After the Managerial State

death to the managers

I read a review of yet another book of “essays by writers, government officials, and policy wonks proposing how to solve our political and economic problems”, generally in a nationalist and populist direction. But reviewer Brian Stewart is having none of it.

A reconfigured conservatism must address the economic struggles of lower-skilled workers as well as the steadily increasing inequality in cultural capital.

It made me think. Everyone writing about politics is thinking about how they would propose to manage things.

I think that the temptation to “manage things” is our real problem. Stewart leads with a comment by writer Michael Lind who goes with the New Deal over “libertarian economics.” Which you can see basically says that Lind is in favor of a managerial Brain Trust directing traffic rather than the chaos of the unfettered market.

Of course, when you issue a pejorative like “libertarian economics” you are saying that “we experts” can outperform the market. And that made me think of how new and unprecedented is the idea that we can understand economic transactions between people.

Here is a brief history of economics, from Google AI & Co.:

• Scholastics: St. Thomas Aquinas and the School of Salamanca debated issues like just price, interest rates, and natural law.

• Mercantilism: It’s about “accumulating wealth (primarily in gold and silver) through trade surpluses and government intervention.”

• Classical economics: Wiki: Adam Smith proposed that income was “based on the labor of its inhabitants, organized efficiently by the division of labour and the use of accumulated capital,” He proposed prices established partly by “exchange value” and partly “use value.”

• Marxist economics: Me: Marx used classical “use value” and “exchange value” to argue that the workers would be “immiserated” by capitalism.

• Marginal economics: Me: In 1870, Menger, Jevons, and Walras all argued that prices are established by people in actual transactions and that prices are what they are.

• Macroeconomics: “Keynesian theory advocates for active government intervention through fiscal and monetary policies to stabilize the economy and mitigate business cycles (booms and busts).”

Notice how all these theories still exist today: Mamdani and the just price for rent; the tendency to differentiate between things that are “useful” and things that are valuable; the enormous political effort to stave off “immiseration” in declining industries; the difficulty people have accepting that the price is the price; the conceit that government can make things better in the economy.

Now, I believe that all attempts to “manage” the economy are doomed to failure, because the market is smarter than experts and managers. And experts and managers are corrupt, looking for the inside straight over just letting the market decide. I have boiled this down into Four Laws:

1. Socialism cannot work because it cannot compute prices (Mises).

2. The administrative state cannot work because the Man in Washington does not have the bandwidth to run the economy (Hayek).

3. Regulation does not work because “regulatory capture” (Stigler).

4. Government programs cannot work because you can never reform them (Chantrill).

I want to add two other considerations.

• Central Banking: A central bank allows the government to convert its debt to paper money, and thus commandeer the wealth and income of a nation for a war, or a stupidity like COVID. Central banking is the reason that the dollar is worth about $2,000 per ounce of gold today, versus $20.67 under the gold standard a century ago. And according to Walter Bagehot, the central bank is the “lender of last resort,” that prints money to bail out the banks in a credit crunch.

• Understanding Debt: In Lombard Street, written right after the 1873 crash, Walter Bagehot wrote about debt. He said that a credit system needs two things:

  It needs debtors that can make their payments. And it needs debt that is properly collaterialized, so that the principal can be repaid if the debtor fails to service the loan.

  So, in the 2000s the government pushed mortgage loans to sub-prime borrowers who wouldn’t be able to make payments in an economic downturn, and it pushed low-down mortages so that loans would go underwater when home prices declined in a recession. In 2008, debtors couldn’t make their payments and their homes were underwater. If you take out a mortgage you are assuming that your future income will stay level or increase. If you are wrong, you are going to lose money, big time.

Let’s look at some notable failures of economic managers in the last century.

• Crash of 1929: Bagehot says that the job of the central bank is to act as “lender of last resort.” The Federal Reserve failed to do that, and 700 odd banks failed in 1929. Lots more to follow in 1930, 1931, 1932, 1933.

• New Deal: FDR’s Brain Trust executed on Keynes’s idea to boost the economy with government spending. It didn’t work, and so FDR boosted the economy with war spending in 1939-40.

• Nixonomics: When the post-war Bretton Woods fix-up collapsed in 1971 President Nixon resorted to wage-and-price controls and money printing. It did not work.

• Crash of 2008: In the mortgage debt crisis caused by government boosting “liar loans” and low-down-payments, Federal Reserve Chairman Ben Bernanke failed to act as “lender of last resort” when Lehman Brothers failed.

• COVID crisis: The Federal Reserve boosted the money supply by about 40 percent in 2020 and 2021. Not suprisingly, prices have risen about 40 percent. But hey, stock prices have about doubled since 2020, and home prices have increased about 50 percent. Hourly wages are up 28 percent. What’s not to like for baby boomers.

So, whaddya think about giving over the nation and the economy to a new crew of experts and managers?

I say, let the market decide. It will amaze you.