Friday, November 18, 2011

For Your Consideration.

You are a natural, why is that so hard to see?  Maybe it's because you keep on looking at me.

Friday, March 4, 2011

The Fatal Conceit

As a reminder, the Fatal Conceit is the idea that "man is able to shape the world around him according to his wishes."

Hayek argued passionately against this idea.  This was his primary argument against socialism, that in order to have any chance of functioning, a socialist government has to centrally plan the economy.  Hayek's Theory of Prices, along with founding modern microeconomic thought, is based on the fact that prices are based on differences in known information and the different evaluations of value of goods based on this information difference.  In other words, no two people have the same evaluation of the worth of any one good.  For example, while I might value a canoe at $20, my friend Bob might value that same canoe at $0 as he has no desire to own said object.  Bob would only take the canoe if it were being offered for free.

While I will dedicate a blog posting to this topic in the future, Spontaneous Order is the final result of an economy based entirely on voluntary transactions.  In short, without any central planning of any kind, an orderly economy will just develop.  That is the power of the free market.

Because no one could know everything about everything, from all that was in the past to every single effect of any one action, the economy cannot be centrally planned.  For example, if I buy a car for $30,000 tomorrow, the business gets, say, $25,000 in revenue while the salesman gets a nice $5,000 commission.  The business has to pay for the cost of the automobile and the costs for doing business, leaving about $5,000 left in profit.  The salesman could spend his $5.000 on, among other things, as a down payment for a starter home or on loose women and drugs.  The business could use its $5,000, among other things, to reinvest in the business or on those $1 vending machines 5,000 times.  While someone may have an idea of what someone might do following their action, they cannot foresee every single possible effect of said action.  It would be a nearly endless stream of capital exchanging hands for this or that good until the money is simply put in the bank.  And even then, there's interest earned over time and what the person or group use the interest to buy.  And because everyone does not know everything about the past, people will automatically have differing views on the value of any one good, even ignoring that people can have different ideas for use of and varying levels of need for said good.

In conclusion, just let the free market function and prices will stabilize at an efficiency that far outstrips any alternative.

And that's the Fatal Conceit.

Thursday, March 3, 2011

Friendship Must Always Trump Politics

When it comes to format, the next few posts will mostly be on Hayek and mapping out my economic outlook, especially as it applies to government.

I may refer to my best friend many times in this blog.  He will be referred to as Bob* for reasons explained below.  He's a hardcore Chomskyte (a term I may have just invented,) but I saw an article today that perfectly encapsulates our friendship:

Expect a post on Friday, which is technically today by the time this will be up.

*Some names have been changed to protect the innocent.

Saturday, February 26, 2011

The Curious Task

"The curious task of economics is to demonstrate to men how little they really know about they imagine they can design." -- F.A. Hayek

As a college student studying business in this day and age, I realize how little my fellow students really understand about economics.  Any introduction class to economics should cover Frederich Hayek in some way.  Instead, John Maynard Keynes is covered (glowingly depending on the professor.)  Mine never did.  I found out about Hayek due to a friend who mentioned him and a really good economic rap battle music video on YouTube.  Business classes seem to focus almost exclusively on the nuts and bolts without any time spent on the larger picture.  It is best to demonstrate this by example.

In one finance class I was in, my professor brought up the graph showing the required returns on Treasury notes.  She asked what the recent rise in required returns meant.  I knew the answer immediately.  The rest of the class was flabbergasted.  They brought up mathematical concepts without any grip on the market implications.  I said that a rise in required returns means that the market sees the Treasury notes as riskier investments than they were in the past.  This means that more people think the chance of default has increased.  This is most likely due to the constant and exponential increase in government spending, which has exploded the debt and the deficit in recent years.  In conclusion, current government spending levels are unsustainable.  The professor seemed pissed at my long response but no one else realized it.  One student even said, "That makes sense."  Our Treasury notes have a AAA (or Aaa) bond rating from the two major investment rating agencies, S&P and Moody's.  If that rating were downgraded, there would be chaos in the streets.

Hayek's views accurately predicted nearly every economic downturn since he's been around.  The only one I could say he wouldn't have predicted based on his models was the dot com bubble burst.  That was based on overvaluation of dot com start-ups based on a faulty valuation model (website hits.)  Some recessions can be caused by technology expanding further than financial techniques.  That was one of them.  People just didn't know which websites would succeed.  I cannot fault Hayek for that.  He died before the Internet was even common in households let alone the necessity it is today.  I personally wonder what works he would publish today on the Internet's influence on available information and the influence such information aggregation has on prices if he were alive today.

Modern Keynesians focus way too much on macroeconomics.  They look over their "perfect" models, looking down on the common people from their ivory towers.  These same people, from Greenspan to Bernanke, did not see the housing bubble burst coming.  How is that possible?  George W. Bush saw it coming in the early 2000s and tried to get Congress to rein in Fannie Mae and Freddie Mac all the way back in 2003.  These Keynesians don't realize their ivory towers are ablaze.

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.  Indeed, the world is ruled by little else.  Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." -- John Maynard Keynes

That quote from Keynes above is probably one of his best.  The thing modern Keynesians don't understand is that the "defunct economist" is Keynes.  He was dismissed in the '70s when rampant stagflation happened.  Why has his influence returned while few college students even know who Hayek is?

Hayek claimed that booms go bust due to an expansion of credit, usually done by the Federal Reserve keeping interest rates artificially low.  Personally, end the Fed.  Seriously.  Let the market decide interest rates.  It makes no sense to centrally plan that.  That's what Hayek called the Fatal Conceit, the idea that "man is able to shape the world around him according to his wishes."  In other words, it is impossible for anything to be centrally planned because it is impossible to know everything.  In short, no one can act, like buying a car, knowing fully every result of his action.  It's the same idea that Leonard Read advanced in his essay "I, Pencil."  In short, a pencil seems to be such a simple item, yet no one person knows how to make one.  It takes thousands of people and a near infinite set of transactions to make one.

Not to say I agree with Hayek on everything.  His view on intellectual property laws makes me a little leery.

That's enough for now.  That's a taste of my economic ideology.