Just The Numbers, Mam

By: Les Dunaway

An article by Alberto Mingardi was published in the Friday 23 March 2012 Wall Street Journal titled The European Union According to Hayek. It is an impressive, short summary of key ideas from Friedrich Hayek and an explanation of how Hayek predicted the collapse of the EU, which we are now witnessing. Notice that Mingardi refers to the breakdown of the European social model.

Friedrich August Hayek, who passed away 20 years ago today, was one of foremost social scientists of the last century. A Nobel laureate in economics, Hayek is often associated with a crucial intuition that informs his critique of socialist systems. There is, in society, a “knowledge problem”: Economic life requires the coordination of individual planning. The relevant knowledge for economic planning is dispersed rather than concentrated in society. If this makes coordination challenging enough in a market system, it also makes coordination a virtual impossibility under central planning: The planner can never secure and process all the necessary information to provide detailed guidance to any given development in society.

Even though this argument was originally deployed against hard-core socialism, it works pretty well against the soft-core version widely adopted by European democracies. Centralized welfare systems are necessarily run by a bureaucratic leadership. Pace Max Weber, the “technical superiority” of such an organization is simply not enough to master the nuances of a complex society. Centralized government allocates resources badly—regardless of its intentions. The very nature of centralization makes impossible for it to collect and compute all the information that is needed. This is as true for any grand scheme of industrial planning as it is for the government-led welfare systems that characterize Europe’s “social model.”

See also the interview of European Central Bank (ECB) President Mario Draghi in Wall Street Journal:

Mr. Draghi reflected on how the region’s travails were pushing Europe toward a closer union. He said Europe’s vaunted social model—which places a premium on job security and generous safety nets—is “already gone,” citing high youth unemployment; in Spain, it tops 50%. He urged overhauls to boost job creation for young people.

There are no quick fixes to Europe’s problems, he said, adding that expectations that cash-rich China will ride to the rescue were unrealistic. He argued instead that continuing economic shocks would force countries into structural changes in labor markets and other aspects of the economy, to return to long-term prosperity. “You know there was a time when [economist] Rudi Dornbusch used to say that the Europeans are so rich they can afford to pay everybody for not working. That’s gone,” Mr. Draghi said.

“There is no feasible trade-off” between economic overhauls and fiscal belt-tightening, Mr. Draghi said in the interview, his first since Greece sealed its second bailout.

“Backtracking on fiscal targets would elicit an immediate reaction by the market,” pushing interest-rate spreads higher, he said.

A Chilling Picture

The above, from two of the worlds most respected financial people, paint chilling picture of where our country is headed unless we take action. There are downward spirals which reinforce each other:

1. socialism exists and grows by making more and more people dependent  on the government
2. The costs of supporting more and more non-productive people requires that those who are productive carry an ever-heavier burden

There is a third factor that makes breaking out of the spiral time critical – the effect of  government dependency on people. We have a very visible, current example of this in the current US long-term unemployment. The longer people are on unemployment, the harder it is for them to get a job; the longer they are on unemployment, the lower their self-respect sinks. [read] [read][read]

Another example, far more frightening, is playing out in Europe. There were riots in London last fall; there have been repeated riots in Greece, France, Italy, Spain and Portugal. Notice who the rioters were in Portugal. With this context, it’s interesting to note that Antonis Samaras, the prospective next prime minister has already announced that he will “renegotiate” the terms of the bail-out agreement. [read] With that sort of leadership it’s not surprising that few doubt that Greece will default and leave the EU and, probably, take Spain and Portugal down with them.

What about the US?

As we all watched the “budget debate” and “debt ceiling” debacles unfold, we saw no indication of an awareness of our country’s peril and no indication of any focus beyond partisan politics. We have a Senate who has failed in their statutory duty to produce an annual budget for three years for the simple reason that any budget that wouldn’t be laughed at would anger their supporters ( see “riots” above).

We are not as far down the spiral as Greece and the rest of the EU. We can still break out and avoid the crash. It all depends on what happens on  6 November 2012.

Other Reading

• Greece and the National Moral Hazard Problem Greece and the National Moral Hazard Problem | Alberto Mingardi | Cato Institute
• The Road to Serfdom: Text and Documents–The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2)
• The Fatal Conceit: The Errors of Socialism (The Collected Works of F. A. Hayek)
• A Picture of Where We Are Headed – Les Dunaway | Madison Forum