F.A. Hayek and Why Government Can't Manage Society, Part II

F.A. Hayek and Why Government Can't Manage Society, Part II

By Richard Ebeling - June 30, 2015

It is seventy years, now, since near the end of the Second World War Austrian economist, and much later Nobel Prize winner, Friedrich A. Hayek published his most famous article, "The Use of Knowledge in Society," in September 1945, demonstrating why it is impossible for a system of socialist central planning to effectively manage a complex and ever-changing economy better than a functioning, competitive free market order.

All the necessary knowledge to comprehensively and successfully plan an entire society does not exist in any one place or in the mind of any one person or group of people. Instead, the knowledge of the world is dispersed and decentralized among all the minds of all the people in the world.

To effectively utilize it for all to benefit it is essential to rely upon the market and the competitive price system, through which everyone is able to communicate with each other for the minimal amount of information to coordinate their activities with all the others in society.

Hayek's Message About Prices Still Relevant in a Post-Socialist World

With the failure and implosion of Soviet-style socialist central planning, Hayek and other thinkers like him were shown to have been right. Socialist central planning is dead, relegated, to use Marx's phrase, to the "dustbin of history."

The issues confronting societies, now, are not markets versus socialist planning but the form that markets can take on, and in this setting the degree to which government should or can regulate and intervene into the workings of the market system.

Influencing and moving markets in one direction compared to another through government regulatory and fiscal policies are a far cry, it is said, from the "old days" of those calling for and predicting the "end of capitalism."

But a logical extension of Hayek's argument against central planning is that any interferences with the price system or the autonomy of market participants to act on their own best judgment in their respective local circumstances of time and place must necessarily prevent the "knowledge problem" of economic coordination from being most effectively solved.

Prices, in other words, need to be able to tell the truth: What are the actual demands of market participants for various consumer goods and services, and what are the actual available supplies and alternative demands for the scarce means of production with which those desired consumer and other goods may be manufactured (what economists called the "opportunity costs" of the land, resources, labor and capital in their competing uses on the supply side of the market)?

Interest Rate Manipulation Distorts Savings and Investment Decisions

Market rates of interest represent a critical network of prices. Hayek made his early reputation as a money and business cycle theorist in opposition to Keynes's policy proposals for "activist" monetary and fiscal policy.

Hayek argued that market-based interest rates are essential for coordinating the decisions of income earners concerning how much of their income and wealth to divide between consumption and savings with the decisions of potential borrowers desiring to use the savings of others to undertake time-consuming investment projects that will bring forth desired consumer goods at some point in the future.

Monetary central planners through the central banking system attempt to influence interest rates and the types and amounts of investment spending through increasing the quantity of money in the banking system. The artificially lowered interest rates reduce the cost of borrowing and raise the prospective profitability of possible investment projects that would not have seemed worth undertaking at a higher market-established rate of interest.

The increase in the money supply creates the illusion that there is more savings available to be borrowed to start, complete and sustain investment projects than there are actual real saved resources to do so.

Borrowers and investors are misinformed by an important market signal to use their special and localized knowledge of time and place in misdirected ways that are inconsistent and eventually unsustainable with the real amount and types of scarce resources with which to undertake their investment projects, given people's actual decisions to save portions of their income, and thus "free up" a certain amount of resources for future-oriented production.

Precisely because the multitudes of individuals participating in the social system of division of labor cannot know all the others with whom they are interdependent in the complex networks of supply and demand, and therefore directly know what others are planning to do with their income and resources, everyone is dependent on the truthfulness of the price system through which all those individuals coordinate their diverse decisions and actions.

By falsifying interest rates – the inter-temporal prices connecting savings choices with investment decisions – governments and central banks potentially set in motion distortions and imbalances in the use of resources, capital and labor that manifest themselves in the form the booms and busts of the business cycle.

Government manipulation of prices, therefore, can be just as disruptive as the abolition of prices by political edict. Just as automobile traffic on the road system would be chaotic if the traffic lights were turned off, it can be equally disruptive and dangerous if red lights are turned to green when the perpendicular traffic at an intersection is simultaneously given a green light signal as well.

Minimum Wage Laws Cause Unemployment and Distort Resource Use

The same applies with the recent political push to raise the U.S. minimum wage law from its current level to $15 per hour or more. Critics of the minimum wage increase have rightly emphasized that doing so will potentially drive many marginal workers out of their existing jobs and prevent other jobs from ever materializing.

Setting a minimum wage below which no worker may be legally employed runs the risk of pricing out of the market those unskilled or low-skilled workers who employers find contribute a value to their production activities less than what the government mandates they are to be paid.

None of us pays more for something than we think it to be worth. This applies no less to employers whose only means of paying those they employ are the revenues they earn from selling products and services to the buying public. For an enterpriser to remain in business, costs of production cannot persistently be above the revenues received from sales of goods and services to consumers. Labor costs are no less a determinant of profit or loss than other expenses of doing business.

But besides this, the manipulation of wage rates through minimum wage laws also influences and disrupts the use of scarce resources in comparison to their allocation in a purely market-determined network of wages for different types and skills of labor.

Minimum Wage Can Result in Capital Replacing Labor When Not Needed

A number of both advocates and critics of a minimum wage increase have pointed out that some businesses have suggested that raising labor costs in this manner may result in replacing some workers with capital.

Computer tablets at restaurant counters can replace waiters and waitresses in taking orders conveyed to the cooks and chefs in the kitchen (as has already been happening in some places). And in Japan they have even been experimenting with robots that bring food orders to the counter or the restaurant tables in place of human servers.

