Failure . . . an essential element of life. It is indeed failure that provides valuable information and the feedback mechanism that detects and dissiminates failure is at the heart of progress.
A key distinction between a market order and a planned/collective order is the way in which these orders deal with failure. First, the detection of failure - that is matching the results of behavior with expectations is different under these two regimes. Individuals experience the consequences of changes in their environment and, more importantly, in a market order, internalize the costs of failure. In contrast, collectivist regimes may experience the same type of change, yet this change may well (actually will not) be "experienced" by all authorities in the regime or by the key decision maker in the regime. Therefore, the collective order will be unaware of the failure. Think of any number of contemporary examples - Hurricane Katrina, flows (both legal and illegal) of people, drugs, or information, or macroeconomic stabilization policy.
The speed of reaction to changing events is much different in these two orders. Individual orders more rapidly detect failure and, given the incentives that are fairly clear, move more rapidly to adjust behavior than do centralized orders. Many of the introductory economics texts include a discussion of lags when discussing stabilization policy. The notion of lag is an important one, while individuals may certainly take time to adjust behavior as they consider an uncertain future and the consequences of alternative behaviors, this Hayekian discovery procedure will begin more quickly than under a collectivist regime and will operate with information that is "on the ground" or "obvious to the individual" or "important to the individual" - a process that is clearly impossible for a centralized regime. This process of individual discovery is prone to failure as the individual holds very little information/knowledge in this uncertain environment. What is important is the procedure - the individual more readily discovers failure than does the planner or the collective.
Another example of this contrast was described by the Fed. The US residential mortgage market has evolved in the manner that exemplifies the redistibutional trend that Boyes and I discussed last month. The impact of the evolving government monopoly on mortgage securities will certainly offer a type of natural experiment in the assertion of this blog post that an individual order reacts more quickly and calculates costs and benefits in a more socially creative manner than does a collectivist order.
The emergence of this government monopoly raises an important issue that Hayek and Schumpeter (among others) considered. To the extent that government involvement in the residential mortgage market reflects the concern of the welfare state to provide social justice in the form of an equal outcome - everyone owns a home - is it inevitable that the welfare state must evolve to a socialist state? That is, with a 96.5% government backed mortgage market - would a third party consider this market to exemplify the welfare state or the socialist state?
This distinction is, I think, more than an academic one. If in fact, there is a strong tendency for welfare states to move to socialist states - the Fed graphic above indicates a market that was 60 per cent government backed at the beginning of the time frame in 2000 (which may have already exceeded the tipping point from welfare to socialism) to one that is now very close to an absolute state monopoly.
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