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Source link: http://archive.mises.org/9724/morgenstern-on-stupid-policies-and-why-we-dont-learn/

Morgenstern on Stupid Policies and Why We Don’t Learn

April 1, 2009 by

This very interesting chapter is from Oskar Morgenstern’s 1937 book The Limits of Economics. He is a pioneer in the area of game theory but this chapter puts his Misesian-style liberalism on display, and illustrates why is sometimes lumped in with the Austrians. Indeed, the book itself cites Mises on matters of economic policy.

Here he expresses profound disgust at the stupidity of economic policy. He begins by explaining why precisely that economics is such a difficult science, and why its teachings seem to forever elude the possibility of popularization. He then discusses some of these stupid policies, such as inflationism and protectionism.

He speaks further of lost hopes of the empiricists. He had hoped that politicians would begin to test their policies against experience. But he demands to know who precisely is going to force them to do so. He doesn’t let the economics profession off the hook either: he is frustrated that it has used statistical methods to do impossible things like predict rather than to do possible things like measure political promises against results.
Text of Chapter 7 follows
________

One of the outstanding and most important features of economic policy is the fact that its development shows an unmistakable trend in the direction of increased interventionism. This is true largely independently of the time and actual content of the economic policy, and the reason is to be sought in the current economic ideology or economic attitude.

Nor can there be any doubt that such forces as these do exist and that they are able to exert a very strong influence. At times people simply do not want certain things, or–what is more–do not even want to recognize facts. It is not expedient, however, to discuss these matters here, not because their importance is to be denied, but because they are far too changeable, and it would, moreover, necessitate entering upon” metaeconomic” ground, which is generally not advisable as long as there is still much to be contributed to the subject in the purely economic sphere. That is how things stand at present. Economic organization itself contains a large variety of elements which force economic policy again and again into the same groove, so that a knowledge of these elements would in most cases provide sufficient explanation of the policy. First, it has to be realized that economic knowledge is the prerogative of only a very limited number of people. Hardly any other science–not even mathematical physics–is as esoteric, as exclusive as economic theory. For this there are good reasons, which need to be examined more closely.

In contrast to the natural sciences, economics boasts of no physical constants, no fixed relationships, but is based exclusively upon the establishment relative changes, which can in turn be comprehended and expressed only in terms of other relationships. There is no doubt that thinking in terms of purely logical relationships is one of the most difficult tasks with which the human mind has to contend, and if a science is based predominantly upon such a mode of thinking, it is clear that it will not be easy to popularize that science. Furthermore, even the passing on of scientific doctrines from one generation to another within the narrow circles of those who seriously pursue the study of this science is more difficult than in other sciences.

It seems to be inevitable that the rising generation should have to re-think out all the errors ever made in economics. Otherwise it would be inexplicable how again and again, often at short intervals, works could appear which contain old errors in some new guise, and are yet supposed to represent a fresh contribution to knowledge. Every individual economist must always start afresh for himself right from the beginning; he can rely upon no ” established results” in the way the natural scientist, for instance, can. This takes time and is a laborious task, which explains why one must be extremely distrustful of any economists (particularly young economists) who come forward with patent solutions. What is here the fate of the individual on a small scale, is repeated on a large scale as the fate of nations, if only in the, perhaps, comparatively limited sphere of economic policy.

Still more difficult than the passing on of economic knowledge from one generation to the next is the handing down of experience obtained in the field of economic policy. Though it is obvious that the generations do not follow each other at sharp intervals, but that there is a sort of “synchronization” of young and old, this is mainly true only in a physiological sense. Intellectually the caesuras are generally much greater, as is particularly evident at the present time. This explains why the same stupidities in economic policy are committed and vigorously upheld over and over again, with pathetic regularity. The disasters of an inflation remain in the memory only for a short time and a few years later a new inflation is begun in the same country, and is looked upon as the last word in wisdom. Although we have already had one experience of the breakdown of a system of foreign exchange control, ten years later the same thing happens again in the same countries, and this in spite of the fact that some time ago international conferences plainly and clearly showed the utter futility of this kind of monetary policy. Tariffs far from warding off economic crises only augment their intensity: nevertheless, exorbitant increases in tariff protection, in the form of quotas and import prohibitions, are time and again believed to be the remedy for the most severe depression. A nervous juggling with measures which are, for the most part, mutually inconsistent is a permanent characteristic of what is supposed to be super-rational procedure.

It may be seen from this that it is not only a question of further developing the theory (in doing which it is assumed that the theory is actually familiar In the form which it has at the time); but of securing the effective acceptance of what has already been worked out. These inherent difficulties of economic policy will only be properly appreciated by the man who has himself devoted a long time to the study at first hand of the economic ideology of the leading groups of various camps and countries.

