Economies Are Much Too Complicated To Plan And Control

This is an opinion editorial by Max Borders, a well-published author and a contributor for Bitcoin Magazine.

Well into the Great Recession, arch-Keynesian Paul Krugman wrote that what drew him to economics was, “The beauty of pushing a button to solve problems.”

Yet economies don’t have buttons.

Similarly, imagine someone who claimed they could build, fix or run the Great Barrier Reef. You’d be justifiably skeptical. The Great Barrier Reef is one of the most splendid ecosystems on the planet. Its beauty is matched only by its complexity. No one on earth could design, much less control, the array of biological processes that allow the reef’s fractal order to emerge.

If you believe in God’s creation, you’d probably argue that only an omniscient being could build, fix or run the Amazon Rainforest. Why? Humans aren’t smart enough. If you’re an orthodox Darwinian, you’d argue that only the decentralized processes of evolution could give rise to such biodiversity. Why? Humans aren’t smart enough.

Yet, for too long, we have tolerated experts who claim authority over our economies.

Sure, economy and ecology are two different domains of inquiry, but economies are like ecosystems in a few important respects: Both economies and ecosystems are complex adaptive systems that cannot be built, fixed or run, both emerge in their complexity thanks to simple rules and both express unique patterns based on their particular contexts.

Despite these critical similarities, too many interventionists labor under the idea that economies are like machines that can be built, fixed or run. Here are a handful of examples:

Instead of stable institutional rules, interventionists think they have the knowledge required to meddle in the macroeconomy. Instead of respecting economic decisions distributed among those living in unique circumstances, interventionists deal in abstract aggregates and false metaphors.

Mission Control

Nearly everywhere, policymakers and central bankers manipulate our economies as if they were sitting at mission control. They fancy that if they can turn this dial or that rheostat, they’ll be able to “prime the pump” or whatever inapt metaphor guides such hubris. Sadly, the only way technocrats have been able to take us to the moon is atop a financial bubble.

We’re only now starting to hear a giant hissing sound, malinvestment leaking from the everything bubble. We have much farther to fall. In the U.S., we’re experiencing high inflation because of the dollar and its exorbitant privilege. The inflation is not “transitory” as the authorities predicted. Our shared experience is an ongoing global phenomenon that will compound our troubles quarter after quarter. Paradoxically, as the world plunges into recession, the dollar could get stronger for a time, but it will be a wrecking ball as weaker, more indebted nations compete for dollars to service their debts, as was prescribed long ago at Bretton Woods. Now there is simply too much leverage in the global system.

Macroeconomic wizards, as well as the politicians into whose ears they whisper, have never faced the fact that economies are not like machines at all. Yet these economists’ prestige, positions, and livelihoods depend on scientism. It’s no wonder then, that these same experts fail time after time to make basic predictions with any accuracy. Worse, they labor under the notion that, given enough power and largesse, they can play God by pushing buttons, bailing out banks, firing up the printing press or setting a different interest rate.

The tab always comes due — and eventually, it will be handed to you, the taxpayer.

Meddling Begets Meddling

Since 1971, when President Richard Nixon took the U.S. dollar off the gold standard, macroeconomics’ entrail readers have been sowing the seeds of economic collapse by encouraging government’s profligacy as a cure to every ill. Specifically, Keynesians and their kissing cousins, the Modern Monetary Theorists (MMTs), have been whispering falsehoods into the ears of power. Tell the political class exactly what it wants to hear, and you might end up a presidential appointee.

The fun usually starts with politicians eager to shower goodies on favor-seekers. With Nixon it had been “guns and butter” that funded the welfare/warfare state. Today is only different by degree. Today, politicians are fond of characterizing everything they do as an “investment,” even though real investors have to feel the sting of losses. Politicians and their consiglieres feel no sting and sign no IOUs. Indeed, most of these mandarins have little skin in the game.

Interest groups and constituents line up at the public trough. Dispensing corporate welfare and helicopter money becomes their raison d’etre. Intervention is a necessary evil for the common good, they’ll say, brandishing their laurels from Harvard or the London School of Economics. Only they, “The Order of Macroeconomists,” can rescue the economy from crisis to crisis — or so the story goes.

The wizards end up facilitating cronyism and corruption.

One need only consider the billions the Federal Reserve has given to banks and other corporations during the past decade or more of quantitative easing, not to mention the Cantillon effect, which benefits the wealthiest and leaves the poor to buy less things with more money. In response, populists yowl and the people demand more goodies, but there is no more blood left in the turnip.

The mandarins of mission control have become adept at papering over problems or, to mix metaphors, kicking the can beyond the next election cycle. Yet, meddling begets meddling. Eventually, the people must pay.

The wizards are not so good at setting impartial institutional protocols that allow the world’s productive people to save, invest, produce and exchange in a stable fiscal and monetary regime. To deny the wizards the power to adjust the price of credit (the interest rate) would deny them an enormous lever of power. Most people can’t imagine a world in which market actors determine such prices — you know, the same way we determine the price of eggs.

Instead, monetary interventionists sit behind an opaque marble and do their best to maintain “targets,” such as inflation and employment. The fiscal interventionists roam byzantine halls and smoky back rooms to determine which corporate cronies will win their masters’ spending promises — you know, in the name of “creating jobs.”

Neither politicians nor experts create wealth. They transfer it, and that sucking sound you hear comes from taxation and inflation, respectively.

The Decentralist Imperative

Whenever one complains about the sorry state of the world — including the all-too-visible hands behind the mess — a chorus will reply:

“But what shall be done? And who should do it?”

