Adam Smith, Frederic Bastiat, and Friedrich Hayek Join Us Through a Time Machine

A Machine called

Our Last Chance

Major scientific break though just announced. Advances in quantum physics have allowed visitors from the past. The first three, after exiting a time machine, spent a few weeks touring the U.S.  All, after revealing much disappointment, unanimously decided to run for Tacoma area political offices.

Friedrich Hayek – economist and social theorist, 1899-1992 – first out of the time machine (nicknamed by prankster inventor Our Last Chance) has announced a run for a 26th District Legislative seat, under his newly formed party, the Decentralists. He will be debating his opponent – allied with the new CentralPlannerist party – at Artondale Elementary School Saturday night.

A flyer Hayek’s volunteers are passing out at Ace Hardware, quotes Friedrich: “The problem of economic order is determined by the fact that the knowledge of what we must make use of exists as dispersed bits of incomplete and frequently contradictory information.”

Hayek told the Tacoma News Tribune science reporter, he implores us to learn from the past.  We should understand from his quote, that it is impossible for government legume quantifiers to efficiently glean vast amounts of conflicting economic data, in order to make rational decisions regarding picking winners and losers in the market place. He indicated shock, when he heard about the bail out of GM, vs. the proposed but tabled “cash for cluckers” chicken farm bailout. Mr. Hayek insisted to the reporter , that money injected into the economy through tax cuts is better directed by individuals reacting to natural market forces, than by the CentralPlannerist Party’s stimulus. His campaign sign maker, Milton F., also pointed out that unbridled entrepreneurship (until 2009) allowed inventions like the transistor, major medical breakthroughs, and the Internet.

Emerging from Our Last Chance behind Hayek, Frederic Bastiat – hailing from the French Liberal School of Economics, 1801-1850 – additionally expressing disappointment after his tour, has decided to run for the Tacoma City Council. Joining the Decentralist Party also, Frederic’s campaign is titled “Hands Off My Business”, reminding us of the futility of government attempts to kindle growth by selective stimulus in 19th century France.

Bastiat’s campaign literature paraphrases a whimsical story he wrote about a fictitious petition to the French government in 1845: “To the Honourable Members of the Chamber of Deputies.  I present a petition from the Manufacturers of Candles. What they pray for is that it may please you to pass a law ordering the shutting up of all windows and skylights, by or through which the light of the sun has been in use to enter houses.”

This tongue-in-cheek parable suggests that if the government bans windows, then British candle makers (very overcast there) wouldn’t have an unfair advantage due to the fact sunlight enters through the candle maker’s windows in sunny France and melts their wax!  Frederick will explain at the Tacoma Chamber of Commerce, that the moral of the story is that the unintended dire consequences of protectionism to Tacoma window makers and their suppliers, will outweigh any advantage to the economy by a betterment of local area candle makers’ circumstances.

The flyer also illustrates CentralPlannerist Party efforts to ban the entry of 95 trucks into the U.S. from Mexico, to save a few union-trucking jobs. This to the possible detriment of countless jobs in the U.S. to include local Washington State wine and apple exports due to retaliatory tariffs.

The last candidate to join us via the space-time continuum through Our Last Chance is Adam Smith – one of the fathers of modern economics, 1723-1790. Taking a two year leave of 18th Century Scotland, Dr. Smith will run for Tacoma’s 6th Congressional District seat. His guineas being refused by all the local banks, in the neighboring city of Gig Harbor, the Gig Harbor Decentralist Women’s Club will be throwing a fundraiser and auction for him at Jerisch Park on Monday.

The fundraiser’s theme will be one of Adam’s 18th century quotes: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard [for their] their own interest”. A local caterer serving venison, sarsaparilla, and loaves, will provide lunch at competitive cost. An insider in Tacoma area food services, leaked the rumor that the caterer is not benevolent, but only concerned about maximizing her profit by insuring quality. (Also whispered is that picketing CentralPlannerists will be objecting to their lack of entitlement to great catering at their desired cost, and will be petitioning the Tacoma City Council to set maximum catering prices.)

The MC, George Washington, also with us (inadvertently sucked into the wormhole), unfortunately can’t stay long as he has an urgent meeting in Yorktown.  George will open the event with one of his quotes: “A people… who are possessed of the spirit of commerce, who see and who will pursue their advantages may achieve almost anything.”  Miles Standish, sucked into the wormhole along with George thanks to the properties of String Theories 11th dimension, will present a PowerPoint lecture (weather permitting) on how Plymouth Colony was saved from starvation by eliminating collective farms, instead allowing the pilgrims to work their own fields.

