Saturday, April 17, 2010

Interventionist chaos

Boyes' recent analysis of the impact of increasing scale and scope on economic performance generates two questions: why does this transpire and how does this transpire?

A reading of Hayek's classic The Road to Serfdom provides one plausible explanation. The belief systems that emerge and evolve shape the "consensus" of society. The road to liberty was one that emerged over considerable time and was gradual and incremental. Liberalism expanded in England and on the continent as a strong understanding and belief in liberty and freedom expanded. This informal institutional development lead to what Hayek called Individualism: True. In his view this was a commitment to allow the individual to use their own knowledge for their own ends in the absence of coercion. Now, this coercion might come from other individuals or it might come from the state, but the commitment to individualism led to a firm understanding of liberty and coercion and a clear picture of the trade offs involved in securing personal liberty (property rights, contract rights, freedom of thought and action) in the face of potential or actual predation by submitted to a central authority. This trade off was based upon clearly limiting the central authority and concentrating the locus of planning within the individual. That is, the state would be one of many players that would shape a constitutional framework - rule of law, individual order, separation of powers at the national level, federalism as a further check, etc, and with other players (formal institutions and informal) would commit to a law that was adaptively efficient and could be dynamically stable.

The essential connection between individualism and adaptive efficiency is clear, both in Hayek and in reflecting on incentives. The diffusion of knowledge and the process of learning lead result in much different outcomes if one begins from catallaxy and socialism. These differences can be viewed through time.

Entrepreneurs play a key role in the discovery process. Whether this discovery results in success or failure, it is this process that is at the heart of a dynamic society. As agents of learning in complex world, entrepreneurs play a key role in the process of economic change.

Boyes points out how measurements of economic change are impacted by the scale and scope of state involvement in society. This expansion impacts the economy in a number of ways:

1. Changing the incentive structure that shapes entrepreneurial behavior
2. Increasing uncertainty
3. Redistributing income
4. Dramatically shaping belief systems

The notion of wealth creation v. wealth destroying entrepreneurship is explored by Powell, Baumol and others and rests upon the view that incentives shape the direction of behavior. This view seems to be confirmed when examining measures of entrepreneurial behavior across countries using instruments such as the Frasier or Heritage indices. While it may seem to be a tautology, it is important to repeat the impact of entrepreneurial behavior on economic performance and economic change. Larger scale and scope of the state provides increased entrepreneurial opportunities for agents to engage in wealth destroying rent seeking behavior and less opportunity for wealth creating rent eroding behavior. That is, profit opportunities rise in actions with the state and fall in actions in the private sector.

Uncertainty from diffused knowledge and the process of learning create incentives for agents operating under liberal societies that are in fact individualistic to quickly internalize the consequences of actions and to engage in the level of learning that best suits their own needs. This process moves toward wealth creation under a liberal society that places consistent and clear constrains on coercion. As any number of social scientists point out, centralized planning tends to increase rather than increase uncertainty due to the socialist focus on planning detail or individual activities (what Hayek refers to as the preoccupation with legislation. The civil law system of Continental Europe is used by Hayek as an example to contrast the liberal or common law system that is the constitution of liberty). Gary Becker et al do a nice job of exploring a contemporary example that supports Boyes concern about the future impact of large scale and scope of government involvement in our society. In Uncertainty and the Recovery the authors develop this argument:

other government proposals created greater uncertainty and risk for businesses and investors. . . .

Congressional "reforms" of the American health delivery system have gone through dozens of versions. The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest, expand and hire harms households as well, because it slows the creation of new jobs and the growth of labor incomes.

. . .

The uncertainty about monetary policy has important political dimensions as well. The Fed now faces greater political pressures than at any other time in the past quarter century, as seen from the grilling the Senate Banking committee gave to Fed Chairman Ben Bernanke in deciding whether to approve his reappointment. These pressures may intensify greatly if, and when, future Fed actions to restrain inflation conflict with politicians' desires to prop up housing and the major government enterprises enmeshed in housing finance.

Even though some of the proposed antibusiness policies might never be implemented, they generate considerable uncertainty for businesses and households. Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse.

Becker deftly sees the impact of increasing scale and scope of government on entrepreneurship and uncertainty inherent in complex environments. His colleague Greg Mankiw, in a recent post, shows the ultimate aim of the central planner or interventionist or Keynesian or socialist:

I have long said that one of the prime motives for healthcare reform had nothing to do with health per se but rather was a desire by those on the left for greater redistribution of income. The Tax Foundation has now put some numbers to that proposition for the recently passed bill. Roughly speaking, the top 1 percent of the population pays an additional $50,000 in taxes because of this legislation, and each of the bottom 50 percent gets about $1000 in benefits. Click here for the more complete description.

So, here it is, the end of planning or socialism - social justice or income redistribution. And the question becomes, what type of process leads to a shared belief system that would not only support for but agitate for equal outcomes.

This is the message in Hayek's Road to Serfdom - that it is the change in beliefs that leads to anti-individual, anti-liberal, egalitarianism? This change in beliefs is due, in the view of some (Sowell, Hayek) to the role played by intellectuals in shaping belief systems. The unfortunate result of this "intellectual" domination of the emergence of shared beliefs was exemplified by a blog post by Paul Krugman entitled Are Austrians Self Hating Keynesians. (Note: like his colleague Brad deLong, Krugman has since changed the title of the post - seems even he could see the potential harm to his propaganda campaign from discourse that verges toward that of previous central planners).

Hayek worries that as material progress advances, individuals in society lose memory of the reason that liberty is an ultimate and instrumental value and begin to be concerned with either a safety net or a more "just" distribution of material. This replacement of the freedom to act (individualism) with a freedom from want (fill in the want) is the tipping point to totalitarianism.

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