The Economy is Not a Machine

The Economy is Not a Machine
01/13/09 - TCSDaily by Max Borders

[edited] The idea of fixing, running, regulating, designing, or modeling an economy rests on the notion that we can appoint smart directors who will implement an intelligent plan.

But the economy is not a mechanism. There is no mission control. Government cannot swoop down to explain and fix. The knowledge required to grasp the billions of actions, transactions and interconnections would fry the neural circuitry of a thousand Ben Bernankes.

F.A.Hayek called this the knowledge problem. Knowledge is dispersed through society, not concentrated in a few central authorities. Bad consequences follow government interventions because a ruling committee cannot have enough knowledge or judgment.

Many blame "greed" for our current problems. The profit motive is a good thing in an environment where bad investments receive losses and good ones are profitable. Government can distort that system, giving profits to people who make bad decisions. Greed becomes much more dangerous in that environment.