Central Planning = Spontaneous Economic Order?
The following article was originally posted July 1, 2005
Before I had ever heard of Ludwig von Mises, Friedrich A. Hayek, Murray Rothbard, and, thus, the Austrian School of economics, I had enthusiastically followed the economics research undertaken by the Santa Fe Institute (SFI). My interest in the institute emerged after reading Dr. Stuart Kauffman's fabulous book At Home in the Universe: The Search for the Laws of Self-Organization and Complexity (published in 1995).
Dr. Kauffman is a member of the Santa Fe Institute, which is the world's leading research institute pertaining to the science of complexity. A particular line, in Dr. Kauffman's aforementioned book, struck me as important: "It is our quest to understand emergence of this ordered complexity all around us, in the living forms we see, the ecosystems they construct, the social systems that abound from insects to primates, the wonder of economic systems that actually deliver us our daily bread and astonished Adam Smith into the conceptualization of his invisible hand."
It was this line, combined with the concept of self-organization, which gave me hope that brilliant scientists would produce research supporting the wonders of capitalism while demonstrating the reasons as to why socialism/central planning has utterly failed and has only lead to wide-scale poverty. After all, socialism/central planning is a concept antithetical to spontaneous self-organization. Unfortunately, the Santa Fe Institute's economics research program—particularly in the area of poverty—has shown me that the socialistic paradigm, that is so common in academia, is literally blinding their research efforts.
Instead of promoting capitalism, which is inherently an unplanned, self-organized, and a successful economic system, SFI's research regarding poverty has a Marxist class-struggle flavor to it while promoting wealth redistribution—i.e. taxation and redistribution, by a central governmental authority, with the goal of alleviating poverty.
In my opinion, logic has been completely suspended here. Thankfully, a few years ago, a friend introduced me to Austrian economics. It is here that I have found my intellectual home. I learned that economic calculation is impossible in a socialist commonwealth and that capitalism provides the best chance for all individuals to prosper. If the researchers at the Santa Fe Institute want to learn how to alleviate poverty, then their most fruitful research will come from using an Austrian perspective. This will require a radical paradigm shift. Ironically, it will be a shift back to accepting the truth that a robust economy is self-organized and, thus, an unplanned phenomenon.
For those who are not familiar with the science of complexity, it is a relatively new science that is somewhat difficult to define. At the heart of this science is the belief that spontaneous order—or self-organization—emerges as a result of physical laws, which clearly remain undiscovered. A broad definition of self-organization is as follows (taken from the book Swarm Intelligence: From Natural to Artificial Systems):
Self-organization is a set of dynamical mechanisms whereby structures appear at the global level of a system from interactions among its lower-level components. The rules specifying the interactions among the system's constituent units are executed on the basis of purely local information, without reference to the global pattern, which is an emergent property of the system rather than a property imposed upon the system by an external ordering influence.
Using this definition, I would strongly assert that central banks such as the Federal Reserve are formed under the pretense of providing an ordering influence to the market place, and yet, are completely unnecessary for a free-market order to emerge. The same can be said of a central taxing authority bent on creating a more perfect society via wealth redistribution. As I will discuss later, central banks and central taxing authorities end up as destabilizing influences and, therefore, cause disorder and poverty.
If one was to reword the above-mentioned description of a self-organized phenomenon into economic terms, then it couldn't be done any better than the following quote from Dr. Murray Rothbard's magnum opus Man, Economy, and State:
Directly, voluntary action—free exchange—leads to the mutual benefit of both parties to the exchange. Indirectly, as our investigations have shown, the network of these free exchanges in society—known as the "free market"—creates a delicate and even awe-inspiring mechanism of harmony, adjustment, and precision in allocating productive resources, deciding upon prices, and gently but swiftly guiding the economic system toward the greatest possible satisfaction of the desires of all the consumers. In short, not only does the free market directly benefit all parties and leave them free and uncoerced; it also creates a mighty and efficient instrument of social order. Proudhon, indeed, wrote better than he knew when he called 'Liberty, the mother, not the daughter, of order'.
It is quite possible that there are no physical laws of self-organization responsible for the emergence of a free-market social order. Certainly, Dr. Rothbard did not advocate such a concept (i.e. that there are physical laws responsible for self-organization). Nevertheless, the great Austrian economist and Nobel laureate Friedrich A. Hayek did feel that research regarding spontaneous, self-organizing processes was a worthy endeavor. For example, Dr. Hayek stated the following in his book The Fatal Conceit: The Errors of Socialism: "Adam Smith nevertheless remains the butt of jokes even among economists, many of whom have not yet discovered that the analysis of self-ordering processes must be the chief task of any science of the market order."
