In 1946, Friedrich Hayek published one of his best works, “The Use of Knowledge in Society,” which would later earn him the Nobel Prize in economics about 30 years later. 76 years have passed since the publication of this extraordinary work, and we can still learn from the lessons taught.
No matter how much he, and Mises more than he, warned against the presumption of knowledge of individuals supposedly wiser than all others: the proverbial “power grabbing” by central planners is now more pervasive than ever. And, let’s not forget, that this result was also possible thanks to a host of neoclassical/keynesian/monetarist economists who endorsed the supremacy of a narrow group of individuals over society by stripping economic science of its soul: methodology.
Mathematical modeling is not a methodology of inquiry, but a useful tool for better understanding the economic environment. The advantage of the Austrian School, in fact, is to present students with a theoretical framework that starts from the philosophy underlying economic science, without the need to resort to failed and overly simplified constructs such as the proverbial homo economicus.
It recognizes, therefore, a simple yet complex truth about human beings: they act in an environment of scarce means that they use to achieve certain ends. What is more statistically certain than human action? Metabolizing this concept allows us to understand that the spontaneous order that emerges from the interaction between individuals and their mutually advantageous exchanges is a process that allows us to achieve prosperity and well-being. But it must be as free as possible from artificial interference.
Hayek argues that the price system in a market economy provides information that individual producers merge with local knowledge to decide what to produce and how to produce it. Local knowledge can take many forms, for example, it can be geographic: where is the best land to grow potatoes? Or it can be technological: what is currently the best means of conducting exchanges without violating one’s privacy? Hayek’s work has important implications, especially for determining whether economic decisions should be made by central planners or by the spontaneous order of the free market.
The main problem is not that central planners are corrupt or stupid, although sometimes they really are. No, the main problem with central planning is that a large number of individuals have local knowledge that cannot be collected and processed even by the noblest and most intelligent planner. And this is especially true for a very important field: monetary policy. In short, central bankers do not have and cannot have the knowledge necessary to create macroeconomic stability.
This is why central planning fails: it destroys the source of knowledge that allows economic efficiency in markets. Can the central banking system achieve some sort of monetary equilibrium? The answer is no. Central bankers do not have access to a real-time feedback process that transmits the state of the monetary market.
This is the type of information that cannot be exploited from the top down but can only be generated from the bottom up. Because, remember, money is not the end of exchange but the means. Through this means, central planning aims to influence market actors’ behavior as much as possible. Models, unconventional tools, and macro-financial engineering have all proven to be one failure after another. The most likely result is that central banks will be forced to turn their fiat currencies into digital assets.
The Fed will almost certainly lose control over the financial markets as it is forced to inflate the dollar. Foreigners will dump the dollar, fixed income assets, and stocks. The latter, in fact, are inflated by central banks through QE to valuations out of this world, a policy destined to fail when interest rates inevitably rise. And this will lead to a bear market on the lines of that in 1929-32.
This opens the door to the world of cryptocurrencies and, more generally, blockchain technologies. In fact, these new technological tools are an attempt to preserve wealth by putting it out of the reach of states and central banks. The world economy will continue to suffocate until there is a Great Default. When it begins, the establishment will be obstructed at all levels and the era of central planning expansion will end. Public spending and taxation will go out of control, and to try to circumvent the obstacle, an enormous debt is being placed on the shoulders of taxpayers.
This can go on for a while, but its end is certain. Herbert Stein was right. Mind you, we are not heading for national disintegration. We are heading for a restoration of the foundations that make a nation strong. Some sacred cows will be slaughtered along the way, but not the entire nation.
Those who are economically dependent on the promises of politicians will take a hard hit. Younger voters and those more attentive have understood that cryptocurrencies and blockchain technologies represent a fundamental loophole: a reliable and decentralized means to achieve their goals.
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