Economic Statistics Boost the Illusion of Control

Part 3 of a Discussion of Peter Foster’s Why We Bite the Invisible Hand Chapter 12 “Homer Economicus”

Foster asserts that anti-capitalists have long feared that people’s desire to raise their standard of living would devolve into envy-driven conspicuous consumption that would trump virtue. (p. 264)

Related to this criticism is concern that economic statistics created to measure the economy and the impact of policies do not take into account happiness and thus are inherently flawed. (p. 264)

The man most associated with the notion of the political promotion of happiness was that autistic moral philosopher Jeremy Bentham. Bentham, who lived from 1748 to 1832, was the father of social utilitarianism, the idea that it was the business of policy to secure the “greatest happiness of the greatest number.” This pretension required measurement…(p. 264)

In order to run something and make decisions, you have to be able to define and measure it.

GNP, or more commonly today, GDP, is a good example. The policymakers and the media are highly focused on the ups and downs of GDP as a measurement of the health of the economy and the well-being of the people.

However, the creator of GNP, Simon Kuznet, never intended it to be used in that way and even warned about it. He knew it was a rough indicator of the capacity of the economy for production and consumption, not a measurement of well-being or happiness.

Once the metric existed though, people criticized it as insufficient. For example, GDP will rise with increased government expenditures whether the money is spent on roads or bombs. Then that is held out as proof that capitalism values war.

As Foster points out, it was actually Keynes who proposed “deliberate destruction” as “a useful promoter of economic activity.” (p. 265)

It can only make sense to propose the government paying for some people to dig holes and others to fill it up if you are focused on a metric like GDP. Common sense says that is not how you improve a real economy.

The pursuit of happiness is enshrined as a self-evident truth in the founding of our country, but measuring happiness and guiding policies to promote it was not the intention.

Foster cites one economist, Joseph Stiglitz, as a typical example of one calling for more and better statistics to guide policy to improve the economy and raise happiness.

“Are statistics giving use the right signals about what to do?” he pondered. But his question begged for more fundamental one, such as: Who was this “us” and what did it plan to “do” with these “signals”?…Measurement is crucial to judging policy success, but it also tends to be the mother of activism, on the basis of the delusional conviction that if you can measure it, you can improve it. (p. 267)

Stiglitz apparently came to the conclusion “that one couldn’t reduce everything to a single number [GNP],” but as Foster notes, it was only policy wonks who even thought to try.

As our computational capacity grew with supercomputers, this desire to measure and monitor everything intensified.

Foster notes that after the 2008 financial crisis, the idea of “macro prudence” caught on.

The Keynesian prefix “macro” had become the herald of policy pretension. That pretension started with human irrationality and alleged market failure, and leaped straight to the conclusion that what was needed to deal with “systemic” problems was stratospheric oversight, masterminded by the brightest… (p. 269)

By “alleged market failure,” Foster means that markets simply reflect the behavior of those in the market and the laws and regulations set up to manage the market. (p. 267) If bad rules are put in place, the market is not failing, it is just revealing the outcome of the bad rules.

Concluding that “stratospheric oversight” was needed to prevent another financial crisis is particularly disingenuous given that that was already in place before the crisis.

The Financial Stability Forum was created 10 years prior as a part of the global “financial architecture.” (p. 269)

The obvious failure of the FSF was ignored except to replace it with even more bureaucracy with a bigger budget in the form of the Financial Stability Board. (p. 270)

And yet it was the free market that caused the financial crisis?

But Foster mentions a paper, “Are Regulators Rational?” by Slavisa Tasic that examines the impossible task any policymaker has in trying to know how to regulate the market.

Tasic noted that the limitations of regulation had already been laid out by Hayek, who had pointed out that the essence of the market was dispersed knowledge to which regulators, by definition, did not have access. This created an “insurmountable epistemic limitation.” It wouldn’t matter how expert policymakers were in cognitive psychology; they still couldn’t solve the dispersed knowledge problem. (p. 271)

Further than that unsolvable problem, Tasic asserts that regulators are also subject to “illusions of competence.” (p. 271) They don’t know what they don’t know, yet they are very confident. They suffer from “the problem of being not merely ignorant but unaware of their own ignorance.” (p. 271)

No wonder we live with so many unintended consequences.

When regulations fail, it does not occur to them that the attempt at regulation could be at fault.

Those macromaniacs who cannot see the trees for the wood suggest that the picture might be clearer from outer space. They are firmly convinced that they have a broader perspective than those benighted souls who warn against fiddling with markets until you understand them. All the regulators really lack is sufficient power. (p. 272)

The realm of power — politics — is where Foster turns in the next chapter. Looking back to the days of early humans and their motivations and how political instincts developed.

Reference: Foster, Peter, 2014. “The Darwin Wars” Chapter 12 of Why We Bite the Invisible Hand, Pleasaunce Press.