If I have done anything here, I hope that I have demonstrated an intellectual connection between Austrian economics and the science of complexity. Therefore, it would seem that the Santa Fe Institute's economics researchers would be most interested in studying the free-market order as advocated by Dr. Kauffman (unless he really didn't mean what he stated in his book At Home in the Universe). As I will demonstrate below, SFI's scientists are defying logic and are advocating socialistic prescriptions for alleviating poverty.
So let's get to the Santa Fe Institute's suspension of logic. As I mentioned earlier, SFI is involved in researching the socio-economic issue of poverty. It appears to me that SFI's researchers believe the solution to the problem of poverty lies with socialism instead of capitalism — which, once again, is an unplanned, self-organized economic system. As an example, here's what was stated in the Santa Fe Institute's 2000 Annual Research Report:
SFI is in the midst of hosting four interdisciplinary workshops seeking to better understand the persistence of economic and social inequality in both groups and individuals, its impact on the ability of groups to cooperate in the pursuit of environmental sustainability and other common objectives, and the capacity of governments and other collective actors to alleviate poverty and economic insecurity given the constraints of global economic integration. The workshops address the following topics (I've shortened the workshop-topic descriptions without preventing you from getting the gist of each topic):
- Poverty traps. For economic, cultural, technological and institutional reasons, otherwise identical individuals often suffer or enjoy divergent fortunes as a result of differing initial conditions; as a result individuals, ethnic groups, nations and other entities can remain locked in poverty.
- The intergenerational transmission of economic inequality. The impact of parental wealth and income on offsprings' economic success is substantial.
- Inequality and environmental sustainability.
- Globalization and egalitarian redistribution. The freer movement of capital, goods, people and information is thought to raise the costs and compromise the effectiveness of some national policies designed to raise incomes and economic opportunity for the least well off.
Plain and simple, these workshops will provide no contributions to gaining a better understanding of poverty. The Santa Fe Institute is merely seeking ways to help government redistribute wealth, via taxation, in order to alleviate poverty. This is not science, it is scientism. Nowhere have I found any research from SFI pointing to governmental central planning as a key cause of poverty. To me, this makes no sense considering SFI performs research regarding self-ordering phenomena. Wouldn't it make sense to explore the idea of making a free-market economy even more robust so that poverty could be alleviated (i.e. looking at deregulation, abolishing the Federal Reserve, eliminating taxes, etc.)? A left-wing paradigm clearly can lead to a suspension of logic, especially considering that Ludwig von Mises has shown that economic calculation is impossible in a socialist commonwealth—refer to Dr. Mises' excellent book Economic Calculation in the Socialist Commonwealth.
For me to make the claim that the Santa Fe Institute is seeking ways to help government redistribute wealth via taxation is a strong statement, although it is self-evident from looking at the above-mentioned socialist-flavored workshop topics. All doubt will be removed once you read the following quote from an interview with Sir Robert May, who sits on the Santa Fe Institute's Science Board. I found this information on page six of the Summer 2001 edition of the SFI Bulletin. This section of the article was ironically subtitled "Making Coherent Contributions":
He also has ideas about applying complexity theory in the social sciences, particularly economics, a field he sees as desperately in need of "transforming insights that respect data." And the advent of e-commerce provides a fruitful new area to explore. One possible topic is taxation. "As money becomes more and more virtual it is going to become harder and harder to levy taxes," he argues, "other than from individuals that are located in particular places in ways that much of commerce is not." He suggests an SFI program to explore the implementation of new tax regimes to offset the inaccessibility of commerce, and the social consequences that might follow from a shift of the tax burden from corporations hiding out in cyberspace to individuals who the government can still find.
In other words, the Santa Fe Institute wants to help government hunt you down and tax you wherever you may be in the world. Of course, Sir Robert May is making the mistaken assumption that government creates wealth when the opposite is true. Government destroys wealth and perpetuates poverty.
As any adherent of Austrian economics knows, inflation is a hidden and redistributive tax. Moreover, it is a central bank that causes inflation. When a central bank can create money out of thin air, the power to depreciate the value of money is frightening, and eventually socially devastating. Let's look at the United States' Federal Reserve and its long-term destruction of the dollar's purchasing power. Since the Federal Reserve's founding in 1913, the dollar's purchasing power has depreciated by over 95% (go to the Bureau of Labor Statistics' Inflation Calculator, at www.bls.gov, and you can confirm this horrific destruction of the dollar's purchasing power).
If having the government create money out of thin air leads to prosperity, then Argentina and Brazil should have become the world's wealthiest countries by the end of the 1980s. Instead, the ravages of inflation lead to greater poverty and massive social unrest in both of these countries. It is simply amazing that the Santa Fe Institute's research scientists haven't figured this out yet. Families in America are having more difficulty making ends meet because the prices of goods and services are rising over time, directly due to the dollar's depreciation brought on by the Federal Reserve itself. Using a little bit of logic here, doesn't it stand to reason that it will be more difficult to climb out of poverty if the prices of goods and services are rising continuously? The very government the Santa Fe Institute wants to serve, is the same entity that helps perpetuate poverty through the pernicious tax of inflation.