All of this may end up being a market-based "wave of the future" to the extent that an aging and retiring population makes certain types of labor more scarce and expensive to employ over time. The demands for labor and their rising cost of employment over many decades in the twentieth century was a major factor behind the reduction in domestic servants in middle class households and their replacement with laborsaving home appliances and conveniences to do everyday housework.

Another example is how the greater cost efficiencies of office and laptop computers resulted, over time, in the disappearance of large numbers of secretaries employed in the "typing pools" of many large and small businesses throughout the economy.

By artificially raising the price and therefore the cost of certain types of labor through minimum wage legislation, the price system for workers no longer is fully telling the truth about who is available for work and at what market-determined wages to assist producers and enterprisers on deciding what would be the most appropriate use and combinations of labor and capital given the real, underlying supply and demand conditions in the market.

Capital that would be more profitably and efficiently utilized in other sectors of the economy will be drawn into these labor-saving activities due to the government imposing this higher wage floor for labor. This may occur, as a consequence, years or decades before the market would have determined that this was the best use for scarce laborsaving capital resources, and in some cases when it might never have been profitably desirable to redirect capital into those uses at all, if not for the minimum law.

So by manipulating workers' wages through minimum wage legislation, people will, again, potentially make misdirected decisions on how best to use their local knowledge of their own particular place and circumstances in the market because the price of hiring labor will not be telling the truth.

Government Regulations Prevent the Use of Personal Knowledge

This is no less the case with government production regulations and restrictions. In a dynamic market, individuals are constantly coming up with new ideas based on changing supply and demand situations that create the incentives and profit-oriented alertness to discover and imagine new possibilities about what products to produce and how to produce them.

In a world in which change seems to come swift and fast, flexibility and adaptability to such change are keys to business success in meeting and beating the competition in capturing consumer sales. Compare the market world of today with that of twenty or ten or even five years ago, and you see the technological discoveries and applications that have transformed everyday life in ways that we often forget to fully appreciate since they have already become so taken for granted.

It has been pointed out that in the U.S. the private sector spends about $2 trillion a year on compliance with government regulations, which in the Code of Federal Regulations take up over 175,000 pages of rules, commands, restrictions and prohibitions. 

Businessmen and those they employ must apply their knowledge and time to meet the demands of politicians and bureaucrats rather than utilizing them toward consumer-oriented production, innovation and improvement in all that their enterprises do.

At the same time, these thousands of pages of regulations serve as straightjackets that limit and inhibit entrepreneurial ability to take advantage of the changing circumstances of time and place because any and all responses, changes and adjustments are confined within the existing permissible rules and regulations imposed on the marketplace by the heavy hand of government.

Of course, appreciating the full impact of this is impossible to completely know precisely because it is part of what Frederic Bastiat explained as the "unseen." These are all those market activities and outcomes that never occur, or at least not in their entirety, because the regulatory structure prevents or modifies all the forms they would have taken on in a more free-market institutional environment.

That we cannot fully see or know all of these "might-have-beens" if not for government regulation does not any the less change the fact that individuals in the marketplace are prevented or restricted in how best to use the knowledge that they only possess and which the government regulators can never know or appreciate in the same way each of the individuals in the market do in their respective places in the division of labor.

The More Complex the Society, the Less Government Can Do Successfully

Another way of saying all of this is that Hayek challenged the entire trend of collectivist thinking and policy advocacy – whether in the form of central planning or price and production interventionism – by emphasizing the limits on what man can successfully command and control in the social and economic order of things.

For decades the socialists and interventionists argued that the more complex the society the less it could be left to the unhampered workings of the market system. The more intricate the social order and people's relationships in it, the more there needed to be a centralized political guiding hand to assure that it did not fall into chaos and disharmony.

Hayek turned this argument on its head. He insisted that the more complex the social and economic system the less any single or handful of human minds could comprehend, master or manipulate the relationships for better outcomes than when the market was left free.

If we wish to use all of that ever more complex "knowledge of the world" for the benefit of all, we must leave alone those who possess it in decentralized fragments, and who know best its use through their own actions and interactions in their corners of society. We need to allow all of that dispersed knowledge to be effectively coordinated in an increasingly global community of commerce, culture and creativity through the mechanism of competitively formed market prices to give each the minimal amount of necessary information about all the others with whom they are interdependent so to integrate what each does with the actions of everyone else.

In "The Use of Knowledge in Society," Hayek summarizes his argument:

We must look at the price system as . . . a mechanism for communicating information if we want to understand its real function . . . The most significant fact about this system is the economy of knowledge with which it operates, and how little the individual participants need to know in order to be able to take the right action . . .

It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch the mere the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to change of which they may never know more than is reflected in the price movement.

Hayek went on to refer to the "marvel" of all the complex knowledge and actions of multitudes of millions of people the price system successfully and constantly tends to coordinate even in the face of continual unanticipated and uncertain change. Hayek said:

I have deliberately used the word 'marvel' to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price change understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind.

Of course, the competitive price system is not the creation or design of a grand council or benevolent king. Trade, competition and prices emerged "spontaneously" out of people searching for avenues and opportunities to improve their circumstances through discovered mutually advantageous exchange.

The Significance of Hayek's Contribution to Human Knowledge

The fact that the market price system has emerged and evolved over centuries and not been created by the fanfare of a political command makes most people not even realize its importance, with it being taken for granted like language, or customs and manners, all of which makes society and social life possible but are also not the designs of political leaders.

