Friedman Facts.com

Austrian economist F.A. Hayek had a term for the belief that knowledgeable, sophisticated people could plan for an ideal outcome. He called it the “fatal conceit,” and even wrote an entire book on the subject. His thesis was that such planning is impossible given the limited knowledge of a group of people, and that the free market is the most efficient means of production–something that Milton Friedman agreed with wholeheartedly.

It shouldn’t come as any surprise that policy makers and pundits are now falling right into the trappings of the belief that “if only the government were to [fill in the blank].”

catallaxia recently sent me an article from Bloomberg.com, which discusses the Chicago School’s reaction to the recent spurt in government intervention in the economy. It’s worth a read in its entirety, but I want to highlight a particular section that demonstrates a small degree of the “fatal conceit:”

Robert Lucas, a Chicago economist who won a Nobel in 1995 for a theory that argued against governments trying to fine-tune consumer demand, says deregulation may have gone too far.

Depression-era laws that separated commercial and investment banks helped depositors decide if they wanted secure accounts or riskier investments. Today, without these distinctions, people can’t be sure if their investments, or those of their customers, are safe.

“I’m changing my views on bank regulation every week,” Lucas, 71, says. “It was an area I saw as under control. Now I don’t believe that.” 

Far be it for me to criticize a Nobel laureate, however, I would love to ask Mr. Lucas what kind of investments he believes are “safe.” Just how can government go about ensuring (and insuring) “safe” investments? A CD is relatively safe, but the depositor is taking a risk whenever he or she invests money anywhere–it’s how the game is played.

An investment will always be a risk–you have to take a risk to succeed, and sometimes you fail. That’s exactly what’s NOT being allowed to happen now with banks, financial firms, automobile manufacturers and even steel mills and artists. 

And as to Lucas’s comment that he believed that regulation was “under control” I’ll only say that a vibrant, wealth-creating economy should never be “under control.” It should always be changing, evolving and recreating itself. Again, the cycle of never-ending bailouts appear to be perpetuating the bad at the expense of the good that we may never know.

(To read up regulation and the myth of deregulation in the past few years, take a look at John Stossel’s piece here.)