Hayek on development

Friedrich Hayek, one of my favorite economists, has some very wise words on development in his essay “Competition as a Discovery Procedure” that are worth quoting here.

If even in highly developed economies competition is important primarily as a discovery procedure whereby entrepreneurs constantly search for unexploited opportunities that can also be taken advantage of by others, then this is true of course to an even greater extent as far as underdeveloped societies are concerned. I have intentionally begun by considering the problems of maintaining an order in societies in which most techniques and productive forces are generally known, but also an order that requires continuous adjustment of activities to unavoidable small changes simply to maintain the previously attained level. At this point I do not wish to inquire into the role played by competition in the progress of available technology. I would like to emphasize, however, how much more important competition must be wherever the primary objective is to discover the still unknown possibilities in a society where competition was previously limited. While for the most part false, it might not be completely absurd to expect that we can predict and control the development of the structure of a society that is already highly developed. But it seems incredible to me to hold that we can determine in advance the future structure of a society in which the major problem is still to find out what kinds of material and human productive forces are present, or that we should be in a position, in such a country, to predict the particular consequences of a given measure.

Quite apart from the fact that there is still so much more to discover in such a country, it seems to me that there is another consideration making the greatest possible freedom of competition much more important here than in more highly developed countries. The fact I have in mind is that the necessary changes in habits and customs will occur only when those who are ready and able to experiment with new procedures can make it necessary for the others to imitate them, with the former thereby showing the way; but if the majority is in a position to prevent the few from conducting experiments, the necessary discovery procedure will be frustrated. The fact that competition not only shows how things can be improved, but also forces all those whose income depends on the market to imitate the improvements, is of course one of the major reasons for the disinclination to compete. Competition represents a kind of impersonal coercion that will cause many individuals to change their behavior in a way that could not be brought about by any kind of instructions or commands. Central planning in the service of any some “social justice” may be a luxury that rich countries can afford, but it is certainly no method for poor countries to bring about the adjustment to rapidly changing circumstances on which growth depends.

It might also be worth mentioning in this connection that the more the available opportunities of a country remain unexploited, the greater its opportunities for growth; this often means that a high growth rate is more a sign of bad policies in the past than of good policies in the present. It also seems that one cannot in general expect a country that is already highly developed to have as high a growth rate as a country whose full use of its resources has long been rendered impossible by legal and institutional barriers.

Having seen what I have of the world, it appears to me that the proportion of people who are prepared to try out new possibilities that promise to improve their situation—as long as others do not prevent them from doing so—is more or less the same everywhere. It seems to me that the much-lamented lack of entrepreneurial spirit in many young countries is not an unchangeable attribute of individuals, but the consequence of limitations placed on individuals by the prevailing point of view. For precisely this reason, the effect would be fatal if, in such countries, the collective will of the majority were to control the efforts of individuals, rather than that public power limits itself to protecting the individual from the pressure of society—and only the institution of private property, and all the liberal institutions of the rule of law associated with it, can bring about the latter.

The NFL referee strike and others

The recently-ended strike by the NFL referees illuminates an interesting (if obvious) feature of strikes in general: they only work when comparable substitute labor is not readily available. In the hypothetical pure Keynesian stimulus world, a hole-diggers and -fillers union would have zero clout whatsoever because the next guys in line, the non-union workers, could do exactly what the job required. In the real world recently encountered by the NFL, substitute referees were available but the overwhelming consensus is that they were not the same quality of labor as the refs they replaced. This is why the regular referees won out.

When a large, established American union like the UAW strikes, the situation is not quite the same. It may be the case that they cannot be replaced so easily—I’m not familiar with the technologies and techniques used to produce automobiles, so I couldn’t say for sure. But assume that it’s true. Let’s say the major auto manufacturers brought in non-union labor that was less skilled to keep production running. Producing automobiles of the same quality would be costlier, or they could maintain the same costs and produce lower-quality automobiles. I assume that the regulatory structure in the US means that there is a limit to how low the quality of automobiles could be, and in addition they have shareholders to please so that option is pretty hard to take.

But the major automobile companies are in a very different position: there are substitute products readily available. The auto industries in Japan, Germany, Italy, South Korea, and other countries could pick up the slack during a sustained strike by the UAW. Sure there is Canadian football and there are other sports entirely that American football fans could watch, but these are not close substitutes. [Except for Canadian football, I suppose, but there are only eight teams. Plus the games are hard to get to.]

Overall, the message for fans of the strike method is not to get too excited by this round. It’s hardly generalizable.

Reasons to be skeptical of official statements

One very simple difference between my perception of government policies and most peoples’ is that I don’t presume the government’s stated purpose is its real purpose for any given policy. I admit here that the burden of proof is on me: why should they be misleading us or lying to us? I’ll give a few reasons.

1. There is ample documentation that governments (more properly, government officials or agents) have lied to us in the past. This is not proof positive that they are always lying, but it should make us aware that lies are a possibility. I mention this reason first because it is the most broadly known and accepted.
2. The government (and here I refer to the United States though the principles are the same elsewhere) is composed of several different parts, each incentivized to behave in its own interest. There are always incentives to over- or understate estimates of benefits, costs, times to completion, social ramifications, etc. before initiating a project, and ditto for evaluating projects in retrospect. But this extends even to the purposes of projects. Essentially, government agents are incentivized to try to expand their mandates and glorify their legacies, so in addition to false optimism about the success or failure of their programs, there will be false justifications. Even an ostensibly neutral administrative action very likely might be a power grab by a person/office/bureau/department/committee.
3. The government is actually made up of a lot of people with different influences and motivations, and furthermore works in concert with nominally private entities who have their own influences and motivations, and therefore has its fingers in a lot of pies. In point #2 I discussed the ways in which public entities expand their takes by lying, and here the obvious parallel is how private entities benefit by similar processes. A bill touted as pure political rent-seeking by a private entity has no chance of success, but these interests are an important part of the political process and will not be denied in our political system. Thus the backers of such a bill need to think of a plausible and acceptable story for what the purpose of the bill is. Remember that legislators rarely write legislation themselves with no input from the affected industries.
4. Political success is the result of taking credit for triumphs and deflecting blame for failures while trying to please people. If this isn’t a recipe for creating an incentive structure for official lies, I don’t know what is.

There are probably many more good justifications, but this is a quick list.

Realizing that there are incentives for government officials to lie to you is not particularly controversial, but very few people seem to take the lesson fully to heart. Moreover, these incentives are at work for Democrats, Republicans, and non-partisan officials alike. Even such a simple lesson, if internalized, results in a very different view of government than the prevailing one.