The repetition of all the errors at frequent intervals–by “errors” is meant the inappropriateness of the means for obtaining given ends, including all the secondary effects–can nevertheless have its good sides, in so far as it is possible to learn from these errors.

It is conceivable, for instance, that in the future, at least a “catechism of rules of thumb” will be drawn up, the constant application of these rules being, as has already been described, one of the principal characteristics of the actual practice of economic policy. The reason for the permanency of these rules of thumb is not only that economic policy is difficult to conduct; it lies also in the representational structure of sectional interests in the economic system, a structure which is in large part quite independent of the form of government. The point is not only that, as has already been remarked, consumers’ interests, for instance, can always, and, whatever outward form they may take, only be asserted with much less vigour and success than, say, producers’ interests. The organizability of the various interests is always unequal and will always remain so, no matter in what framework they may be set (e.g. Parliament, economic councils, the corporate state, &c.). In accordance with the degree of these differences in organizability a kind of “trend” will manifest itself in the actual course of economic policy in each country, or at any rate a preponderating influence will emerge, which gives the economic policy a quite definite stamp, and which is largely independent of the form of government.

That is how things are in reality. The fact that certain interests always secure strong representation creates a tradition and produces people practised in the art, who are generally far superior to the chance partners with whom they have to deal (members of Parliament for instance), in skill, knowledge, eloquence, and so on. Politicians are often and certainly, when they are new-comers, completely at the mercy of these men, as was repeatedly evidenced in many cases in the post-war period. The trend of economic policy as thus determined undoubtedly lies in the direction of strong discrimination in favour of all those interests possessing distinctive organizing potentialities.
In the front of these there rank agriculture, the primary products industries, and in general those branches of industry which are engaged in producing intermediate products.

There is nothing incomprehensible about all this; for it follows from the mere fact that interests are represented at all, that economic policy will always exhibit a highly “interventionist” feature. Closer examination of this state of affairs shows it to be determined by the structure of the State and many other concrete circumstances too numerous to permit of detailed comment here. The whole object of the activities of the group represented is to secure for itself as large a share as possible of the social product. The mere fact that organizations are formed, supports the assumption that the free mechanism of effecting distribution would result in the receipt of a smaller share, and that the share obtained by means of representation must be greater.

It makes a difference, of course, whether the organizations were created for reasons of State, or came to life because others were already in existence, which assured other groups of the upper hand. It is, of course, clear that in a democratic State with a strongly socialist leaning, the role played by the wage-earning classes will be different from that in a State in which, by reason of a purely political distribution of power, the rhythm is set by the agricultural interests, for instance.

All these remarks are platitudes, but, nevertheless, if they are taken altogether, an important lesson may be learned from them. This lesson will be briefly developed in Chapter X. It might well seem as if these statements contained a contradiction. A few words more may therefore be added to make the point quite clear. The contention is that there are interests which are easy to organize and interests where organization is difficult or quite impossible. This may be taken as an indisputable fact. It is further contended that according to the form of government certain interests can outweigh others. Here again there is nothing to question.

It follows, therefore, from these two facts that, if the State wishes to create special privileges for certain groups, it will only succeed without difficulty in doing so if groups can be easily brought together in some form of organization. If, on the other hand, it wishes to take away a certain preponderance from organizations already in existence (without suppressing them altogether), it can only do so effectively if the organizations which it sets up in opposition are at least organizable in the same way as those already in existence. Nothing much can be expected from the method of creating an association of consumers as a counter-blast, say, to the monopolistic misuse of power by certain industries. Other ways must be found which are technically less objectionable.

Now in every economic system the number of these methods is strictly limited. Which methods will in point of fact be chosen is a matter of politics or even of chance. Hence it follows that, however political ideas may oscillate and develop, the economic organization exhibits an important, element of constancy. This, of course, is subject to the general assumption that the individual governments which succeed each other in office, or the successive forms of government, do not happen to wipe out the fundamental principle of capitalist economy along with the whole institution of private property.

How apt these considerations are is proved by the events of the post-war period in many European States. Even Fascism has created no fundamentally new machinery of economic representation: to realize this, of course, one must not only look at the texts of the laws, but must observe the effective functioning of the corporations. The same applies to the constitutional development in other countries, where the entire alteration in the bodies representing economic interests usually took the form of giving them new names and changing their leaders. It can thus be safely claimed that if we look somewhat more closely at the outcome of the two seemingly mutually exclusive principles of organization, no inconsistency can be established. In any case such an inconsistency would be, as always, extremely undesirable.

