Don’t fear the free market, part 4: Intervention, central banks and planning
We can be so clueless when it comes to what governments are capable of. Never mind that the state has only token incentive to do what its constituents want. Regarding many of their demands, it simply cannot. Citizens want governments that create wealth (or prevent its destruction). How do they think wealth is created? Governments cannot fix the economy, as if it were a motorcycle. They cannot grow the economy, as if it were a garden. An economy is a complex mass of interactions that no one person, organisation or clique could oversee with any dependability. Attempts to intervene into the economy by a few technocrats is to presume they somehow know what is right (and will actually do what is right) better than the people peforming all those interactions.
Commentators who are slightly more realistic call governments “stewards” of the economy. When they praise the stewards of the economy, they usually mean that the government’s policies have not wrecked the economy, or at least that their most deleterious effects have no yet struck enough people to give the press an obvious candidate for blame. Let us first examine inflation.
John Maynard Keynes once said “[t]he best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Since central banks have positioned themselves as the saviours of the economy, inflation has eaten away at savings with painful results.
Inflation is caused chiefly by an increase in the money supply. As the supply of money increases, demand for it falls and more money is needed to buy fewer goods. Central banks increase the money supply. Inflation is not automatic, nor is it inevitable. It is a response to a realisation that there is more money in circulation. So prices rise over time. But the people who get the money when it is first circulated will be able to spend or invest it before it trickles down and lowers the cost of money overall. In the US, because of the Federal Reserve system, the people who get the money first when the central bank prints more of it are bankers, those banks that make up the Fed. The Fed creates money but not value, which is the true measure of economic growth. Since its inception in 1913, the Federal Reserve’s inflationary policy has left the US dollar at 2 cents of its previous value. (http://mises.org/daily/5269/The-Great-Myth-of-the-Inflation-Cure) And yet, its apologists claim that the Fed fights inflation. Printing money is always done in the name of “the greater good”, that statist chimera, but really it benefits the banks who are the first recipients of the money before prices begin to rise and catch up to the money supply. When the state prints money, bankers win, and everyone else loses. (Read Murray Rothbard’s The Case against the Fed for a fuller explanation.)
Others say that inflation is good policy because if the value of people’s money is decreasing, they have an incentive to spend, which keeps the economy growing. Deflation can be a huge problem (though it is not necessarily) but a constant money supply means the value doesn’t change (or at least would probably change only very gradually). That makes it easier for everyone to know what to expect. They can allocate their resources accordingly. Central banks cannot simply control inflation, saying that it will be exactly 2%. It might get out of control, and it sometimes does. A little government intervention goes a long way–almost always in the wrong direction. How could anyone advocate consumption over savings in these days of unsustainable retirement funds? People will need to learn how to save again if they want their standards of living to rise; but saving is meaningless if inflation will consume your nest egg. But the best argument against inflation is that the government has no wisdom or right to reduce the value of your savings or tell you what to do with your money and when.
Governments also like to plan. Many statists who consider the Soviet Union a foolish project that was bound to fail nonetheless advocate some form of economic planning. Economist James K. Galbraith wrote in Harper’s a few years ago that the government needs once again to plan. “What the government needs most today is to regain an independent capacity to think. The government needs a way to imagine the future that is not dominated by lobbies or even by Congress so long as Congress is dominated by lobbies. Planning is a process: thinking, coordination, action. What is the long-term national interest? What specific targets must be met? What is the best way to do it, and who plays what role?” This argument contains several questionable premises. First, it makes the old assumption that government information and wisdom is superior to that of people on the ground, you know, the ones actually doing the work. But the performance of state-run businesses and strict regulations before the 1980s was a joke compared to that of the private sector after privatisation and deregulation. Prices fell, innovations rose, and the taxpayer was no longer on the hook for failed government corporations. We can only imagine how people’s potential would be liberated in a free market.
Second, governments have no capacity to escape the clutches of lobbies. Not only do they provide the money politicians need to get elected, and are thus heavily rewarded after the election, but many lobbyists become politicians and vice versa. Lobbies are not just in bed with the government; they are the government. That means that any appearance of detachment from lobbies will be an illusion, until a revolution occurs.
Third, we need to get beyond this thinking about “the national interest”. There is no national interest, because every nation is made up of people who disagree about the right policies, who will all be affected differently by them. All policies produce winners and losers, with special interests taking home most of the prizes. We do not need nations, or national economies, or national governments. These things are inventions that only benefit those who exploit nationalism for their own gain. All people have self interest, which could easily be at odds with national interest, that they are not allowed to pursue if their money and labour is going toward the national interest. The national interest is in fact a codeword for the national government’s interest, which could easily be at odds with that of the people themselves. The people might want to spend their money on a wide array of electronic devices, the treatment of a variety of diseases, and their startup businesses. What if the government says we should be spending it on desktop PCs, AIDS and state-run monopolies? It will take away people’s money to pay for those things, then take away their freedom to get what they really want. If you don’t like the plan, you still have to follow and pay for it. How could that be right?