Fundraiser open to the public. The Gig Harbor Decentralist Women’s Club requests volunteers bring a hasty pudding for desert.

Your most humble and obedient servant, etc, etc

Chief Time Travel Correspondent, Poor Richards Almanac

Published in: on October 9, 2010 at 09:46  Comments (6)  

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6 CommentsLeave a comment

  1. OK. Last one. :-). I have to pick up some cups for a Tea Party.

    Yes, you are correct. That link did make the argument about deficits, not revenue, that was why I included it though as the arguments are very interrelated. But you are still using “as fact” Bush tax cuts caused a decrease in revenue. Taking away Katrina, both wars (position on the wars irrelevant), a housing crisis (how it was caused irrelevant) and an ill advised prescrip. drug bill, there was an increase in net receipts and a decrease in the deficit.

    Regarding an assumed “stimulus result” of 0.5 or so: (And wouldn’t where that stimulus money went to greatly affect the outcome? In other words, AFL/CIO pockets vs. real infrastructure?) OK, so if I accept that as fact, then what would be the resulting stimulus if the same amount of $ was distributed throughout the economy via tax cuts for small businesses for example? (E.g. here in WA state we have a B&O Business and Occupation tax. on most small businesses, and this is on revenue, not just net profits.)

    This leads us back to Hayek again on the best way to distribute resources. Govt or marketplace.

    OK, I’m really going now.

  2. riedel does not refute that the bush tax cuts resulted in reduced revenues. he actually implicitly admits it. he focuses on whether or not bush’s fiscal policy caused our deficit. this is a separate issue. see the graph below for tax revenue as a percentage of gdp over the last five administrations. the actual source data is included below as well.

    you are correct that top down regulation of economies has often proved disastrous. as i said earlier, i think that markets generally do a better job of efficiently allocating resources than do central planners. but the extent to which this is true is an open question. just because the planned economy of the ussr was a disaster does not mean that public spending cannot increase gdp.

    as i have stressed, i am no keynesian (keynesian models are actually hilariously simple). but to say that public spending will never increase gdp does not cohere with the data. the vast majority of research (most prominently done by prof. barro) points to a money multiplier somewhere slightly below 0.5. so gdp should increase due to fiscal policy. whether this is more effective than a tax cut, i am not sure. if i absolutely had to pick a side concerning the obama stimulus package, i would probably say it was a bad idea. but my point, as you know, is that this is not a settled question, and we should not pretend that it is. personally, i would love to slash taxes and spending, but that is entirely selfish (not a dirty word to me). how exactly taxes affect the economy, however, is not a settled issue.

    apologies for my verbosity, but we do live in interesting times.

  3. Response to a few of the below points to the commentator:

    – You are stating as a fact that the Bush tax cuts caused a drop in revenues. Please refer to this link for a better reply than I can provide here.

    Yes, we could discuss all day whether models can be proven correct or not, and as I mentioned on my previous comment, they probably never will be mathematically. However while public spending can always help someone, somewhere, top down direction has displayed miserable results in Eastern Europe, the Soviet Union, Africa, South and Central America, China, N. Korea, etc.

    I agree on models being very imperfect measures. Just like “Global Warming” models. The Laffer curve doesn’t suggest zero taxes, nor does it claim that higher revenues will be immediate. The public and business in particular, unlike now has to be convinced that a deregulatory environment is going to to be lasting before they unleash their animal spirits. Kind of like Milton Friedman’s permanent income hypothesis. (Yes, a hypothesis.)

    In addition, refer to William Easterly’s work on the successes of market oriented approaches in the developing world vs. World Bank and IMF funding efforts. I could bring up the Great Depression too, but there will always be a Krugmanesk reply out there somewhere.

    Regarding: “Markets do fail”. As I mentioned below, yes they do. But the question is whether to: Let them fail and recover on their own; try to smooth them out with Fed Funds rate and QEII type manipulation, and/or inject massive stimulus as we are doing now.

    One individual once told me the only reason the stimulus isn’t working is that it wasn’t done correctly. But that’s really part of the point. It never will. Political payoffs, quid pro quo, ideology, etc will inevitably be part of the game.