However many inherent obstacles may stand in the way of the application of economic theory to economic policy, there yet remains considerably more scope for it than is at present granted to it, and this scope can be still further enlarged by the energy of its advocates. Public activity, for instance, can be much more strictly supervised than it is to-day. I am not thinking here of the control which the State exercises at the present time by sending out inspectors, for example, to banks of issue or other forms of enterprise; nor am I thinking even of planned economy, but of a process of constantly reviewing the economic situation and the influence which economic policy exercises upon it.

Since, as we have seen, even a well-informed economic policy seldom gets beyond the application of those measures which we have described as “rules of thumb,” it follows that the situations to which they are supposed to be suited must be presumed to be identical or at least analogous. Now this is where the first problem arises and the similarity or difference of this initial situation can be much more accurately ascertained by reference to science than by reference to anything else. Modern statistical methods, which have advanced particularly far in the field of business research, take us a good part of the way. Thus there have already been credit expansions in former times, years ago import prohibitions were imposed and abolished again, tariffs were increased and removed again, and so on, so that it is possible without further ado–even if the results no longer belong to living memory or become intermingled with other matters and events–to establish ex post what was the nature of the effects and whether they harmonized with the original intention.

It is strange that the memory of economic subjects is generally so brief that even within the shortest periods, say, from one to two years, it is forgotten what promises were bound up with the passing of particular measures, and what results actually followed. A typical example of this is to he found in foreign exchange control, which was introduced expressis verbis in order to hold the value of the currency at par. Scarcely two years later the same authorities announce that it has been possible to do away with this control, while foreign-exchanges rates have actually risen by several per cent. The satisfaction over the removal of an irksome, self-imposed fetter which throttled trade wipes out every memory of the initial situation, so that the whole period must seem to a distant observer to be a time of complete arbitrariness and anarchy.

At the same time, it contains no exceptional features; but all the typical factors, which are always to be observed, stand out more markedly because of the greater quantitative importance of the transactions. And there is nobody there to bring the authorities responsible to account; nobody to hold the true facts of the matter before them and to show them the grotesque absurdity of most of recent policy.

Many decades ago Alfred Marshall pointed emphatically to the possibility mentioned here of extending the role of economics, but did not follow up this idea. In the last ten years the suggestion should have found an intensified echo, but instead of developing economic statistics, aided by the eagerness of the present generation, in such a way as to derive permanent utility from them, the economists have gone to extremes and have betaken themselves to the dangerous field of economic prognosis.

I myself was perhaps one of the first among the very few who protested sharply against this abuse of science. I emphasized in place of it the need for the maximum dissemination of information, with a view to improving the degree of the idea of being able to utilize the gradually accumulating material as the foundation for a scientific laboratory of economic policy. The position remains unchanged, and my plea, with all the arguments which were advanced at that time, still holds; only economic prognosis has come to belong to the pathological department of economic policy. For that reason the few words devoted to this subject are relegated to the next chapter. It is clear that the exercise, in this sense, of a closer inspection of economic policy means a certain slowing-up and impeding of that policy.

This, however, is in no case a disadvantage, for it has been shown above that, because of the extraordinary difficulty in obtaining a general view of economic policy as a whole, there is more chance of hitting upon the right thing if nothing is done on the spur of the moment, and, furthermore, it is apparent that the loss of time which may be caused by somewhat deeper reflexion will only in very rare cases have an unfavourable influence. There is a much greater probability of making a mistake by acting hastily than by selecting and adopting a measure which has been decided upon after fairly lengthy consideration as being really appropriate for the aim in view. This is, of course, dependent upon the fact that it is always necessary first of all to determine the lay-out of the actual situation from which one starts.

However simple this may seem to be, it is in fact an extremely complicated problem, as is shown by the labours of the various Institutes for Economic Research–labours which for purely technical reasons can never, as will be easily understood, be absolutely up to date. It may be added that one cannot hope successfully to comprehend the situation at any moment solely by means of statistics, because the whole economic process cannot be statistically portrayed. And, moreover, in framing measures of economic policy, all the forces operating must be taken into account, including those which can no longer be properly described as “economic.”

It is fitting here to refer once more to a difference between economics and the natural sciences or medicine. This time, however, the difference relates not to the inner construction of the sciences, but to their application. What intellectual effort, what an enormous amount of reflexion precedes the building of a ship or an automobile, an operation on a human being, even the laying out of a street! The intellectual work involved in every single case of this kind is truly impressive. No one risks starting a productive process haphazard, without utilizing the technical equipment which science places at his disposal. It is only in questions of economic policy that the case is otherwise. Here the decisions are hardly preceded even by more than momentary reflexion, let alone careful scientific preparation. The ” preparations” consist almost always only in lending an ear to the interests. The Royal Commissions ” in England are perhaps the first point from which a new development might branch out. Yet these commissions are often too restricted in their operations, or the choice of their members is too often governed by political considerations, to allow us to expect much more from them than they have accomplished so far.