These are not unreasonable questions, but they can mask certain assumptions. The most important of these is that a particular person ought to do something, which implies a centralized effort by some elite. That assumption scratches a distinctly human itch, which is to exert control or, at least, to feel that someone is in control, but the rage for order got us into this mess.

Authority’s handmaidens will cry “market fundamentalism!” Yet what manner of faith says technocrats can or should play Intelligent Designer with our economies? What economic theory is more “trickle-down” than Keynesianism, obsessing as it does with aggregate demand? Dealing in aggregates completely misses the details, particularly the vital circumstances of time, place and person.

There are no angels among the mandarins. Legal counterfeiting is no manna from heaven. And neither the legislature nor the central bank is anywhere near the pearly gates.

That’s why anyone who purports to know the right way, much less the One True Way, should have to enter a vast competition for mindshare, attracting members to their systems rather than compelling them. So, my position isn’t market fundamentalism at all. It’s about market fundamentals. The best systems win by creating long-term value for those they claim to serve. If Switzerland beats Somalia, more people will choose the former. Competition among systems makes for a more “antifragile” metasystem, using Nassim Taleb’s term. Failures are localized. Watchful stewards can duplicate successes.

We must therefore enter an age of consent in which we choose our governance and monetary systems from a menu of providers who must respond to customers rather than to the powerful. And if they don’t? People will simply vote with their Hondas.

The Monetary-Institutional Stack

Imagine what we might call the monetary-institutional stack. In that stack, you have the issuers, such as independent banks, cryptocurrency networks or smaller states. Some will adopt commodity standards, such as gold or a basket of commodities. Others will adopt a bitcoin standard. Still, others will generate algorithmic stablecoins or currencies that continuously improve based on feedback from the fitness landscape.

Click out an order of magnitude from these issuers, and you’ll find authorities operating in various jurisdictions — perhaps 50 — after the United States of America breaks up or like the U.K. after Scottish or Welsh secession. Some of these new authorities will successfully regulate issuers operating within those jurisdictions. Others will not be so successful or will choose market discipline, but there is competition at that level of the monetary-institutional stack. After a time, we’ll see arbitrageurs do what they do on the way to more stable equilibria, for example, as we did in Canada’s or Scotland’s eras of free banking.

Monetary economists George Selgin and Lawrence White studied the empirics of America’s central bank’s history and concluded:

“The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment.”

Selgin and White are rare because they deviate from the mission control approach and suggest decentralized competition among currency issuers. They understand that better ways must be discovered, not compelled, in a Darwinian dance.

My version of that dance looks something like this:

• Let the Bretton Woods status quo wash away in a sea of red ink.
• Dismantle central banks, which create moral hazard, political abuse and unending distortions.
• Unleash free banking, which means competing institutions issue competing currencies.
• Develop standards and practices that require issuers to mitigate risk and open their books.
• Let many such currencies rely on secure, transparent reserves and commodity standards; others might be digital commodities, such as bitcoin.
• Allow market actors (not political appointees) to determine the price of credit.
• Let users drive discovery processes instead of politicians exerting power.

If we don’t make such changes, brutal circumstances will make them for us as the macroeconomic machine sputters and stalls.

Evolutionary processes, though potentially painful in the short term, will select for superior money and governance — as judged by participants’ lights. Decentralization catalyzes this process as issuers compete. The competition centers on desired properties as opposed to the interests of power.

In terms of the desire for political types to transfer opportunities to favored groups, the decentralization of money and authority makes that game much less profitable. Accountability gets baked in when switching costs go down. Suppose the costs of voting with your Honda or your mouse continue to go down as our great experiments in centralization continue to unravel. In that case, we’ll begin to see competitive forces exert themselves to benefit the people over the powerful.

The idealist in me wants a system that operates on the principle of the “consent of the governed,” and I don’t mean majoritarian rule. I mean a real, contractual civil association that one selects in a governance market, but I am under no illusions. Power will do what power does. Still, as the inevitable forces of decentralization check power, authorities will have to content themselves with controlling less and providing more. That means fewer imperial ambitions, smaller territories and more sustainable budgets.

The Big One

The next recession might well be a depression. The Fed has run out of tricks and sits on the tines of the “Devil’s Fork”: Raise interest rates too high, and we’ll see mass layoffs, unaffordable mortgage rates and weaker governments unable to service their debts; keep printing money, and we’ll see our purchasing power continue to diminish. We can say something similar about the European Central Bank and the Bank of England. The U.S. government is currently sloshing about in an ocean of red ink at nearly 140% of gross domestic product, though the dollar is still the world’s reserve currency. The days of exorbitant privilege are nigh at an end.

The Bretton Woods era is nearly over. The Fed’s power is waning. Europe is a basketcase. The Great Reset is a technocratic nightmare devised by those still clinging to unholy corporatist hierarchies and green hysteria. Xi Jinping’s attempts to Sino-form the world aren’t exactly going as planned either. All such efforts will be weakened by the coming upheaval, which means it will be time to reorganize according to different economic principles among smaller, competing systems.

Instead of what amounts to the economics profession’s version of Intelligent Design, we need a set of practical experiments constrained by economic reality, stable rules and distributed decision-making. We’ll need more Dubais and Singapores and Liechtensteins, some on terra firma and others in the cloud.

Let the empires fall.

We will trust the institutions we build and use together. Indeed, what the world needs now is decentralism. Sadly, we’ll have to wait till the house of cards falls to get it.

This is a guest post by Max Borders. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.