Nobody Knows How to Make a Pencil or Why Government Locks In Failure

Kevin Williamson has a great article over at National Review Online talking about how in the private sector everything gets better and cheaper all the time, e.g. mobile phones, and how

“We treat technological progress as though it were a natural process, and we speak of Moore’s law — computers’ processing power doubles every two years — as though it were one of the laws of thermodynamics. But it is not an inevitable, natural process. It is the outcome of a particular social order.”

He goes on to show how competitive markets allow for competitors to come and go, rise and fall, and how important it is for failure to be possible as contrasted with institutionalized failure when politics takes over and government tries to pick winners and losers:

“Politics creates the immortal corporation. Amtrak and the U.S. Postal Service are two institutions that would have failed long ago if not for government support — subsidies for Amtrak, the government-chartered monopoly on letter delivery for the postal service. The cost of their corporate immortality is not only the waste associated with maintaining them, but also the fact that their existence prevents the emergence of superior alternatives.”

It comes back to “the knowledge problem” or as Hayek put it, the fatal conceit that a small group of people or an individual can have all the knowledge necessary to direct an entire industry (think healthcare, e.g.) or an economy. This article is one of the best discussions of this I have seen.

Read the whole thing.

How Debt Ruins Systems–Nick Gillespie Interviews Nassim Taleb Over at Reason

Over at Reason Nick Gillespie interviews (video and transcript) best-selling author Nassim Nicholas Taleb, a  former trader and hedge fund manager, and a groundbreaking theorist on risk and resilience. He is also a finance professor at New York University and a research scholar at Oxford. He has some great insights about why systems fail and why decentralized systems are more resilient than centralized systems. An excerpt from the transcript:

Taleb: To cite the great Yogi Berra, a good antifragile system is a system in which all mistakes are good mistakes. And the bad system is one, again to paraphrase Yogi Berra, where you tend to make the wrong mistakes. Let’s compare the banking system to, say, transportation. Every plane crash makes the next plane crash less likely and our transportation safer. Now, with the banking system, [a failure] leads to increased probability of failure of an entire system. That’s a bad system.

reason: What’s the best way to stop that so you’re not allowing the problem to replicate throughout the system?

Taleb: What fragilizes an overall system? Three things: One, centralization. Decentralization spreads mistakes, makes smaller mistakes. Decentralization is where we converge with libertarians. A second one is low debt. The third is skin in the game.

I’ve just acquired The Black Swan and will most likely buy Antifragile when I finish with that. Links to the books below.  I highly recommend reading the interview transcript (or watch the video, 56 minutes. Your choice but I can read faster). Links to the books below.

 

             

Keynes vs. Hayek - Round II

Via Instapundit, we have this music video of Keynes and Hayek facing off in the hearing room/boxing ring. It's a good summary of the philosophical differences between their approaches to the economy. Produced by Econstories.com

Hayek's Top 10 Do's and Don'ts in a Recession

Over at The Heritage Foundation's Foundry blog, David Azerrad has a list of top 10 do's and don'ts in a recession, as distilled from the works of F.A. Hayek by Bruce Caldwell. You should read the whole thing, of course, but here is the even shorter version.

  

“We usually don’t have the necessary knowledge to intervene effectively in the economy, and the political process is such that, even if we did, we still likely would get bad policy, coupled with an ever-growing government sector.”

The ever-growing government sector is a bug, not a feature.

(via Instapundit)

Edward P. O'Driscoll: An Economy of Liars

The Cato Institute's Gerald P. O'Driscoll has an op-ed in today's Wall Street Journal entitled, "An Economy of Liars." It's a great summary of how crony capitalism, rent seeking and regulatory capture distort markets and end up stealing our wealth. I agree with the whole article, but this part is worth highlighting:

Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. That conception of government and its duties was articulated by the Declaration of Independence and embodied in the U.S. Constitution.

Modern liberals have greatly expanded the list of government functions, but, aside from totalitarian regimes, I know of no modern political movement that has shortened it. While protecting citizens against force, both at home and abroad, is the government's most basic function, protecting them against fraud is closely allied. By the use of force, a thief takes by arms what is not rightfully his; he who commits fraud takes secretly what is not rightfully his. It is the difference between a robber stealing brazenly on the street and a burglar stealing by stealth at night. The result is the same: the loss of property by its owner and the disordering of civil society. And government has failed miserably to perform this basic function.

Read the whole thing.

The Law of Unintended (But Entirely Avoidable) Consequences

Every time Congress passes a law, it reaffirms an old one too; the Law of Unintended Consequences. Writing in The Washington Examiner, Glenn Reynolds illustrates the problem nicely, couchng it in terms of F. A. Hayek's Knowledge Problem, for which he won the Nobel Prize in Economics. The latest example is the recently passed "Obamacare" bill, 2,700+ pages of legislation that no one had read, let alone thought through. The immediate result was that multiple public companies such as AT&T, Caterpillar, John Deere and numerous others did what they are supposed to do and took the costs imposed by the legislation, calculated the impact on present and future earnings and took writedowns to compensate for it. AT&T alone saw $1 billion in shareholder value evaporate instantly. The estimate for writedowns for all corporations that provide prescriptoin drug benefits for their retirees is $14 billion for this year alone. And it isn't the corporation that is hurt. It's the people who own or are employed by it.

The writedowns took Henry Waxman (D-CA) by surprise. This wasn't supposed to happen. Obamacare was supposed to reduce costs, or at least conveniently hide them until later, and he has called the CEOs of AT&T, Caterpillar, Deere and several other companies on the carpet for hearings to be held on  April 21 to answer for why they obeyed the law and Generally Accepted Accounting Principals (GAAP) and took these writedowns. Buffoonery personified.

If President Obama had lived up to his promises of transparency and done everything out in the open with C-Span cameras present and posting the full, final bill on-line well before it was voted on, someone might have been able to point out this problem. There are more lurking in the text that will surface as time goes on. Instead, no one had any more than fragmentary knowledge of what was in the bill, if that, leading to the entirely avoidable screw-up we have now or as Glenn puts it:

"We're governed not just by people who screw up constantly, but by people who can't help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or "better" rules will do any good: Incompetence is built into the system."

Until We the People reign in the government we can expect more of the same, with the corresponding erosion of our rights and freedoms. Reigning it in won't be enough though. The People need to remain engaged in what their purported representatives in Washington are doing. As a wise man once said, "the price of liberty is eternal vigilance".

Read the whole (Glenn's article) thing, of course.