Looking over the last seven decades since the appearance of Hayek's "Use of Knowledge in Society," we can now appreciate that in retrospect it represents one of the most important contributions to man's understanding of how the world in which he lives and works is made possible without the guiding hand of government command.

And just how relevant his argument remains today in the face of political regulations and controls that prevent that "marvelous" price system from most effectively integrating and coordinating the actions of billions of people whose freedom to use their own bits of unique knowledge and knowhow is critical for the continuing advancement of mankind.

Dr. Richard Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. - www.thedailybell.com

John Roberts’ damaging doctrine of judicial deference

John Roberts’ damaging doctrine of judicial deference

By George Will

WASHINGTON — Conservatives are dismayed about the Supreme Court’s complicity in rewriting the Affordable Care Act – its ratification of the IRS’ disregard of the statute’s plain and purposeful language. But they have contributed to this outcome.

Their decades of populist praise of judicial deference to the political branches has borne this sour fruit.

The court says the ACA’s stipulation that subsidies are to be administered by the IRS using exchanges “established by the state” should not be construed to mean what it says.

Otherwise the law will not reach as far as it will if federal exchanges can administer subsidies in states that choose not to establish exchanges.

The ACA’s legislative history, however, demonstrates that the subsidies were deliberately restricted to distribution through states’ exchanges in order to pressure the states into establishing their own exchanges.

The most durable damage from Thursday’s decision is not the perpetuation of the ACA, which can be undone by what created it – legislative action. The paramount injury is the court’s embrace of a duty to ratify and even facilitate lawless discretion exercised by administrative agencies and the executive branch generally.

The court’s decision flowed from many decisions by which the judiciary has written rules that favor the government in cases of statutory construction. The decision also resulted from Chief Justice John Roberts’ embrace of the doctrine that courts, owing vast deference to the purposes of the political branches, are obligated to do whatever is required to make a law efficient, regardless of how the law is written. What Roberts does by way of, to be polite, creative construing (Justice Antonin Scalia, dissenting, calls it “somersaults of statutory interpretation”) is legislating, not judging.

Roberts writes, almost laconically, that the ACA “contains more than a few examples of inartful drafting.”

That is his artful way of treating “inartful” as a synonym for “inconvenient” or even “self-defeating.”

Rolling up the sleeves of his black robe and buckling down to the business of redrafting the ACA, Roberts invents a corollary to “Chevron deference.”

Named for a 1984 case, Chevron deference has become central to the way today’s regulatory state functions. It says that agencies charged with administering statutes are entitled to deference when they interpret ambiguous statutory language. While purporting to not apply Chevron, Roberts expands it to empower all of the executive branch to ignore or rewrite congressional language that is not at all ambiguous but is inconvenient for the smooth operation of something Congress created. Exercising judicial discretion in the name of deference, Roberts enlarges executive discretion. He does so by validating what the IRS did when it ignored the ACA’s text in order to disburse billions of dollars of subsidies through federal exchanges not established by the states.

Chevron deference does for executive agencies what the “rational basis” test, another judicial invention, does for legislative discretion.

Since the New Deal, courts have permitted almost any legislative infringement of economic liberty that can be said to have a “rational basis.”

Applying this extremely permissive test, courts usually approve any purpose that a legislature asserts. Courts even concoct purposes that legislatures neglect to articulate. This fulfills the Roberts Doctrine that it is a judicial function to construe laws in ways that make them perform better, meaning more efficiently, than they would as written by Congress.

Thursday’s decision demonstrates how easily, indeed inevitably, judicial deference becomes judicial dereliction, with anti-constitutional consequences. We are, says William R. Maurer of the Institute for Justice, becoming “a country in which all the branches of government work in tandem to achieve policy outcomes, instead of checking one another to protect individual rights. Besides violating the separation of powers, this approach raises serious issues about whether litigants before the courts are receiving the process that is due to them under the Constitution.”

Roberts says “we must respect the role of the legislature” but “a fair reading of legislation demands a fair understanding of the legislative plan.” However, he goes beyond “understanding.” He adopts a legislator’s role in order to rescue the legislature’s plan from the consequences of the legislature’s dubious decisions. By blurring, to the point of erasure, constitutional boundaries, he damages all institutions, not least his court.

THE NIGHT WATCHMAN; A parody on the government

THE NIGHT WATCHMAN; Parody on the government
Once upon a time the government had a vast scrap yard in the middle of a desert.

Congress said, "Someone may steal from it at night."
So they created a night watchman position and hired a person for the job.

Congress said, "How does the watchman do his job without instruction?"

So they created a planning department and hired two people, one person to write the instructions, and one person to do time studies.

Then Congress said, "How will we know the night watchman is doing the tasks correctly?"

So they created a Quality Control department and hired two people. One was to do the studies and one was to write the reports.

Then Congress said, "How are these people going to get paid?"

So they created two positions: a time keeper and a payroll officer then hired two people.

Then Congress said, "Who will be accountable for all of these people?"

So they created an administrative section and hired three people, an Administrative Officer, Assistant Administrative Officer, and a Legal Secretary.

Then Congress said, "We have had this command in operation for one year and we are $918,000 over budget, we must cut back."

So they laid-off the night watchman.