Naturally, Austrians advocate a 100% gold standard. Through a socio-economic selection process, gold and silver emerged as money. When gold and silver are used as media of exchange, the tendency is for the prices of goods and services to decline over time. With this being the case, logic would also dictate that declining prices, for goods and services, should alleviate poverty over time as well. Once again, I have not seen any research from the Santa Fe Institute regarding the positive role that a gold standard would play in the battle against poverty. Keep in mind that governments hate gold because it restricts a government's ability to spend money on every pet project that comes down the pike. A gold standard forces government to live within its means just as American families must do.
A favorite tax amongst those who view the world with a class-struggle (i.e. Marxist) paradigm, is the estate tax. By taxing an estate, government believes it is taking from the rich and giving to the poor. Moreover, it is attempting to prevent "the intergenerational transmission of economic inequality" (to use SFI's words). In reality, the death tax has produced results that are exactly the opposite of its essential goal (i.e. to redistribute wealth in order to help the less fortunate climb the socio-economic ladder). Republican Congresswoman Jennifer Dunn's April 5, 2001 press release titled "House Buries Death Tax" provides excellent insight as to how the death tax tends to perpetuate poverty instead of alleviating it. She stated the following:
This onerous tax has a crippling grip on economic expansion and doesn't discriminate when it comes to victimizing Americans. Victims of this tax can be found in minority communities, where it takes an average of three generations to build an economic foothold in the community but this tax puts a stranglehold on growth causing minority-owned small businesses to close shop after only a couple of generations. Because of the death tax, women in particular are struggling to pass their businesses on to their children. This was confirmed by a recent survey of women business owners where 60% of the respondents indicated the death tax will hurt expansion plans. Sadly, that's after women were given equal access to business loans just 25 years ago.
It is interesting to note who was in favor of scrapping the death tax. Congresswoman Dunn received the support of over 100 organizations including the following four:
- The Black Chamber of Commerce
- The Hispanic Chamber of Commerce
- The National Indian Business Association
- The Nature Conservancy
These people understand that wealth redistribution is tantamount to wealth destruction. If this was not the case, then LBJ's "Great Society" program would have been a smashing success. The best way to allow people to climb the socio-economic ladder is to let them keep their own hard-earned money. Confiscatory taxes only serve to make it more difficult for all families to grow wealthier over time. Members of the above-mentioned organizations know this. It is time for the central planners—and their enablers such as the Santa Fe Institute—to understand that the outcomes of their plans tend to be the exact opposite of what they had hoped. The death tax provides a perfect example.
For the Santa Fe Institute's economics research program to regain sound footing, it must shed its Marxist-colored glasses and get back to its fundamental research of spontaneous order. In their research, I am sure that they will find that liberty, a rule of law securing private property rights, and sound money (i.e. gold) will provide the conditions for a robust economy to emerge without the need for central planning. In turn, poverty will be alleviated over time. Of course, Austrian economists already know this.
In closing, I want to pass on a powerful quote from Friedrich A. Hayek. This quote came from his marvelous book The Fatal Conceit: The Errors of Socialism. For clarification purposes, when Dr. Hayek uses the term "extended order" he is referring to a complex adaptive system (a free-market economy):
I have been attempting to explain how the extended order of human cooperation has evolved despite opposition from our instincts, despite fear of all the uncertainties inherent in spontaneous processes, despite widespread economic ignorance, and despite the distillation of all these in movements that seek to use allegedly rational means to achieve genuinely atavistic ends. I have also maintained that the extended order would collapse, and that much of our population would suffer and die, if such movements ever did truly succeed in displacing the market. Like it or not, the current world population already exists. Destroying its material foundation in order to attain 'ethical' or instinctually gratifying improvements advocated by socialists would be tantamount to condoning the death of billions and the impoverishment of the rest.
If the Santa Fe Institute continues on its path of serving government through promoting taxation and redistribution, then its goal of helping reduce poverty will be met with the exact opposite result. Just look at the results of the death tax and at the results of the "inflation-fighting" Federal Reserve. Conscious central planning/socialism has increased poverty all over the world.
Should the Santa Fe Institute become serious about understanding spontaneous processes, in the field of economics, it will discard any pretense that somehow conscious central planning has anything to do with spontaneous economic processes. Such an intellectual error is breathtaking yet can be rectified by shifting to an Austrian paradigm. At this point, they will come to understand that abolishing the inflation-happy Federal Reserve and abolishing confiscatory taxes will be the best economic policy prescriptions it could ever make to help alleviate poverty.