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 ". 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.
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.