Why Government Can't Manage Society

Why Government Can't Manage Society

By Richard Ebeling

This year marks the seventieth anniversary of the end of the Second World War. On May 8th, Nazi Germany surrendered to the Allied Powers in Europe. On September 2nd, Imperial Japan surrendered to the Allies on the deck of the U.S.S. Missouri in Tokyo Bay, thus ending a global conflict that is estimated to have cost the lives of upwards of 50 million people.

In autumn of 1945, everyone was looking forward, finally, to a world at peace that could recover from the destruction of a catastrophic war and move towards a bright new future. But what kind of world was it to be?

Nazism and fascism had been militarily and ideologically pulverized in the conflict. No one wanted to goose-step to Hitler and Mussolini's grandiose dreams of a world-ruling master race or a war-worshipping aggressive nationalism to which innocent human beings were to be sacrificed.

The Postwar Hope for a Better World Through Soviet Socialism

Instead, many looked East to the Soviet Union that stood as the new colossus that had bore the brunt of the Nazi war machine; Soviet socialism seemed to offer a vision of a "better world" free from economic exploitation or class distinction.

Before the war, under Comrade Stalin's bigger-than-life leadership, socialist central planning and a spirit of serving the "common good" of humanity seemed to be creating a colossal industrial society in what had been the backwards agricultural nation of Russia a mere handful of years before. This was all being done, Soviet propaganda assured, for the benefit of the mass of the workers, and not a handful of greedy plundering capitalists. A people's utopia was in the making.

The German invasion had destroyed many of the industrial centers in European Soviet Russia. But beyond the Ural Mountains, Stalin had directed the reconstruction of new industrial centers that had ground out vast amounts of military hardware and equipment that stopped the Nazi onslaught, and had brought the Soviet Army to the central of Europe, with the red flag raised over Warsaw, Budapest, Vienna, Berlin and Prague.

Marxian ideology (and prophecy) asserted the inevitability of the coming socialist society. Communist parties both within the orbit of Stalin's new empire in Eastern Europe and in the Western democracies outside of Stalin's grasp were all at work to bring the totalitarian collectivist future to pass.

Western Socialists Wanted Socialism with a Democratic Face

Of course, not all socialists in the West were slavish servants to the Soviet Master in Moscow the way the communist parties were so bound. Many Social Democrats believed that democracy was both compatible with and an essential complement to a humane socialism, a socialism that did not reduce humanity to obedient cogs in a giant collectivist wheel directed by a "dictatorship of the proletariat." They wanted socialism with traditional civil liberties, personal freedom and democratic politics.

It is important to remember, however, that at a fundamental level the conflict between Western European democratic socialists and Moscow-managed single-party communists on opposite sides of the European divide was a dispute over means and not desired ends.

Soviet Communists and Social Democrats All Wanted Central Planning

In the years before, during, and immediately after the war, the dispute and debate between "communists" and "socialists" was over two things: How shall the collectivist society come about: through ballots or bullets – through democratic elections or violent revolution? And once in power, would collectivist rule and control be maintained through multi-party democratic choice or on the basis of one-party dictatorship with the suppression of civil liberties and political freedom?

But both Western socialists and Soviet-style communists, nonetheless, still agreed about the end or goal to be attained: near or full abolition of private ownership of the means of production and the implementation of government central planning of production and distribution in the place of decentralized and competitive private enterprise.

Capitalism was the enemy for both Soviet-oriented communists and those desiring a hoped for "democratic" socialism. Private enterprise was considered the root of "exploitation" of the workers, "social injustice," and economic inequality of income and wealth. Both communists and socialists believed in government central planning of a society's economic activity over virtually all facets of life.

Most American Leftists Pushed for Interventionist-Welfare Statism

The United States, of course, was noticeably different. The socialist ideal of nationalization of the means of production and central planning had never caught the imagination or the political traction the way they did in Europe. In spite of America's flirtation with economic fascism during FDR's early New Deal days and the wartime planning under which virtually the entire U.S. economy was put into the straightjacket of government control, the postwar direction was for the freeing of the market from direct and total government planning.

In America, outside of the more consistent and vocal voices on "the left," the debates focused on the degree to which U.S. industry needed to be regulated by the government to tame tendencies toward supposed monopolistic and oligopolistic inefficiencies and distortions in the market; the extent to which New Deal-introduced welfare state programs should be enlarged and extended; and, of course, the requirements for "activist" fiscal and monetary policies to assure and maintain "full employment" inspired by the virtual monopoly dominance of Keynesian ideas over the thinking of economists and government policy-makers in all matters of macroeconomic theory and policy.

F. A. Hayek was Critic of Keynes and Author of The Road to Serfdom

But in that same September of 1945, now seventy years ago, there appeared a lead article in the American Economic Review, the leading journal of the American economics profession, on "The Use of Knowledge in Society," by an "Austrian" economist named Friedrich A. Hayek who had been teaching at the London School of Economics for almost a decade and a half.

Born in Austria and having graduated from the University of Vienna, in the 1930s Hayek was recognized as the leading opponent and contender against the ideas of the Cambridge University economist John Maynard Keynes and his emerging "Keynesian" economics. Hayek was also acquiring an international name recognition from a book he had published a year earlier in 1944, The Road to Serfdom.

The theme of The Road to Serfdom is that while socialism had been promised as a "new world" of freedom and prosperity for all with an abolition of capitalist exploitation, in reality the inescapable concentration of power and control in the hands of a socialist government so to centrally plan the economic affairs of the society would lead to the threatened loss of not just economic freedom with the end of private property, but the loss of personal and civil liberties as well.

