Writer Kurt Luchs’s key points are:
Another reason that centralized government social engineering simply doesn’t work is what F.A. Hayek called “the knowledge problem.” Hayek was the only Austrian economist ever to win a Nobel Prize. He won it partly for a brief essay called “The Use of Knowledge in Society,” in which he explained that government is intrinsically helpless before most social and economic problems because the knowledge needed to solve them is too widely dispersed among the members of society. It cannot ever be made known in a timely fashion to a central authority, and even if it could, that authority would lack the godlike coordinating ability needed to use that knowledge effectively. Adding to the difficulty, much of this knowledge is tacit knowledge, not consciously known or articulated by the individuals who have it.
What can make effective use of the knowledge distributed locally among the members of society? Only the free market system and its accompanying structure of voluntary trades and changing prices. Freely determined market prices are what send signals to individuals telling them how to best use their unique knowledge to their own, and ultimately society’s, advantage. Without a free market, the only way to allocate resources is by government fiat–a few, far-removed individuals making choices for us all, perhaps with the best of intentions but in near-total ignorance. The result is government programs that clumsily and ineptly ape the market, with none of its efficiencies and never coming close to achieving consumer satisfaction. A government program must be counted a success if it does not achieve the exact opposite of its stated goal.
Government’s inability, indeed the inability of any elite group, to gather sufficient information quickly enough and to interpret it in a timely way in order to manage the entire economy as if it were a private company has been devastatingly demonstrated in the fiasco wrought by the Federal Reserve system in recent decades.
The Wall Street Journal reports, regarding last Wednesday’s testimony before Congress by former Federal Reserve Chairman Alan Greenspan:
The difficulties of forecasting served as a key defense for Mr. Greenspan. The Federal Reserve, with its legions of Ph.D. economists, has a better forecasting record than the private sector, he said, but that’s still not enough to prevent every problem. “We were wrong quite a good deal of the time,” he said. Forecasting “never gets to the point where it’s 100% accurate.”
Subprime mortgages led to a global economic crisis in considerable part because of securitization, in which the home loans were sliced up, packaged into securities and sold off to investors all around the world. Anticipating such a crisis is “more than anybody is capable of judging,” Mr. Greenspan said.
If the best experts were not able to foresee the development, “I think we have to ask ourselves, ‘Why is that?’” Mr. Greenspan said. “And the answer is that we’re not smart enough as people. We just cannot see events that far in advance."
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