The economics of ad hoc government
Over the past few weeks, my flatmates’ understanding of Austrian economics has improved immensely, as I’ve aired my grievances with, well, pretty much everything we study as economics students. Friedrich Hayek, Ludwig von Mises, Murray Rothbard: Austrianism is one of the great strands on the libertarian movement. It is also, as an economic doctrine that eschews complex and rarefied mathematics in favour of reasoning that anyone can understand.*
Anyway, I for one see most economic matters from an Austrian perspective. One of them is the role of knowledge in the economy. Basically, it’s a good thing, as it results in prices that reflect the value of investment at that time. One of my flatmates, being new to Austrian economics, has set about trying to find exceptions to information being bad. He gets a lot of ammunition, because he’s studying the economics of information. So far, as with most economics, all of the ammunition has been duds.
Knowledge in the health insurance market, he says, would eliminate the market and make everyone worse off. My answer was pretty obvious before he’d even finished: “The insurer might be worse off, but it’ll be a damn sight better for the guy that finds out he’s going to get cancer to spend his money on going to a doctor, rather than going to an insurer.” That’s the best his lecturer could come up with.
Another issue he’s challenged me with is the so-called Hirshleifer Effect. It’s an observable effect that states that the ‘parachuting’ of information into the money markets might lead to net welfare loss, because people can’t hedge against changes if risk of that change is already priced into markets. Eh? So what?! If the risk is already priced into markets, that means that that market will be more efficient, because prices in the real economy, and hence welfare, will reflect actual future demand more closely.
Non-Austrians will point to the fall in values that sometimes occur because of the information being realised, rather than its content. This was the case when the Bank of England announced rates cuts on a Tuesday in November, rather than the traditional Thursday.
But this observation could easily be explained by the risk introduced by the government in announcing rate changes early. The market had previously used the information that interest rates were set on a Thursday to organise themselves and set prices (so-called “deadline effect”. However, by announcing a rates decision on a Tuesday - whether it had been up or down - that information was destroyed, leading to information of the economy declining and welfare suffering as a result.
The extension of this is a repudiation of ad hoc government: the sort that plagues this country. Instead of assessing policy properly, it is set on the fly as day-by-day responses to newspaper headlines. This unnecessarily creates uncertainty, removes information, and has, obviously, led to some pretty darn stupid policies. If only Gordon Brown listened more to the Austrians. Here’s an idea, Gordo: if you can’t stomach the 1,300 page Human Action, how about a little Road to Serfdom? But, please remember: it’s a warning, not a blueprint.
* For those that need a primer, the von Mises Institute has a mailing list that sends out a daily article from the Austrian perspective.