In spite of the dreams and promises of the "democratic" socialists, when the government owns all the means of production, then the only books and magazines published, including their content, is what the government wants printed. When the government owns all the resources, factors and machines, the only things produced and made available are those consumer goods the central planners considered "good" and desirable for "the people." When the government is the monopoly manufacturer, then the only employment opportunities are those the political authorities make available and assign you to fulfill.

You, as an individual, are at the mercy of an all-powerful, single provider of all things from which you have no escape because there is nothing outside of what the government owns, controls and plans. There is virtually no "private space," to live in and freedom over outside of the centrally planning hands of the State.

Running through his damning indictment of the political and personal consequences from imposing full socialist planning on society is a defense of the dignity and sanctity of the individual as a human being. The importance of private property is argued to be essential to secure and protect any and all freedom for the grasping hand of political power.

Hayek also pointed to the crucial role of the existence, practice and respect for an impartial rule of law for any protection from arbitrary government control. Without a delineation and enforcement of the rights of the individual and constitutional limits on the size and scope of government, political tyranny always threatens a society.

Hayek's "Use of Knowledge in Society" and the Un-workability of Planning

There are several concise and suggestive passages in The Road to Serfdom in which Hayek points out fundamental weaknesses in the practical ability of a central planning system to effectively replace a functioning competitive market order for solving the "economic problems" of society. But it is only in his 1945 article on "The Use of Knowledge in Society" that Hayek details what he considers to be the essential difficulty with any comprehensive system of economic planning.

If central planning were to work, it would be necessary for the central planners to possess complete and comprehensive knowledge of all the relevant "data" to decide how best to use and allocate all the diverse physical resources, human labor skills and technical possibilities so to produce those goods best serving the wants of the members of society, and in the most efficient manner to get the most out of the scarce means available to satisfy people's ends.

Hayek's starting point was to emphasize that all of that meaningfully relevant "data" exists in no one place and in no one mind or group of minds. The "knowledge of the world" is dispersed and divided up in the minds of all the members of society, with each knowing and understanding only a small part relative to all the knowledge that exists in everybody's minds, combined.

Furthermore, while people often think of knowledge in the textbook or "scientific" sense, there are other types of knowledge no less relevant or important that must be utilized and brought to bear if production is to proceed effectively and efficiently and if what is supplied tends to match what members of society want to demand.

Decentralized Knowledge and Need to Coordinate All that People Know

Hayek called this other type of knowledge the "local knowledge of time and place." This is the knowledge that is only acquired working and interacting within a particular corner of the social system of division of labor. This knowledge comes from working in a particular trade, in a specific firm or enterprise, working with a distinct group of other people, in which particular machines and tools are used as the means to satisfy specific consumers and demanders in the attempt to gain and keep their business in a competitive market.

But if knowledge is decentralized in a complex system of division of labor in which people are invariably separated from each other by both time and space, how shall information be communicated among people so their choices and actions on the production side of the economy can be tending to match and coordinated with the consumption side of the market?

Hayek forcefully argued that it is not necessary for all the multitudes of millions (now billions) of participants in the division of labor to directly know each other and each other's planned actions and desires to interpersonally coordinate all that they do. And it is certainly impossible for a handful of central planners to know enough of all that there is to know to successfully perform such an intricate and ever-changing task.

The Role of Market-Based Prices to Solve Society's Knowledge Problem

The market solves the "economic problem," which Hayek emphasized was really the problem of how to utilize all the knowledge in the world when all that knowledge can never be coordinated for effective use other than through the competitive price system.

Through the prices they offer to pay, demanders from one corner of the globe to another register their interest and their degree of willingness to pay others to supply them with the various goods, services and resources they are interested in obtaining from those willing and able to supply.

At the same time, every producer anywhere in the world is saved the necessity of needing to know all the other competing producers and enterprisers who also may have investment goals in mind involving the acquisition and use of various types of labor, capital equipment and raw materials.

It is sufficient that those rival demanders for the means of production on the producer-side of the market indicate and register their interest, willingness and ability to demand those factors of production through the prices they offer to purchase, hire or employ them.

These input prices inform producers anywhere in the world what the relative costs shall be to use those factors of production in their own line of activity, and therefore which combination of them would incur the least monetary expense to employ relative to the anticipated price they think consumers might be willing to pay for the finished product they could assist in producing.

These prices on the demand side of the market enable everyone in their own corner of the society to decide how best to allocate their limited income among alternative consumer goods they might purchase; and those prices on the supply side of the market assist each and every producer in deciding whether production of some product might earn a profit or suffer a loss, and if possibly profitable, with what combination of inputs to minimize expenses given other desired uses for them in other parts of the market.

Markets Enable Both Freedom and Use of Knowledge

The advantage of using a market-generated network of competitively established prices is that they not only inform everyone about the demand and supply potentials of others in society. It also means that every individual may be left free to make his own decisions about how best to use that knowledge of his local time and place in the most effective manner, so all may benefit from what each knows and can do what no central planner could ever know or do better than the decentralized decision-makers themselves.

Thus, individual liberty and social coordination through prices – personal freedom and market order – become not only possible, but can be shown to be indispensible if the "knowledge of the world" is to be brought into play for the mutual benefit and advantage of all.

If personal freedom is considered to be a desirable human condition and if human cooperation for mutual improvement is considered of value for the material and cultural betterment of mankind, then it can be shown, Hayek concluded, that only free markets – competitive capitalism – can solve the "economic problem" of the use of knowledge in society.

