The Humble Capitalist

The central planning fallacy never dies

Free marketers are often accused of arrogance. Supporters of more stringent government intervention in the economy portray their opponents as beholden to a dogmatic and rigid ideology that they want to force onto an unwilling public.

I think this criticism is true, but only in a very peculiar sense. Libertarians in particular often think they know better than the democratic process, average people, and even many or most economists. At the same time, at the ideological core of the free market position is epistemic humility.

Take the issue of whether a nation should have an industrial policy, which is defined as a strategic effort to develop specific parts of a national economy, or manufacturing in general. A country may decide it wants to, say, manufacture cars, rather than let the market send price signals about what its citizens should be doing.

When I hear such plans, I’m taken aback by the faith it puts in intellectuals and politicians. At most, I think the smartest human beings might be capable of being small cogs in vast machines that no one can understand or control. I trust that the guy who runs a single car factory, or the logistics manager of a major hotel chain, might know what he’s doing in his limited domain. I am, in contrast, inherently suspicious of those who think they have answers to questions like “What kinds of jobs should most people have?” or “Which goods should we manufacture at home instead of buying from China?” If you believe that you have 20 extra IQ points on proponents of industrial policy, but it would take a superhuman AI to even have the possibility of doing central planning well, is that arrogance or humility? Sounds like arrogance relative to fellow humans, but humility in the sense of understanding your limitations.

Markets take into account the information necessary to allocate goods and resources in efficient ways. Through the price system and individuals making decisions that they’re directly responsible for, they provide answers to an endless array of questions that no central planner can even begin to consider and weigh in their entirety.

Is your nation any good at making cars? Are the people culturally or temperamentally suited for that kind of work? Would forcing them to manufacture their own cars make them better off than just doing whatever produces the most value and then buying cars from other nations? Are you sure, from all the goods and labor it takes to produce a car, the market can’t figure out a better way to create wealth or make technological breakthroughs? Can the supply chains for each product that goes into making a car be put together at a reasonable cost? What are the second and third order effects of distributing resources toward what are, based on the choices of those who could risk their own money, inefficient uses?

Many conservatives who support industrial policy seem to see economic efficiency as no more than a secondary concern. They somehow think manufacturing jobs are better for people getting married, forming families, and instilling virtue. As someone with a background in the social sciences, I find the idea that one can not only plan an economy, but also predict the cultural impacts of an economic policy to be absurd. That project is way beyond any tools that we have. Just because in previous decades the US had better manufacturing jobs and higher rates of family formation does not mean one can recreate through trade policy the culture of Eisenhower’s America. This is pure cargo cultism.

If you believe in central planning, read Hayek, and humble yourself.

When I read through the website of American Compass, I see hubris masking what is little more than a stream of non-sequiturs. The pattern of argumentation in each area tends to go something like this:

1. Free markets have produced some result that is suboptimal. This is shown either with a few datapoints, or by highlighting a poll with a leading question asking how people feel.

2. Conveniently, voluntary exchanges with foreigners are the ones most likely to hurt you. Most of the public believes this, so it must be true.

3. Now, just forget the central planning fallacy, and assume our writers know how to allocate resources better than the market can, plus that we have the omniscience to foresee how all of our great central planning will affect Americans’ psychology and their propensity to form strong families and communities.

My experience is that very few free market economists even try to predict what the social effects of their preferred policies will be, while those who are for central planning do. This makes sense given the hubris involved in believing one can plan an economy in the first place. If you think you can beat Dwayne Johnson in a fistfight, why not also a grizzly bear? Economics can at best tell you how to get rich, it can’t give you communities, or strong families, or meaning in life. If that’s what you care about, go become an artist, motivational speaker, or religious leader. And if you hear an economist talking about how his preferred tariff is going to give you those things, know that you’re dealing with a charlatan.

American Compass seems to have few credible economists on board, and its work tends to be skewered by those in the field, whether on the right or left. I’m not usually a defer to the experts kind of guy, but it’s rational to do so when the experts are not only better credentialed than outsiders but also, relative to them, ideologically diverse, more humble about what their field can accomplish, and making a lot more sense. American Compass claims Michael Lind as one its scholars, which is appropriate given that his entire work basically revolves around making stuff up.

