Fiatch

↓

The proliferation of czars across the federal government symbolizes the fatal conceit that has taken hold.

Katherine Mangu-Ward writes in “The Lure of the Czars:”

President Barack Obama is taking the practice of naming czars to new heights. As Foreign Policy points out, with the selection of “border czar” Alan Bersin, the Obama administration surpassed the Romanovs in its production of czars. It took those old Russkies 300 years to produce 18 czars. It took Obama less than 100 days.

The czar is a perfect techocratic role—appealing to Obama, who has been much praised for “surrounding himself with smart people.” The appeal of the czar rests on the belief that if we could just figure out the right smart, competent, well-intentioned person to put charge, everything would go more smoothly.

Would you believe we now have a TARP Czar, a Stimulus Czar, and a Car Czar?  We do.

This czarist approach is both conceited and futile.  It will necessarily underperform markets.  Free enterprise simply, clearly does a better job.

It is amazing that our officials idolize the czar position.  It is even more startling that American citizens tolerate such arrogant, expensive folly.

Of course, it must feel intoxicating to become a czar.  Note the full title of Russian sovereign rulers:

“…according to the article 59 of the Russian Constitution of April 23, 1906, ‘the full title of His Imperial Majesty is as follows: We, ——— by the grace of God, Emperor and Autocrat of all the Russias, of Moscow, Kiev, Vladimir, Novgorod, Tsar of Kazan, Tsar of Astrakhan, Tsar of Poland, Tsar of Siberia, Tsar of Tauric Chersonesos, Tsar of Georgia, Lord of Pskov, and Grand Duke of Smolensk, Lithuania, Volhynia, Podolia, and Finland, Prince of Estonia, Livonia, Courland and Semigalia, Samogitia, Belostok, Karelia, Tver, Yugra, Perm, Vyatka, Bulgaria and other territories; Lord and Grand Duke of Nizhni Novgorod, Sovereign of Chernigov, Ryazan, Polotsk, Rostov, Yaroslavl, Beloozero, Udoria, Obdoria, Kondia, Vitebsk, Mstislavl, and all northern territories; Sovereign of Iveria, Kartalinia, and the Kabardinian lands and Armenian territories - hereditary Lord and Ruler of the Circassians and Mountain Princes and others; Lord of Turkestan, Heir of Norway, Duke of Schleswig-Holstein, Stormarn, Dithmarschen, Oldenburg, and so forth, and so forth, and so forth.’”

Now read about US Auto Czar Ron Bloom who:

according to his not being embroiled in a state-pension-kickback scandal like his predecessor and despite his union ties; by the grace of President Obama, Regulator and Technocrat of all the Automakers, of General Motors, Buick, Cadillac, Chevrolet, Tsar of Chrysler, Tsar of Dodge, Tsar of Jeep, Tsar of Ford, Tsar of Pontiac, Tsar of Hummer, Lord of GMC, and Grand Duke of Autoparts Makers Visteon, Delphi, Williams Controls, AutoZone, and PepBoys, Prince of CarMax, Penske, AutoNation and Advance Auto Parts, US Auto Parts, O’Reilly, Pick-Ups Plus, and other Auto-Parts Retailers; Lord and Grand Duke of Genuine Parts Company, Sovereign of LKQ Corporation, The Coast Distribution System, and All Wholesale Auto-Parts Distributors; Sovereign of Conrad Industries, Harley-Davidson, and the Michigan lands and union territories - Heir of Hoffa, Duke of Washington, D.C., Ohio, Indiana, and so forth, and so forth, and so forth.

It is also worth noting that the Obama administration placed a 31-year-old Yale Law School student with no auto industry experience in charge of restructuring GM.  Reportedly, he is a very smart guy.

These arrogant officials should get over themselves and get out of the way.  Entrepreneurship is hope and change that yields an open tomorrow.  Centralized power is an old, sad, terrible road that leads to a dead end.

And so, forth.

[image source]

“I expect there will be some failures” of smaller banks. “Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.”