Socialist central planning, therefore, with its concentration of control over the means of human existence in the hands of the political authority, is not only a threat to human freedom and dignity – a "road to serfdom" – but also could be shown to be an economic dead end offering neither productive efficiency nor the practical utilization of the division of knowledge that accompanies a system of division of labor.

Abolition of private property in the means of production not only results in the personal loss of the means for existence and betterment outside of the power of government, with its danger of tyranny. It limits mankind's opportunities and progress to what a small number of finite minds can master and know, who are assigned the task of centrally planning and commanding the productive activities of the society.

Hayek's argument on the essential limits of the human mind to know enough to reconstruct and plan society according to a crafted central design was and is a powerful critique against the socialist ideal of the last one hundred years.

Which one of us, if we spoke with all honesty and truthfulness, can assert that they know enough to plan the economic and related social activities of the over 320 million distinct individuals living in the United States, or the more than 7.2 billion people who live on our planet?

But it might be said that "socialism" in his older and original form is now dead. It died with the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991. Except, maybe, in North Korea, the case for and the practice of central planning has become something of the past, a tragic historical curiosity that historians will analyze and try to understand for a long time.

Today around the world practically every country operates with forms of a market economy. Some may be more free and competitive while others less so, but "the market" as the broad institutional framework in which economic affairs go on in daily life is now virtually universal. Therefore, is Hayek's message in both The Road to Serfdom and his article on "The Use of Knowledge in Society" still meaningful and relevant in our world today?

(The text is based on a talk given on a panel session devoted to "Friedrich Hayek as Defender of Liberty" at the Tenth Annual Moral Foundations of Capitalism Conference sponsored by the Clemson Institute for the Study of Capitalism at Clemson University in South Carolina, May 29, 2015)

Dr. Richard Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was professor of economics at Northwood University in Midland, Michigan (2009-2014). He served as president of the Foundation for Economic Education (2003-2008) and held the Ludwig von Mises Chair in Economics at Hillsdale College in Hillsdale, Michigan (1988-2003).

A public killing, a mother’s pain

A public killing, a mother’s pain

Khanita Maston, the mother of the man who killed Cincinnati Police Officer Sonny Kim in an ambush before another officer fatally shot him, sat on her front porch Sunday morning, her dog Blue at her side, a smoke in her hand.

She is a grieving mother, at one point collapsing in tears when talking about never being able to see her son again.

But she’s also witness No. 1, a woman who tried to stop the ambush as it unfolded and the citizen who was with Officer Kim as he lay dying, telling him to “just hold on.”

“I understand what happened,” she said. “I know what my son did was wrong. But I am a mother.”

She wants people to know, this was out of character and nobody who knows Trepierre Hummons saw this coming.

As police have already reported, Hummons, who lived with his mother in her Madisonville house, fought with his girlfriend in the wee hours of Friday morning. A woman, who police are not identifying, filed a sex assault complaint against Hummons.

Before he went to bed, at about 2 a.m. or 3 a.m., Hummons asked his mother: “How am I supposed to live the rest of my life as a sex offender when I didn’t even do nothing wrong.”

Hummons woke up before Maston; they bumped into each other in the hall.

Hummons: “I love you mom.”

Maston: “I love you more.”

Hummons: “I don’t think so.”

Maston: “How much do you love me?”

Hummons: “I love you more than oodles of noodles.”

Hummons said he was going to sit on the porch.

But when Maston went outside to walk to the dog, he wasn’t there.

What she didn’t know: He had posted a cryptic Face book message at 8:55 a.m., “I love every last one of y’all to whoever has been in my life ... you’re the real MVP.”

And then minutes later he sent a text to several friends, saying, “I really love you and thank you for all you’ve ever done for me.” 

On the walk, as she reached Roe and Whetsel, she spotted Hummons. But she was taken aback. He was drinking from a “jug,” smoking a Black and Mild.

“This don’t look good, what are you doing?” she asked.

“Have a drink with me,” he encouraged.

No, no, let’s go home, she told him. She loosely linked her arm through his.

At that point, she says a probation officer pulled up, one who works in Madisonville, someone they both know.

The Enquirer is unsure about this man’s name, and from police accounts it’s unclear when he arrived on the scene.

Maston said the probation officer encouraged Hummons to go on home.

What is clear is that before he saw his mother and maybe the officer, Hummons made two calls to 911. “Someone’s walking around belligerent with a gun,” Hummons told a dispatch officer on his first call.

The second call came from the corner Roe and Whetsel. “I just called about a guy with a gun... Please get to Roe and Whetsel as soon as possible.”

As Officer Kim pulled up, Hummons let go of his mother’s arm, handed her his wallet, and beckoned to Kim, waving him over with two hands. And then Hummons pulled out a gun.

Maston said Kim warned her son to put the gun down or he was going to be shot.

“Tre said ‘shoot me,’ ” Maston said.

Kim fired. Hummons fired.

Kim fell, then Hummons ran and jumped on the officer. Maston pulled him off.

“I think he was gone at that point, he was not my son at that point,” Maston said.

Officer Tom Sandmann pulled up, boxed them in and fatally shot Hummons.

Maston said she called for help on Kim’s radio. They Enquirer could not corroborate that claim Sunday.

Paramedics arrived on the scene in seconds.

“I want people to know it was me who called for help for the officer,” she said. “Even though it was my son, I called for help.” 