This aversion to grand theories of how society works and can be controlled is part of what I was getting at in my piece on Enlightened Centrism. Industrial policy as a way towards social conservatism is an argument that’s hard to even contest in a normal way, because it’s based on a thinking style that begins with a narrative and then seeks out data to support it.

Partisans of modern forms of central planning shy away from directly arguing in favor of their own wisdom. They like to point to supposed evidence that their preferred policies have worked in the past. The only non-Western countries to achieve first world standards of living for large populations and without an abundance of natural resources have been in East Asia. This has led some to argue that protectionist policies explain their success. Of course, when you look at IQ data, you see that East Asians are major economic underperformers. Their rates of business innovation given levels of human capital are extremely unimpressive. So you have a simple theory, where certain populations are poorest when communist, see Maoist China and North Korea, and richer when they allow markets a larger role in determining the allocation of resources, but would be even better off if they did not engage in any attempts at central planning at all. Practically any time you compare the same ethnic group across countries, say Swedes versus Swedish Americans, those living under the more capitalist system tend to be significantly wealthier.

There may be exceptions to the rule that government should never try to direct industry when, for example, there’s a national security justification for making a good within one’s own country. Yet I think such instances are extremely rare, and most of the time industrial policy ends up being captured by special interests or based on a generic desire to do something that sounds good.

The idea that the free market position is based on epistemic humility extends to the welfare state. Take the area of retirement. What forms should people’s savings take? When should they access them? How should they balance the desire to form families and have children earlier in life with the need to be comfortable in old age? I wouldn’t want to make these decisions for any particular individual, much less have a one-size-fits-all approach that I would impose on the entire country.

Supporters of Social Security point to the fact that the rate of poverty for the elderly has decreased over time. We don’t have a counterfactual of what would have happened without Social Security, but I’m willing to believe that redistributing money away from one stage of life to another changes when a person is more likely to be poor. But so what? Here are some other things that have changed since we got Social Security: collapsing birth rates, lower male workforce participation rates, larger age gaps in wealth, and more divorce. Can redistributing money to old people be blamed for any of this? Again, I’m humble, so I have no idea. All I know is that government decided to make decisions about people’s retirements, and supporters of the program looked at what happened to one variable afterwards while ignoring everything else in the world, and based on that declared victory.

I think most people inherently understand the case against central planning when it comes to deviations from the status quo. Why shouldn’t vacations work like social security? The government takes a certain amount of money out of your paycheck, tells you when you can have it back, and lets you spend accumulated funds on trips. I’m sure if you did this, people would take more vacations. A clever analyst could find some data, put together a series of assumptions he has no evidence for, and come to the conclusion that government vacation funds save $200 billion a year in health care costs by lowering stress.

We don’t do this because we understand there is such a thing as heterogeneity of preferences. Our default assumption is that we want to create a wealthy society, at which point people can decide whether they want to spend their money on vacations, larger homes, hobbies, children, more comfortable retirements, or whatever else makes them happy. Yet government has decided that certain things, like education, retirement savings, and health care, are just inherently good, and people should be taxed in order to get more of them than they would otherwise have if left to their own devices. This is a separate issue from redistribution, even though such programs often do have the effect of transferring resources to the poor. Public opinion generally has few consistent patterns in what kinds of welfare it supports or rejects except status quo bias. Providing Social Security and public education strike us as natural because they’re things government has been doing for a while, while vacation savings funds seem like authoritarian overreach. 

I think we should approach economic issues the way we do social issues, where we have a default towards freedom and an extremely high bar when it comes to state intervention. If a woman’s boyfriend is mean to her, the answer is to either work out the relationship themselves, or for one of the parties to end it. But when we hear about an employer mistreating a worker, the instinct of many is that the government should micromanage the relationship and reset the terms. I don’t see any reason to believe government is better at understanding the best way to run a package distribution warehouse than it is at saving failing relationships.