The possibilities of development in this sphere are, nevertheless, very great; this applies, however, predominantly to democratic States. This chapter has dealt only with those inherent difficulties of economic policy which have their roots in human nature and ‘consequently adhere to, and are reflected in, all social organizations. Compared with many other obstacles that may be detected, they are theoretically not very important, but in practice their influence is all the greater since these other obstacles only begin to exert an effect when we are already close up to them. In the case of the obstacles that we have been considering here, however, it is clear that before the scientific treatment of economic policy can begin at all, there are already forces at work which are continually recurring with renewed strength and always pressing in the same fateful direction.

The consequence is that the practical role of economic science is constantly being impaired. It is completely beyond the power of science and scientists to do anything to bring about a lasting change in this state of affairs. On the other hand, it is within their province to undertake, and without being officially commissioned to do so, the impartial investigation of the relation between the promises which were bound up with measures of economic policy and the actual results. No greater service can be rendered to the general public than this. It would, moreover, be fairly easy to carry out and would have beneficial results both practically and theoretically.

Clearly these are the lines we must follow if we want to suppress demagogy in economic policy and expose and defeat those who, under pretext of working for the good of the community, are bent on creating special privileges, either of a temporary or of a permanent character. It is the task of the general public, on the other hand, to force the economic politicians who advocate particular projects to furnish at least historical evidence that their opinions have proved correct on earlier occasions. Surely they must be in a position to give such evidence, for where else could their knowledge come from, if not from “practice ” or logical reasoning?

This evidence should then be submitted for continuous examination and criticism to entirely unbiased scientists who command public confidence and have the necessary technical apparatus at their disposal. The economic politicians and interested parties would be really obliged to comply unresistingly with such a demand on the part of the public, since it is but a fair request. Moreover, it makes claims only :upon the knowledge which the politicians in question must profess to possess, for otherwise they could not very well make the attempt to put ideas of economic policy into practice. That, at least, is the most generous interpretation to put upon the matter.

There is another reason why the task which would thus be set them is not too difficult. As we have seen, they generally keep on applying the same old rules of thumb over and over again, so that, if a new kind of measure comes up, this can easily be brought under a formula incorporating a principle contained in the methods hitherto used. Another of the most important tasks belonging to these supervisory functions is the unmasking of catchwords of economic policy, a subject to which we can only refer very briefly here. The exposing of catchwords shows at once how extraordinarily intricate problems of economic policy are. ‘The most effective method is to analyze as completely as possible all the assumptions and implications of the catchword, at the same time emphasizing the positive forces which are necessary to keep the economic system in working order. If these conditions are fulfilled with all that detail which conforms to the particular historical concrete situation to which the catchword is being applied, the manifold nature of the possibilities will show itself.

It is only when one is in a position to introduce quantitative evidence into this scheme of assumptions and conceivable effects that a reliable judgment can be made. This procedure does away with the over-simplification of the argumentation, which is so liable to be a danger in economic policy, and kills all mere catchwords, because it is never possible to draw up such a scheme tor them which is free from inconsistencies.

The “de-bunking” of economic catchwords is a very useful exercise-and perhaps even one of the most urgent tasks of the present time. For the scientist, to be sure, it is not a very attractive occupation, for it is a matter of battling with nothing but old material. I am thinking, for example, of the thesis that the balance of trade must in all cases be made active, or o£ the maxim, which gained currency in post-war Europe as a brilliant discovery, that countries should buy only from those who bought from them. In both cases we are dealing with quite elementary misunderstandings or with incomplete interpretations of very involved economic relationships, but to the economist this does not offer an interesting sphere of activity.

It is as though the physicists had to keep on declaring that there is no perpetuum mobile, that the sun does not revolve round the earth, and so on. All other scientists can work undisturbed at the real constructive work of their sciences. Early mistakes have no longer any place in their labours, either scientifically or practically. It is only the economist who in this respect finds himself in a totally different position. He is the only one who is not granted the privilege of concentrating his efforts on the real problems of science from which new knowledge may be obtained.