Planning is fine on a low level. We each have specific knowledge that we can use to make our lives richer. A free market permits prices to emerge from the sum of people’s localised knowledge. Government does not have that knowledge, so it cannot take personal situations into account when planning. Planning thus sacrifices the individual on the altar of “progress” or “the public good”. Many small plans work, and one big one does not. Trying to steer markets would only work if those on the bottom were not individuals with individual ideas and plans for their own lives. It would also be necessary to predict changes. That was hard enough during the Great Depression; now the pace of change and the number of black swans out there is unprecedented.
Families, kibbutzes and monasteries live according to “from him according to his abilities to each according to her needs”. Many cooperatives do so to a lesser extent as well. Planning can work when it is done voluntarily. Forced equality, or coercive communism, like in the USSR, does not work. It is not the communal nature of things that fails but the coercive side. And all government is coercive.
Finally, government “investment”, or deficit spending, is meant to kickstart a lethargic economy. Does it really work that way? Keynesians seem to believe that whatever enormous spending the government undertakes is investment, which is superior to consumption, at least if done strategically. But if the people have their own money, they can consume and invest, and consumption itself is buying from people who invest. Why is government investment better than private investment? Government spending is so terribly inefficient that I am surprised there are any Keynesians left in the world. One reason it is so inefficient is moral hazard: I don’t care what happens to money that isn’t mine. Private investors, on the other hand, are scrupulously careful with their money because it is theirs.
Paul Krugman is an interesting example of such thinking. I tend to agree with his analysis of the problems he discusses, but do not understand his prescriptions. They seem naïve, as if he is not listening to himself. For instance, when he argued in May that foolish and self-interested elites caused the economic problems we have with us now, he seems to believe that we need better elites on the ballot paper. How would that help? The new elites would have the same incentives and pressure groups because they would occupy the same seats. What we need is not new elites, or more people voting for them (I do not understand what difference that would make), but a complete overhaul of the system. If no one has coercive power over the entire economy, there will be no one to wreak havoc on it, only people working in their own spheres of influence, who generally help economies grow by acting in their self interest.
One problem with modern economies is that the people are so used to government intervention, to calling for help every time things go downhill, which of course can mean painful losses of jobs, savings, houses, and so on, they will call on the government to save them. The government persuades them that it is the economy itself that needs saving, which might mean bailing out banks and automakers; they know nothing about economics and take the bait. But government intervention into large, modern economies tends to enrich the already-rich by paying off special interest groups, and future generations are saddled with ever-more debt. When the time comes to wean the people off government life support, such as in economies experiencing hyperinflation or post-communist states, the most effective method is “shock therapy”, the forcing of discipline on a government so that it cannot borrow or print more money. But people are impatient, and the immediate effects of shock therapy are painful. Such is the way, too, when someone living beyond his means finds out he cannot pay his credit cards.
If Keynesians had their way, the government would spend and spend until it created the next bubble, because “in the long term we are all dead”. Unfortunately, there is no logic in this statement, as our children and their children will either benefit from our wisdom or pay for our mistakes. Bubbles have much to do with government manipulation of interest rates and printing money, and the boom bust cycle is nearly always exacerbated by government intervention.
What are some of these “public goods” that we need central planning and massive investment for? Do you think universities and libraries could not exist without government? Tell that to Andrew Carnegie, a private industrialist who, after single-handedly reducing the price of steel by nearly 90%, donated millions of dollars of his own money to universities and libraries. Tell it to John D. Rockefeller who, after reducing the price of heating oil by nearly 90%, established colleges in the American South for freed slaves, and donated money for public health, science and the arts. James J. Hill and Cornelius Vanderbilt not only built railroads all over the US but reduced fares considerably, and Henry Ford reduced the price of automobiles enormously. (These people all contributed to a period of deflationary expansion, which some uneducated anticapitalists will tell you is impossible.) These and many more such men are known today as the robber barons, while people who take your money without asking are called democratically-elected leaders. Look up the philanthropy of Bill Gates, Warren Buffett and the Waltons, too, and then tell me they are bad people.
But even so, why is it inconceivable that we should pay market prices for universities and libraries? We do for a lot of other government services, like recreational facilities, which by the way can and do operate for profit too. I mean, don’t people understand that, if you get back the money in taxes you used to pay for these things, you can pay for them? And at least then we would have the choice. And sure, we are not completely rational actors, but free markets tend to provide us with enough choices that prices go down and quality goes up. If it is true of food, clothing, housing and other essentials, why is it inconceivable for health care, education and security?
We do not need government intervention into the economy. Freeing markets entirely of the encumbrances of laws designed either to help the poor or benefit interest groups will free the people’s creative energies and their potential in ways we can only begin to imagine.