Our aversion to government interference in personal relationships is not based on what the evidence says about any particular intervention. Rather, we let people form whatever relationships they want based on the idea that we’re all better off with a general rule that this area of life is outside the purview of the state, because government isn’t nearly smart or competent enough to manage it well and there will be an endless stream of unforeseen consequences if it tries.

When the Taliban declares that women have to be covered in public, we don’t use empirical data to say that they’re wrong. If they had social scientists, Islamic extremists could surely gather numbers on things like out-of-wedlock birth rates, crime, etc., and give reasons why their preferred policies are best. There are no experiments we can conduct to prove them wrong and few ways to gather high quality data on the topic. One thing I find convincing is looking at where people move to when given a chance, and it’s clear that they go from poorer to wealthier societies, regardless of whether they are more socially conservative or liberal. Japan, Sweden, Singapore, Red States, Blue States, and Qatar can attract as many migrants as they are willing to take. They also run away from more physically violent areas and towards safety. This implies government should see its goal as increasing wealth and reducing crime, not deciding the specific allocation of resources or trying to shape the culture.

If anything, the case for government micromanaging personal relationships strikes me as much stronger than it is for intervening in most areas of the economy. I feel like I could do a better job advising individuals on the nature of toxic personal relationships and how to avoid them than determining which industries the nation should cultivate or deciding how workers should balance factors such as pay, safety risks, and physical comfort when it comes to whether they should take any particular job.

Epistemic humility is not the same as epistemic nihilism. The study of history, social science, and data gives us some very clear signals. Markets are better than central planning. Free societies are better than unfree ones on a wide variety of dimensions, whether we want to measure objectively through things like GDP or subjectively based on where people want to live. Genetics determine differences in outcomes, and denying that will lead to foolish interventions. Territorial aggression is a bad thing and should be stigmatized and resisted. The naturalistic fallacy is a terrible guide for ethics or public policy. So we know quite a few big and important things.

Yet we should draw a line in the sand and be completely honest about what we don’t know: things like the net impact on national well-being of cultivating any particular industry; how different economic policies have downstream effects on culture; and how to make tradeoffs with regards to planning for different stages of life. In the case of direct externalities, of course, government intervention can be justified. The state might not be particularly good at solving the problems that the actions of individuals cause for third parties, but here it arguably at least has to try. The more indirect and theoretical the harms that a government is trying to prevent, and the more a policy requires superhuman foresight on the part of state officials, the more skeptical you should be.

In response to my article on immigration and its likely impact on our politics, Noah Carl and Emil Kirkegaard have argued that there isn’t much evidence for my supposed claim that diversity reduces support for the welfare state. As I explained to Noah, that wasn’t my argument. Rather, what I said was that we have no idea what the political impact of immigration will be, so we shouldn’t take policy positions based on such projections. In the American context, we do have strong reason to believe that diversity has historically reduced support for the welfare state, but I have no idea whether that is more or less likely to continue to be true if we remain welcoming to immigrants. And I certainly wasn’t proposing a universal rule that holds across societies. I doubt such a tendency exists, and if it did, there aren’t nearly enough nations in the world to rigorously test the data and find out. One should support immigration because the direct effects of freer markets in labor are good. I don’t see a Burkean argument for restricting immigration either, particularly in a nation that is already as racially and culturally diverse as the modern United States. One takes a risk by changing the demographics of a country, but it’s also a risk to listen to the arguments of xenophobes, socialists, and populists, who have been great wreckers of nations. Restrictionists could have a point if we had the homogeneity of Japan, but fighting so that in sixty years or so the country can be 52.4% of what we in America call “white” – which is defined as everything from Björk to Mullah Omar – instead of 44.8% isn’t what any reasonable person should be focused on.

I think those who oppose markets mistake their deference to mass sentiment for humility. It’s true most people want big government and central planning, because they’re not smart enough to understand the case for freedom. It sounds mean, and yes, arrogant, to point this out. But by agreeing with the public, they’re only playing to ignorance. There’s an irony in me paraphrasing Socrates so soon after denouncing old books, but he was correct that true wisdom is knowing enough to understand that even if you may be smarter than others, there are some things that no human should try to do no matter how smart they are.