{ 7 comments }

fundamentalist April 1, 2009 at 12:31 pm

“It seems to be inevitable that the rising generation should have to re-think out all the errors ever made in economics. Otherwise it would be inexplicable how again and again, often at short intervals, works could appear which contain old errors in some new guise, and are yet supposed to represent a fresh contribution to knowledge. Every individual economist must always start afresh for himself right from the beginning; he can rely upon no ” established results” in the way the natural scientist, for instance, can. This takes time and is a laborious task, which explains why one must be extremely distrustful of any economists (particularly young economists) who come forward with patent solutions.”

That is why the history of economic thought is extremely important. But even the author’s solution does not work in a society that values the new and novel over the truth. Economics had progressed carefully along the path described by the author up until Keynes. Keynes claimed that he had invented a brand new economics never before seen by anyone, so there was no use in comparing his ideas with past, dead economists. The novelty of Keynes’ economics was its main selling point for young economists. Politicians loved it because it put them in the driver’s seat.

fundamentalist April 1, 2009 at 12:34 pm

“It seems to be inevitable that the rising generation should have to re-think out all the errors ever made in economics. Otherwise it would be inexplicable how again and again, often at short intervals, works could appear which contain old errors in some new guise, and are yet supposed to represent a fresh contribution to knowledge. Every individual economist must always start afresh for himself right from the beginning; he can rely upon no ” established results” in the way the natural scientist, for instance, can. This takes time and is a laborious task, which explains why one must be extremely distrustful of any economists (particularly young economists) who come forward with patent solutions.”

That is why the history of economic thought is extremely important. But even the author’s solution does not work in a society that values the new and novel over the truth. Economics had progressed carefully along the path described by the author up until Keynes. Keynes claimed that he had invented a brand new economics never before seen by anyone, so there was no use in comparing his ideas with with those of past, dead economists. The novelty of Keynes’ economics was its main selling point for young economists. Politicians loved it because it put them in the driver’s seat.

Hayek wrote about the love of novelty in “Fatal Conceit” when the French revolutionaries declared everything before them to be suspect at best and probably false. Modern socialism was the result.

Nick April 1, 2009 at 6:49 pm

Now fundamentalist that’s not quite fair on Keynes. He tried quite strenuously to show that his ideas had president. Mainly in the ideas of the pre-Smith mercantilist writers. He does this in chapter 23 of the General Theory called Notes on Mercantilism. He tries to show that far from being just ignorant and self serving as Smith portrayed them; that instead they were practically minded (unlike Keynes opponents) and understanding intuitively the eternal problem of under consumption.(Again unlike Keynes opponents) And the way that they tried to overcome this was to try and get as much gold into the country as possible thus depressing the interest rate and spurring growth. Keynes also saw an ancestor in Malthus. Who he attributed an understanding of the ‘problems’ with saving and demand. His aim in all this to try and show how his ideas were the norm until the ‘abstract’ classical economists closed their eyes to reality. In effect painting the whole classical and Neoclassical economic tradition(including Austrians) as an anomaly.

ehmoran April 1, 2009 at 7:07 pm

fundamentalist and Nick,

Not to get in the middle of your great discussion (and it is good).

But, following Keynes’ main idea that Govt spending through Central Planning is the only way to truly boost an economy has led the U.S. (and many other countries) into this nightmarish National Debt where we seem to only be able to pay the principle on the Debt.

This is like maxing a Credit Card and paying the minimum required payment, which basically is paying only the interest. You never pay the Credit Card principle. (Welcome to the World of the IMF)

Since Ruling Govt Officials seem to recognize Keynesian Economics as the ONLY true Economic Theory, which I’m sure they love, our Govt will continue to tax and spend more and more until they’ve promised 40 years worth of individual private-enterprise income.

The only good coming from Debt and Keynesian Economics pertains only to the Ruling Class. Debt purely is a means to subvert and oppress individuals…..

fundamentalist April 1, 2009 at 9:11 pm

Nick: “He does this in chapter 23 of the General Theory called Notes on Mercantilism.”

I’ve never read the GT. Does he really tie his theory to mercantilism? If so, then why did he claim his theory was new? Or was he saying that some parts were new?

Rutiger April 3, 2009 at 4:16 pm

fundamentalist,

You can read General Theory at marxist.org (fitting?) for free and decide for yourself.

http://www.marxists.org/reference/subject/economics/keynes/general-theory/

Adam Stewart April 3, 2009 at 11:31 pm

I haven’t read as much of Keynes as I have of Rothbard or others, so I may be wrong on this, but it seems to me that the only consistent thing about Keynes was his inconsistency. His new-old theory is a good example. In that case I think he wanted the best of both worlds… He want to show innovation AND history, two things that (while not mutually exclusive) really don’t make sense together.

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