Federal Reserve Chairman Ben Bernanke, February 2008

Was the Fed Chairman lying or just totally wrong?  In either case, should we make the financial system yet more fragile and inflexible by adding to the immense power held by this position?

Btw, have you noticed how often commentators mention that Bernanke is an “expert” on the Great Depression?  If I had a dollar for every time I’ve heard that bit, I’d exchange all that paper for gold.

Do we not con ourselves with such talk?  It is naturally somehow comforting to believe that our problems will lessen or disappear because some single expert can devise the solution to save us.  As with all myths, though, reality differs from the tale.

While it is of course important that officials represent the best and the brightest, it is folly to believe that any central planners can be so smart as to know how to allocate scarce resources better than markets.

Hayek’s concept of “the fatal conceit” nails it:

The belief that one person or group, no matter how smart, can know how best to allocate resources is a classic example of what the Nobel Laureate economist F. A. Hayek called “the fatal conceit.”

In Hayek’s view, what enables businesspeople to make good decisions about the allocation of resources is not that they are smarter than other people. Instead, two other factors are key.

First, businesspeople have very detailed knowledge of their particular corners of the world. They know where resources are, where their customers are and what they want, and have the experience of knowing how to deliver it. This is not about being “smarter,” but about having local and contextual knowledge that others don’t have.

Second, entrepreneurs develop this knowledge by making use of the signals provided by prices, profits, and losses. Prices guide entrepreneurial decision-making by enabling them to formulate budgets and estimate the profitability of the various choices they might make.

Profits and losses provide information after the fact about how well they chose. Profits signal them to continue, while losses tell them that resources need to be reallocated. By acting on the basis of that information, each entrepreneur contributes to the overall improved allocation of resources.

The lesson from Hayek is that when the rules are right, markets are collectively much smarter than any individual or group within them. This is the lesson that the Obama administration has utterly missed.

Let us have new financial regulation.  Let us have heath-care reform.  With both, let us empower markets and reduce the role of command-and-control central authority.

[Chairman Bernanke photo and quote source]

Entrepreneurship is hope and change that yields an open tomorrow.  Centralized power is an old, sad, terrible road that leads to a dead end.

Please read “F. A. Hayek and the Fatal Conceit of [President] Barack Obama:”

BY STEVEN HORWITZ

The headlines blare that President Obama will “restructure the financial services industry” and “fix the health care crisis.” A 31-year-old with no experience in the business world, but a lot of experience in politics, has been put in charge of dismantling General Motors.

Members of Congress lecture car manufacturers and mortgage lenders on how to do their jobs. Politicians keep taking on more and more responsibility for the U.S. economy, as each industry appears to be getting its own “czar.” Unfortunately, more czars will not produce better cars, or health care, or mortgages, or much of anything else.

The belief that one person or group, no matter how smart, can know how best to allocate resources is a classic example of what the Nobel Laureate economist F. A. Hayek called “the fatal conceit.”

In Hayek’s view, what enables businesspeople to make good decisions about the allocation of resources is not that they are smarter than other people. Instead, two other factors are key.

First, businesspeople have very detailed knowledge of their particular corners of the world. They know where resources are, where their customers are and what they want, and have the experience of knowing how to deliver it. This is not about being “smarter,” but about having local and contextual knowledge that others don’t have.

Second, entrepreneurs develop this knowledge by making use of the signals provided by prices, profits, and losses. Prices guide entrepreneurial decision-making by enabling them to formulate budgets and estimate the profitability of the various choices they might make.

Profits and losses provide information after the fact about how well they chose. Profits signal them to continue, while losses tell them that resources need to be reallocated. By acting on the basis of that information, each entrepreneur contributes to the overall improved allocation of resources.

The lesson from Hayek is that when the rules are right, markets are collectively much smarter than any individual or group within them. This is the lesson that the Obama administration has utterly missed.

The administration evidently believes that experience in policymaking is an effective substitute for the local and contextual knowledge of how to produce goods and services. This is a complete misunderstanding of the way in which markets work and what kinds of knowledge matter.