On culture and social pathology

On culture and social pathology

Walter E. Williams

A civilized society’s first line of defense is not the law, police and courts but customs, traditions, rules of etiquette and moral values. These behavioral norms – mostly transmitted by example, word of mouth and religious teachings – represent a body of wisdom distilled over the ages through experience and trial and error. They include important thou-shalt-nots, such as thou shalt not murder, thou shalt not steal and thou shalt not cheat. They also include all those courtesies that have traditionally been associated with ladylike and gentlemanly conduct.

The failure to fully transmit these values and traditions to subsequent generations represents one of the failings of what journalist Tom Brokaw called “The Greatest Generation.” People in this so-called great generation, who lived during the trauma of the Great Depression and fought World War II, not only failed to transmit the moral values of their parents but also are responsible for government programs that will deliver economic chaos.

Behavior accepted as the norm today would have been seen as despicable yesteryear. There are television debt relief commercials that promise to help debtors pay back only half of what they owe. Foul language is spoken by children in front of and sometimes to teachers and other adults.

When I was a youngster, it was unthinkable to use foul language to any adult. It would have meant risking a smack across the face. But years ago, parents and teachers didn’t have “experts” on child rearing to tell them that corporal punishment was wrong and ineffective and “timeouts” would be a superior form of discipline. One result of our tolerance for aberrant behavior was that, according to the National Center for Education Statistics, during the 2011-12 academic year, 209,000 primary- and secondary school teachers were physically assaulted and 353,000 were threatened with injury.

Nowadays baby showers are often held for unwed mothers. Yesteryear such an acceptance of illegitimacy would have been unthinkable. Today there are no “shotgun” weddings to make the man live up to his responsibilities. But not to worry. Taxpayers bear the financial burden of illegitimacy. Any economist worth his salt will tell you that if something is taxed, expect less of it. If something is subsidized, expect more of it. Taxpayers have been forced to subsidize slovenly behavior. The statistical evidence proves it. According to the 1938 Encyclopaedia of the Social Sciences, that year 11 percent of black children and 3 percent of white children were born to unwed mothers.

Today 72 percent of black children and 30 percent of white children are born to unwed mothers.

For nearly three-quarters of a century, the nation’s liberals have waged war on traditional values, customs and morality. Our youths have been counseled that there are no moral absolutes. Instead, what’s moral or immoral is a matter of personal opinion. So-called sex education classes are simply indoctrination that undermines family and church strictures against premarital sex. Lessons of abstinence were considered passe and replaced with lessons about condoms, birth control pills and abortions. Further undermining of parental authority came with legal and extralegal measures to assist teenage abortions with neither parental knowledge nor parental consent.

You say, “OK, Williams, the Greatest Generation is responsible for our moral decline, but what about our economic decline?” Ask yourself: What are the massive government spending programs that threaten to bankrupt our nation in the future?

The answer would have to be Social Security, Medicare and Medicaid.

Over 50 percent of today’s federal budget is spent on these programs.

Around the time when many in the so-called Greatest Generation were born (1920), there were no such programs, and federal spending was $53 billion. In 2014, federal spending was $3.5 trillion.

If it were only the economic decline threatening our future, there might be hope. It’s the moral decline that spells our doom.

Obama's Trans Fats Ban Could Cost Americans $11 Billion

Obama's Trans Fats Ban Could Cost Americans $11 Billion

President Barack Obama's Food and Drug Administration has issued a ban on trans fats that could cost as much as $11 billion.

A release from the FDA states that the agency "has made a final determination that there is no longer a consensus among qualified experts that partially hydrogenated oils (PHOs), which are the primary dietary source of industrially produced trans fatty acids, are generally recognized as safe for any use in human food."

The FDA said it examined "the costs of all significant effects of the removal, including packaged food reformulation and relabeling, increased costs for substitute ingredients, and consumer, restaurant, and bakery recipe changes."

Based on those factors, the agency estimated the cost of implementing the ban over the next three years at $6 billion, but acknowledged that the figure could go as high as $11 billion.

The FDA also estimated that banning trans fats could prevent up to 23,350 coronary heart disease deaths annually, saving as much as $440 billion. But that estimate is questionable given that manufacturers already have largely decreased the amount of trans fats in foods due to labeling requirements, and trans fat consumption declined about 78 percent between 2003 and 2012, CNN reported. The FDA's lowest estimate is 1,620 deaths.

Until now, companies could still list products as "trans fat free" even if they had 0.5 grams of fat, but the new ban should end that.

Trans fats were introduced into the American diet around 1911 in the form of shortening or hydrogenated vegetable oil used for cooking and making pies. Products likely to contain trans fats today include frozen pizza, doughnuts, canned frosting, margarine, and some buttered popcorn.

Companies can petition the FDA for a special permit to use PHOs, but they can't be used without FDA approval.

The FDA ban is an example of "flawed regulatory policymaking," according to Dan Goldbeck, a research analyst for regulatory policy at the American Action Forum.

He wrote: "A regulatory order that within hours of its release grabs dozens of headlines and admits to affecting the economy by billions of dollars annually ought to undergo a more rigorous, standardized, and transparent process than this action."

The FDA's move, he adds, "calls into question how much the agency truly considered the economics of regulating."

Twenty Reason Hillary is a Socialist, period!

