable to offer the public.

Empirical research has dismally failed to confirm the popular notion -- that in the US has attained the status of a folk religion -- that, as Dr. Hanson puts it, “[the government] doing nothing usually means [that the economy] repairs itself "[1]. This bromide, which to many people seems just common sense, derives its plausibility from the sensational failure of certain crude government economic intervention methods like price controls. However, to promote, by means of an automatic reflex, as it were, this approach of government passivity to a cosmic principle governing all spheres of economic life, is based on sloppy reasoning and lack of theoretical discernment.

Ludwig von Mises proved with trenchant logic that a certain sort of government policy—namely price controls -- is inevitably doomed to failure, since producers cease producing when they see no profit incentive. Mises went on to argue, and quite correctly, that the spontaneous government reaction to the drop in production ensuing from imposing price controls is to extend the control mechanisms to encompass suppliers, trade, etc., thus saturating the economy with administrative and coercive measures that ultimately tend to choke the economy and are doomed to fail. Since Mises’ day this dictum has been often confirmed, as for example by Venezuela's economic experience under the rule of the late naif socialist Hugo Chávez.[2]

However , for some reason Mises never extended his theoretical work to other sorts of government economic policy. One ground for his hesitancy may be that, despite his reputation as a defender of free competition, the thrust of Mises’ work was not actually pro-competition, but merely anti-government.

I grant that often, perhaps even usually, "pro-competition” and “anti-government” mean the same thing. However Mises gave his game away when he insouciantly remarked that whereas government monopolies are bad, private monopolies on the other hand are splendid. He cagily prefaced his statement with the caveat “in my experience”, thus ruling out the theoretical consensus within classical economics according to which ALL monopolies are bad because a monopolist is enabled to collect, in addition to regular profits, a rent that usually results from some sort of non-market coercion. Please note that this approach builds economic theory on a firm ethical foundation.

Moreover, and even more scandalously for a reputed free-market economist, when Mises commented a proposal -- submitted by a German Social Democrat -- that the German government undertake to ensure a competitive market through antitrust measures, Mises rejected the idea out of hand, denouncing it as statist, and resorting to a patently specious argument, fatuously claiming that the market is not a horse race or a boxing match in which cheating should be prevented by means of controls and inspections conducted by an entity that exercises authority over the competitors and is itself not a competitor.

By denying the state any legitimacy to supervise the market in order to assure fair play, Mises perhaps unwittingly deprived the market of any moral standing and with a straight face proposed the law of the jungle. This attitude stands in blatant contradiction to the thitherto unquestioned free-market doctrine – that Mises himself expressly champions in most of his writings -- that market participants must be prevented from using coercion, a principle that implies the rule-of-law postulate of state monopoly on coercion.

The Austrian School experienced a schism in the 1930s when the more level-headed free-market anti-Fascists, led by Walter Eucken, propounded the Ordnungspolitik doctrine, according to which the state should restrict itself to regulating and refrain from competing, while conversely market participants should restrict themselves to competing and refrain from regulating. Would that Walter Eucken were a household name in the United States as it is in Germany, whose 1950s Wirtschaftswunder was based on uninhibited state meddling with the market to banish, among other things, coercive practices by market participants, and with remarkable success. In Great Britain, on the other hand, the state’s share of GNP remained far beneath Germany’s, and Britain's economic progress was correspondingly modest.

The reader should note that these statements, which defy conventional wisdom, are based on actual economic statistics and economic history, instead of on smug pronouncements by windbag armchair economists.

However I do not necessarily conclude therefrom that, if Great Britain had adopted more active economic policies, its economic growth record would have been a smashing success. Firstly, I have done no research on the British economy, and unlike Dr. Hansen, I prudently refrain from writing on subjects on which I am uninformed. Moreover, Britain’s growth rate had ALWAYS been modest, please note, even at the peak of her Industrial Revolution, with its cheeky laissez-faire panache.

Secondly, as postulated by Walter Eucken, state spending as such is a meaningless datum. The decisive factor is what the money is spent on. Big-government conservatives like Bush II proved the importance of this distinction by spending record sums while driving the nation into an economic abyss from which it has failed to re-emerge.

For government spending to be useful, the money must be spent on government activities that increase efficiency, spur competition and encourage productive economic activity, as opposed to unproductive rent-seeking. Conversely, the state must refrain from becoming a feeding station for economic parasites whose contribution to economic growth is negligible or even negative, such as for example the US financial industry, whose untrammeled proliferation since the first Reagan administration has turned it into a bloated parasitical entelechy that actively hampers economic growth and drives the real economy – i.e. manufacturing -- overseas, while slurping up gigantic profits and impoverishing the rest of the economy, as well as most of the population.

[1] How to Weaken an Economy, by Victor Davis Hanson: "It is not easy to ruin the American economy; doing nothing usually means it repairs itself and soon is healthier than before a recession.”
[2] I hasten to add that, despite his economic ignorance, Chávez’ electoral victories have never been marred by any credible charges of cheating, in blatant contrast to the corrupt swamp from which Bush II’s 2000 “victory” emerged. See Greg Palast’s web site on the sordid details of Bush II’s political career. Nonetheless Bush II had the effrontery to question Chávez’ democratic credentials when the Bush II administration in 2002 instigated a coup designed to return to power the corrupt Venezuelan plutocrats whom Chávez had unceremoniously evicted from state power amid the jubilation of the downtrodden masses. 

No comments:

Post a Comment