Friday, October 10, 2008

Can they really predict the future?

As we watch politicians and regulators making one futile and potentially dangerous and highly expensive gesture after another to “save the situation”, “restore confidence” or simply rescue their own careers over the financial crisis, it is worth turning our attention to other situations they have messed up with their certainty that they have knowledge that is denied to ordinary mortals.

Today’s post brought the latest pamphlet from the Institute of Economic Affairs: “Climate Change Policy: Challenging the Activists”, and very interesting it looks, too.

From the Foreword, written by Bruno Prior, Director of Summerleaze Ltd, renewable energy entrepreneurs:
Certainly, the public pronouncements of politicians and the detailed central planning and regulations that they propose seem predicated upon the belief that politicians, their advisers and their regulators have limitless knowledge about the science and economics of climate change, energy use and the environment.

Or perhaps the political class does not have such knowledge, but nevertheless the precautionary principle demands that something must be done. That is the asymmetric precautionary principle, which demands precaution against the risk that today’s freedoms may harm future generations more than they benefit present generations, but opposes precautions against the risk that today’s constraints may harm present generations more than they benefit future generations.
From a politician’s or a regulator’s point of view that is a wonderful situation since we do not really know what will harm or benefit future generations, though we can make some assumptions on the basis of historical knowledge. Therefore, as far as that politician or regulator is concerned, as well as, sadly, too many people in the outside world, any horrifying prediction can be made with no fear of contradiction.

Well, some fear of contradiction and that fear is growing. More and more people are defying what was not so long ago known as a complete consensus (a frightening idea as, for instance, Louis Pasteur could have told us). One of the earliest to do so was Björn Lomborg and there was another well-argued piece in the Times a week or so ago. The comments at the bottom are quite interesting, too, and far more varied than one might have expected though there is still quite a lot of sheep-like bleating as well as the odd piece of silliness, which the author clearly considers to be very witty. You get them everywhere.

Meanwhile, it is worth noting that, as Mr Prior says, government targets rather than market solutions destroy flexibility in development and response to unforeseen contingencies:
State rationing needs firm numbers. The uncertainty may be vast and the permutations of all the unknown variables impossibly complex, but we can provide the necessary figures by applying statistical techniques to sets of tenuous assumptions. The probability of future developments conforming with these assumptions may be negligible, but (having rejected a genuine market approach) there is no option to do without assumptions, and any other set of assumptions will be equally improbable. In a few steps, we convert uncertainty into certainty and dictate that our critics must do the same.

Thanks to this certainty, there is no need or space for entrepreneurs in the traditional sense – that is, those who discover new information in the economic process. Governments have worked out the reasonable costs and expected volumes of each technology (or good), and how much each sector of industry and society will contribute (or require), so there is no need for innovation nor opportunity for the unconventional. The job of business is to deliver as cheaply as possible
what governments have specified. Without rewards for innovation – for betting against the crowd and winning – the economy coalesces around large businesses with low financial costs, high volumes and low margins delivering what governments have ensure will be the most financially viable (though not necessarily the most economic) solutions.
Socialist planning by any other name is likely to bring about the same sorry results.

5 comments:

jeremy said...

'The uncertainty may be vast and the permutations of all the unknown variables impossibly complex, but we can provide the necessary figures by applying statistical techniques to sets of tenuous assumptions.'

Sounds like a perfect description of how our bankers, hedge fund managers and credit rating agencies went about constructing vehicles to offset credit risk.

'The job of business is to deliver as cheaply as possible
what governments have specified.'

Gordon's boom with no bust seems to fit into this category. It seems Labour has been manipulating the market in its own way for years already. Message to markets: just deliver the people prosperity while we the government look the other way.

Helen said...

I am not sure the comment is entirely relevant to the posting but, in any case, you might like to have a look at the EU's role in the matter of financial markets. Your last sentence makes little sense. Markets, left to themselves with light regulation, do deliver prosperity. Who do you think does that, the government either in Brussels or on the local level, in London?

jeremy said...

You're right, that sentence doesn't add much. I was thinking about credit-swap derivatives etc which are not required on balance sheet, so debt obligations are unknown. I believe Basle 2 has responsibility there. Basle 2 does have responsibility for marking prices to market which has frozen credit flows. Light touch might better be right touch. But as you say, I've gone off topic.

Helen said...

Actually, Jeremy, I should have welcomed you to the blog. I hope you will continue to read it and comment on it. Mind you, I might reply. :)

prziloczek said...

"it is worth turning our attention to other situations they have messed up with their certainty that they have knowledge that is denied to ordinary mortals."
I would like to broaden this out so that Argentina is remembered. Like Britain, Argentina is a naturally rich country with an educated middle class and a cultured capital.
For years, this rich country paid its bureaucracy too much and did not nurture its economy properly.
Then it went bust.
We can too, you know. At the moment, I can see the UK pound becoming worthless. We shall be back in 1945-6.