In Her Own Words

1.      “Many of you are well enough off that the tax cuts may have helped you. We're saying that for America to get back on track, we're probably going to cut that short and not give it to you. We're going to take things away from you on behalf of the common good.” – Hillary Clinton

2.      “Don’t let anybody tell you that it’s corporations and businesses that create jobs.” — Hillary Clinton

3.      “You know, we can’t keep talking about our dependence on foreign oil and the need to deal with global warming and the challenge that it poses to our climate and to God’s creation and just let business as usual go on, and that means something has to be taken away from some people.” – Hillary Clinton

4.      “I can’t worry about every undercapitalized business” — Hillary Clinton testifying before Congress on the effects of Nationalized Health Care.

5.      “Yes, we've cut the maternal mortality rate in half, but far too many women are still denied critical access to reproductive health care and safe childbirth, and laws don't count for much if they're not enforced. Rights have to exist in practice — not just on paper. Laws have to be backed up with resources and political will. And deep-seated cultural codes, religious beliefs and structural biases have to be changed.” – Hillary Clinton

6.      "We are at a stage in history in which remolding society is one of the great challenges facing all of us in the West." — Hillary Clinton per Barbara Olson's Hell to Pay: The Unfolding Story of Hillary Rodham Clinton

7.      "There are rich people everywhere. And yet they do not contribute to the growth of their own countries... They don't invest in public schools, in public hospitals, in other kinds of development internally." – Hillary Clinton

8.      "No. We just can't trust the American people to make those types of choices ... Government has to make those choices for people." – Hillary Clinton

9.      "If you have guns in your home, tell your parents to keep them away from you and your friends and your little brothers and sisters." — Hillary Clinton to middle school students

10.   "I also believe that every new handgun sale or transfer should be registered in a national registry..." — Hillary Clinton

11.   "I think again we’re way out of balance. We’ve got to rein in what has become almost an article of faith that almost anybody can have a gun anywhere at any time. And I don’t believe that is in the best interest of the vast majority of people." -- Hillary Clinton

12.   "We came out of the White House not only dead-broke, but in debt. We had no money when we got there and we struggled to piece together the resources for mortgages, for houses, for Chelsea's education. It was not easy." – Hillary Clinton

13.    “I remember landing under sniper fire. There was supposed to be some kind of a greeting ceremony at the airport, but instead we just ran with our heads down to get into the vehicles to get to our base.” — Hillary Clinton makes up a ridiculous, untrue story about her trip to Bosnia.

14.    “In the four years since the inspectors left, intelligence reports show that Saddam Hussein has worked to rebuild his chemical and biological weapons stock, his missile delivery capability, and his nuclear program. He has also given aid, comfort, and sanctuary to terrorists, including Al Qaeda members, though there is apparently no evidence of his involvement in the terrible events of September 11, 2001. It is clear, however, that if left unchecked, Saddam Hussein will continue to increase his capacity to wage biological and chemical warfare, and will keep trying to develop nuclear weapons. Should he succeed in that endeavor, he could alter the political and security landscape of the Middle East, which as we know all too well affects American security.” — Hillary Clinton, October 10, 2002

15.   "There’s a different leader in Syria now. Many of the members of Congress of both parties who have gone to Syria in recent months have said they believe he’s a reformer." -- Hillary Clinton on tyrannical maniac Bashar Assad

16.   “With all due respect, the fact is we had four dead Americans. Was it because of a protest or was it because of guys out for a walk one night decided to go kill some Americans? What difference, at this point, does it make?” -- Hillary Clinton

17.   “My husband may have his faults, but he has never lied to me.” -- Hillary Clinton per Kim Eisler's Masters of the Game: Inside the World's Most Powerful Law Firm

18.   "Put this (helicopter) on the ground! I left my sunglasses in the limo. I need those sunglasses. We need to go back!" -- Hillary Clinton from Air Force Lt. Colonel Robert Patterson's Dereliction of Duty.

19.   "I have to admit that a good deal of what my husband and I have learned (about Islam) has come from my daughter. (As) some of you who are our friends know, she took a course last year in Islamic history." – Hillary Clinton

20.   “The last time I actually drove a car myself was 1996.” -- Hillary Clinton

Now a bad time to raise minimum wage

Now a bad time to raise minimum wage 

In reply to the Rev. John W. Cahill’s op-ed, “Stop subsidizing corporations” from the June 2 Enquirer: As a business owner I had to jump through many hoops before I could open my businesses, among them regulations, permit fees, licensing fees and many different taxes. With two businesses I had to hire lawyers and go to court to obtain the permit to operate. I then had to hire a bookkeeper to compute payroll, write quarterly reports, send reports to government regulatory agencies and keep records for income taxes. As it is very dangerous to hire employees and be in business, I had to purchase expensive liability insurance and hire a company lawyer whom I always had to use several times a year. Then with each employee I had to pay workers’ compensation, unemployment compensation, Social Security and other benefits. Each employee cost about $20 an hour, but the employee only received $10 an hour.

We must remember that once high wages and benefits were required for workers at Studebaker, Packard, Admiral TV, Muntz TV, Crosley and hundreds of other companies, and they are all gone now. General Motors required a government bailout of $11.2 billion. Once we paid high wages to those who made televisions, telephones, shoes and shirts, but all those jobs are gone. Almost everything that is sold at Wal-Mart is no longer made here.

It might not be a good time to raise minimum and low-wages pay, when 102 million – or 48 percent of working age Americans – cannot find jobs, and minimum wage starter jobs for teenagers are hard to find.

Everything that we legislate has unintended consequences. We must be careful.

William Schmidter, Indian Hill