    Again I thank the author of the below post for his reply.

  4. first, it should be noted that i am no enemy to decentralization. i learned economics in the same buildings in which friedman and hayek taught. what i object to is shoddy academic inquiry. there is abundant theory and evidence to suggest that markets, in general, are superior to central planning at allocating resources efficiently. but there is also plentiful evidence that markets are not infallible: one of the most basic economic ideas, that of negative externalities, shows that markets fail. this is a fact.

    the reason that there is no consensus on whether tax cuts or public spending is better at increasing GDP is not because of meaningless alternative hypotheses. it is because we simply do not know. for decades economists have postulated theories, come up with very sophisticated models, and tested these models against observed data with very advanced statistics. the right answer has not been found, and anyone who thinks otherwise misunderstands both academia AND market forces. if physicists come up with a unified theory that works, we will know. if economists definitively solve the central problem in macroeconomics, we will know.

    you are correct in pointing to the reagan tax cuts as evidence that tax cuts can work. but such evidence does not suggest that tax cuts will ALWAYS work. in fact, the model you cite (the laffer curve) explicitly tells us that there are many scenarios in which tax cuts will result in reduced revenues. this is what happened under the second bush administration.

    and yes, professor hayek’s model does suggest that central planning will never work as well as market forces. but this was just his model. there are models that suggest that, under the assumptions that classical economists postulate, central planning is at least as good as decentralization at achieving efficient outcomes. the fact that a mathematical model leads to a certain conclusion does not mean that conclusion is a reflection of reality. economics is very very messy.

    the point is that, while we have a very good understanding of micro economics, macro is a very unsettled field. discussing different theories is great, but to act like these questions are even close to settled is to do a disservice to productive public discourse.

  5. I thank the “unavatared” mystery commentator for his reply. 🙂

    Regarding current scholarship and aggregate demand, in an academic environment, it makes sense to look for an algorithm to “prove” tax cuts or stimulus are the better approach, but these will never be “proven” numerically as an alternate hypothesis can always be raised questioning some minor economically esoteric aspect or another, thereby now bringing the isolated and never ending academic discussion back to the drawing board without ever reaching an observation oriented conclusion.

    This leaves us to the lessons of history. A trillion dollars allocated by allegiance to political debts, unshovel ready projects and unions, (I’m a union member.) and unemployment 2.5 points higher.

    Same inferences with the results from the Hoover, Kennedy, Reagan and Bush tax cuts. The deficit did increase under Reagan, but that was due to the Left side of the aisle more interested in entitlement programs then Reagan’s emphasis on starving the evil empire. Revenues actually increased. The long term benefits of the tax cuts echoed throughout the Bush I and Clinton administrations.

    It is true that tax cuts will not fully pay for themselves initially, but over time the increase in business freedom, (not to mention social freedom) increases the size of a pie that my detractors consider fixed. (Laffer curve.)

    Hayek’s point is that it is mathematically impossible for bureaucrats to absorb all the data necessary to allocate resources effectively, whereas a fishing tackle shop owner doesn’t have to, he reacts instinctively to market forces, thereby allocating his bank account, lures and worms in a much more effective manner.

    Regarding “market failures” and my new friend Adam, (he’s staying at my house until going back to 18th century Scotland through Our Last Chance), downturns do happen in pure market oriented economies, however they self repair far more efficiently then an FDR styled NRA and Smoot-Hawley (yes, under Hoover) effected plan. (No Mark to Market requirements for example?)

    I’ve never seen any “proof”- that since the Fed in 1913 – of improvements in market performance by “engineered steering”. There has actually been several academic papers arguing the opposite.

    Thanks for your reply!!

    Thank you again for your comment.

  6. and if i were in attendance at such an event (for how could i resist the opportunity to meet some of the men who form the foundation of my education?), i would remind mr. hayek that, although his theories are elegant, compelling, and useful, current scholarship is still undecided on whether tax cuts or stimulus is more effective at increasing aggregate consumption. and i would urge mr. smith to read aloud the section from his wealth of nations in which he warns against financial speculation and recommends financial regulation. it is too often forgotten that smith himself saw the potential for market failures.

    in the end, i would offer qualified support of such candidates, because although their theories have proven to be useful and often right, there are no easy answers in economics. after all, if there were, every serious thinker in the field would know. markets work like that.

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