The Rational Optimist, Hayek, Ron Paul, and Obama's centralized, Keynesian stimulus

In a recent column in WSJ, Matt Ridley, author of the The Rational Optimist, discusses the influence of Friedrich Hayek on his thinking. The point of the column is that what matters most in human society is not the extraordinary intelligence of individual members of the species, but the fact that those members communicate and interact with each other and exchange ideas, thereby forming a collective intelligence far more powerful than the contribution of any individual member. Ridley sums up his column as follows:

The political implications are obvious: that human collaboration is necessary for society to work; that the individual is not—and has not been for 120,000 years—able to support his lifestyle; that trade enables us to work for each other not just for ourselves; that there is nothing so antisocial (or impoverishing) as the pursuit of self-sufficiency; and that authoritarian, top-down rule is not the source of order or progress. [my emphasis added]

The last point, that “authoritarian, top-down rule is not the source of order or progress” is especially important. One implication is that centrally planned, top-down government programs, like, for example, Obama’s current $450B jobs program or his earlier $800B stimulus program, are doomed to failure. This is because the authors of such programs cannot possibly have enough knowledge to be able to conceptualize and implement these programs effectively. All you need to ask yourself is the following question: Who is going to have a better understanding of how to create jobs, Obama and a few government bureaucrats in Washington DC, or the collective intelligence of all the entrepreneurs in Silicon Valley? It would not matter if Obama were the most intelligent person in the world (which he most certainly is not); it is simply an epistemological impossibility that he could have all the dispersed, real-time, localized knowledge embodied in the minds of all the entrepreneurs in the Valley. Obama confidently claimed that the stimulus was going to be spent on “shovel-ready projects,” only later on to be forced to admit that the projects were “not as shovel-ready as we expected.” What Obama overlooked was that it was impossible for him to know how spending could most profitably and effectively be distributed among the most deserving individual projects. This knowledge is dispersed among countless market participants at the local level and is changing constantly in real-time. This is one of Hayek’s basic theses. People like Matt Ridley, Ron Paul, and I adhere to this view. This thesis is where economics and biology come together. The economy is like an enormous ecosystem. It is completely dispersed and not under any central control. It is impossible to know in advance where new mutations (economic innovations) are going to pop up. And it is impossible to know in advance which particular mutation (innovation) will be naturally selected over others. Who ever could have predicted that Steve Jobs and Steve Wozniak would have been so successful? Mark Zuckerberg was not successful because the Obama administration identified him at an early stage and backed him with capital.

In sum, the Keynesian philosophy of the Obama administration (and thinkers like Paul Krugman and government officials like Ben Bernanke) that the government can centrally know and plan how to stimulate the economy is just complete hogwash. Instead of trying to act and spend and intrude into and distort the markets, the government should rather be trying to withdraw itself from interfering in those markets. By doing so, the government would unleash the enormous creative energy of the private economy, an energy that derives from the dispersed knowledge and initiative of millions of individual actors, a force infinitely more powerful than any puny, misguided, wasteful, ill-timed stimulus coming from the central government.

There is one question I always ask myself: If extraterrestrials were to descend from outer space and observe the human species, what would be the things that they saw as most typically characteristic of the human species? In my opinion, it would be language, exchange, a monetary system, and a dispersed and flexible market economy in which rationality, locally applied, calculates and recalculates in real-time the prices for exchange and thereby assures that the best human ideas and inventions (the best memes) are dispersed in the most flexible way. In other words, it is dispersed, flexible, non-centrally-controlled systems that are most characteristic of the success of the human species.

As Ridley remarks: “Only the cloud knows.” The problem with Obama and Tim Geithner and Ben Bernanke is that they are not and never can be the cloud. For them to pretend otherwise is an exercise either in gross stupidity or hubris.