Thursday, March 4, 2010

Economics Made Easy Pt. II

Last post you we covered the first economic argument to defeat any statist in an argument about a government policy, the broken window fallacy.  Today we'll cover the second argument, Hayek's information problem.  Hayek, a Nobel Prize winning economist, made the point that it's extremely difficult for any government official to efficiently manage any portion of economy because they simply do not have the information needed to do so.

A modern economy is composed of literally millions of independent actors operating through towards their own subjective preferences.  Just think about all of the decisions you have to make just to manage your personal finances.  What you are going to buy, how much of it you are going to buy, how much to save, how much debt to take on, how much to pay on your debts, etc. takes much deliberation by you.  No one else can make these decisions for you because they simply do not have the information to do so.

How then, can a bureaucrat make decisions on an industry or economy wide basis?  There's no way they can have the detailed information necessary to make wise decisions on your behalf.

So whenever a bureaucrat or politician tells you that "alternative energy is the wave of the future", or that politicians will invest your tax dollars in a stimulus package "that works", just remember that there's NO WAY politicians can know the future better than you can.  They're human beings who are not capable of knowing all these things.

These decisions are best left in the hands of individuals, who know the detailed knowledge about themselves to make the decision whether or not to invest in a business pursuing certain interests such as alternative energy.  If they're right, they make a profit.  If they're wrong, they take a loss.  In any case, they aren't spending other people's money on what are essentially gambles.

When a politicians takes a gamble, he's playing with other people's money.  He doesn't stand any personal gain from correctly predicting the future.  He doesn't lose if he poorly predicts the future.  He simply makes decisions based mostly on ideology.  That's why politicians think alternative energy is the wave of the future; because they want it to be the wave of the future.

The limited information politicians have makes them very poor managers of an economy.  On the other hand, individuals do a better job of making productive decisions because they have an incentive and the information to do so.  When you hear a politician say that investing in this, or that, will benefit the economy, always ask yourself, "how do they know it will benefit the economy?"  Unless they are some sort of Nostradamus, the truth is that they don't know.  They just think that renewable energy, or universal health insurance, or any number of things are good, and that's why they are taking your money to spend on their pet ideological causes.