Much of the same is true with Obama’s supposed fixes for health care and financial services. Imposing a vision of how an industry “should” work and how it should produce and deliver its products from the top down is the height of political hubris.

The conceit behind it is one that dates back to the earliest visions of socialist central planning. Even as belief in that more comprehensive vision has died, the mindset behind it is still manifested in the belief that top-down fixes driven by well-meaning political actors are more rational than letting individuals with their local knowledge coordinate and cooperate via markets.

When politicians such as Barney Frank lecture financial executives on their lending practices, they too are guilty of the sort of hubris Hayek identifies.

How they know better what it takes to run a business is not at all clear, especially since many of them have never done so. This sort of second-guessing of business inevitably gets politicized as there is no other basis for decision-making by politicians who are ignorant of the detailed, contextual knowledge on which effective entrepreneurship relies.

Absent the signals of the marketplace, czars, presidents, and members of Congress are thrashing around in the dark in their attempts to improve upon the outcomes generated in actual markets. Top-down directives forgo the opportunity to learn from the decentralized knowledge of those actually producing the goods and services in question.

Obama’s reliance on experts and czars and top-down restructuring is particularly ironic in light of his promises of change and bringing the spirit of 21st century technology to government.

The clearest lesson of the networked world is that decentralized, bottom-up collaboration works much more effectively than top-down solutions. From Wikipedia, to open source software, to the Internet itself, the 21st century is quickly becoming the century of the “wisdom of crowds.”

Young people understand how contributing their own contextual knowledge to aggregating and signaling processes on the Web make all of us more effective users of information through shared knowledge. Whatever its flaws, Wikipedia could never be written by an Information Czar or Task Force.

Hayek recognized decades ago that markets work in precisely the same way. To think otherwise would be to suffer from the fatal conceit. Czars and second-guessing politicians with grand designs will only frustrate the much more effective decentralized processes of the market.

Even as they communicate constantly through the Internet, probably using open source software in the process, Obama and his administration, in their hubris, continue to believe that industries need czars and that individuals and committees are smarter than collaborating, distributed collectives. We can only hope that conceit will not be as fatal as Hayek feared.

Read Hayek:

The two most important books that any student of current events should be reading in this environment are both by Friedrich Hayek, the esteemed Austrian economist. Based on events he witnessed beginning in the early part of the 20th century, Hayek wrote The Road to Serfdom as a warning to England and the United States against the damaging impact of socialist policies and The Fatal Conceit as a warning against heavy intervention in markets and society at large. Despite the almost universal belief today that more, but better, regulation is needed and that the role of the state needs to be not just temporarily larger, but permanently larger, Hayek’s writings and logic should give everybody pause as to the consequences of these actions.

As a country, we need to rebuild confidence and trust and to understand what happened. Whether by business or by government, the misdiagnosis of situations leads to poor prescriptions for rehabilitation and recovery. When the misdiagnosis is done at the federal government level and involves large parts of a national economy, the consequences can be swift and significant. The unintended consequences are often swifter and even more significant. As the leaders in our nation continue to evaluate and evolve the policies and rules of the game, we would all be wise to heed the cautions raised by Friedrich Hayek. I appreciate that the free market can be a difficult master and that there is an important role for government and regulators, but I hope that as we move forward the rules of the game and the methodology for changing those rules will be more consistent and fair than they have been over the past year. Those who desire to protect civil liberties in times of war appreciate the importance of laws protecting individuals and institutions. In times of economic and financial distress we need to be similarly vigilant in protecting economic and contract rights so that we can continue to have a system that functions properly. Attempts to threaten or eliminate those rights will chase away the capital and investment that our country needs to restore prosperity and to thrive in the future.

Edward Lampert, “Message from the Chairman”. SEC filing.

(hat tip to Taking Hayek Seriously)

What if the ideas of the Austrian school of economics are correct?  If so, what happens next?

Have you started studying yet?  Go now.  Let’s each do what we can.

Historical Fiatch: Listen to F.A. Hayek in 1975 on Meet the Press.  Hat tip to mises.org.