Wednesday, March 10, 2010

Ecology and Free Markets

Many people act as if they believe that anything produced by evolution cold have been done better by human ingenuity.

‘The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.’
– F. A. Hayek

One might say the same thing about the biological specialty of Ecology. We have learned how little we really know about biological systems and our utter inability to design a better wild hillside than what evolves naturally. Even our landscaping art involves utilizing traditions and learned rules-of-thumb (heuristics) to guide natural components and subsystems that are not understood.

Reason is Limited

We are humble enough to recognize how little we understand about the natural ecology, but the educated among us still believe human systems – that evolved by trial-and-error of competing traditions and heuristics – would be improved through the application of social engineering. People who cannot imagine, let alone comprehend, the complexities and power of the extended order of human cooperation convince themselves they can run things better, and that human society has become too complex to be left to advance without the guidance of human reason.

So, a well-functioning financial system – which depended on a certain amount of government-set boundary conditions (regulation, if you will; yes government is necessary for liberty) – was irresponsibly both deregulated and subjected to perverse incentives during the Clinton administration. The Bush administration followed by fiddling with currency values, artificially pushing up housing prices while increasing the pressure on banks to make foolish loans to unqualified home-buyers (including NINJAs: No Income, No Job, No Assets). When this social engineering (fiddling) results in unforeseen trouble – withdrawal of cash from the financial sector leading to the collapse of businesses that foolishly (or greedily) took perverse actions in response to the perverse incentives – one might think the wise thing to do is back up, return to the conditions that worked, stabilize, and stop the social engineering.

Theory trumps reality
But no. The Obama administration assures us that the solution to the trouble caused by earlier fiddling is to increase the amount of fiddling.

We saw this same kind of thinking by the medical community early in the 19th century when physicians, with all the confidence of learned men, told us that the solution to fever and lassitude was to bleed the patient. If the patient became weaker, more blood was taken from the patient – the fact that the patient became weaker after the first bleeding was held to be “proof” that not enough blood was taken the first time.

If the patient were lucky enough to be poor, the doctor would take some blood and leave, letting the patient recover from the blood loss before the doctor came back to continue treatment. If the patient were well-known or rich he might have several doctors, all of whom remained in attendance and all of whom insisted on taking their own portion of blood, for the benefit of the patient. In this way both George Washington and Lord Byron were bled to death when treated for minor fevers.

Modern therapeutic bloodletting

The fiddling is called “economic stimulus” and the administration assures us that earlier bleedings – excuse me, “economic stimulus” – didn’t have the desired effect because the efforts were not strong enough. “Bush failed because he bled only $700 billion from the citizens; we will succeed because we will bleed several $trillion from the citizens.

Helping all this is the mythology that the Bush years, with its pressures on financial institutions, its irresponsible fiddling with the value of our currency, and its bailouts were characterized by a cowboy free market.

In a pigs eye.

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