Political Blame and the Myth of Government-Sponsored Salvation
by J. R. Nyquist, Global Analyst. October 3, 2008
It frightens me to hear politicians play the “blame game.” Those who blame others for national problems are attempting to focus the hatred of their listeners against a particular person. Most often the person targeted is already unpopular. It is therefore safe to lay everything at this person’s door, saying that he is at fault, that he should be punished, that a particular odium should attach to his name. The salvation of the country, therefore, is promoted by vilification. Such is an absurd course which prepares the way for disastrous policies. At the moment we see that President Bush or Vice President Cheney are the scapegoats of the hour. When the Great Depression was underway, several decades ago, President Herbert Hoover was singled out for blame. In Germany the Nazis liked to blame the Jews, who are still blamed for the world’s ills by Islamic leaders. Russian Prime Minister Vladimir Putin likes to blame the United States for the world’s economic problems, though the Kremlin has always embraced economic stupidity as a matter of state principle.
In the current financial crisis involving Wall Street, people tend to blame “greed.” Those who take this position may have a point, but they are also in danger of committing an error; for it is the individual desire to accumulate wealth that has created so much wealth to begin with. It is the “greed” of Wall Street that has made Main Street so prosperous. If not for speculators and the system of “financial greed” currently excoriated, most Americans would be dirt farmers.
According to Adam Smith’s notion of the “invisible hand,” financial selfishness (a.k.a. greed) is a positive force in a free economy. In one of the most celebrated passages in Smith’s book, An Inquiry Into the Nature and Cause of the Wealth of Nations, we read: “[the businessman] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
Smith further explains that politicians cannot promote a country’s welfare as we might imagine. Attempts to intervene in the market are hazardous at best. “The statesman,” wrote Smith, “who should attempt to direct private people in what manner they ought to employ their capital, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
Treasury Secretary Henry Paulson suddenly comes to mind. He is the man who would be Wall Street’s savior, sitting atop a huge pile of government money with which to buy up the “toxic debt” of the financial system. We ought to think it unlikely that anyone should deceive himself so thoroughly as to imagine that he is the market’s “savior.” It is a fundamental axiom that the government cannot save the market because the government does not possess adequate knowledge. The market works precisely because economic knowledge is decentralized and the market allows this decentralized knowledge to become effective. When market actors commit errors, only the market can correct the errors. Only by allowing the market to function can the real solution appear. Central decision-makers who imagine a solution, who think they know what is happening in the economy, are fooling themselves. The economy is too large for their resources. They cannot achieve what they propose. The error we entertain today is along the lines of wishful thinking. We simplify the problem of the economy in such a way that we envision a particular bailout scheme. But notice the lack of specifics in the scheme. Where is the economic science? There is only, first and last, a functionary with a several hundred billion dollar mandate – and typically ignorant organs of “oversight.”
Our financial leaders committed egregious error upon error with the haughty self assurance that they could disregard economic teachings and escape the greatest cycle of boom and bust yet seen. And now, this same generation imagines that government can stop the boom from turning bust. They point to the case of Sweden, where the government intervened to save the Swedish economy from ruin. While it is true that the Swedish government stemmed the tide of panic, the country’s economy was ultimately floated by the decentralized decision-making of the market. A government may be lucky enough to stem panic in an otherwise healthy economy. It cannot, however, stop a financial contraction when bubbles begin to burst at the outset of a global recession.
One has to remember that America is the great market, the great nexus of the global economy. The U.S. dollar is the world’s reserve currency. There is no global prosperity that can refloat America’s sinking economic fortunes. If America’s economy suffers blow upon blow, then the global economy is forced to adjust. It is not a question of stopping panic. The psychology of Americans has long been fortified against panic. The consumer is going to adjust his budget despite Secretary Paulson’s best efforts. The consumer is going to cut back his purchases. We can see this already happening, and no bailout package is going to persuade the consumer that he can continue his consumption on credit. He simply cannot do it, and the realization has dawned. There is no turning back. The decentralized knowledge of the economy, which is the key to future prosperity, has begun to make its own correction. That which is unsustainable will not be sustained. The government can only cloud the issue by moving money from the taxpayer into the market, by transferring wealth from one set of actors to another.
The error of blaming specific actors for problems carries with it a great danger. It is the danger of crediting specific actors with a solution. Those who blame President Bush are the flip side of those who credit Treasury Secretary Paulson with a solution. In reality, the problem occurred because of false market valuations that occurred during a period of credit inflation. No single individual person or agency can solve the problem. No individual possesses the knowledge required. Only the market possesses the knowledge, if only the market is allowed to function without the obfuscation introduced by inappropriate government regulation and the myth of government-sponsored salvation.
© 2008 J. R. Nyquist