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30-Jun-2006
Briefly Speaking, by Victor Niederhoffer

The book The Truth About Markets by John Kay contains a modern compilation of numerous examples of central planning gone astray. There is a nice story about Nikita Khrushchev's visiting Iowa and concluding that the source of American prosperity was corn, and that corn was the future for Russia. He imposed it and it led to disaster and his toppling. A similar example shows the destruction and poverty and famine that followed Mao's Great Leap Forward in 1957 where 100 million people were forced to live in communes. Similar examples are given with the disaster that followed England’s nationalization of electricity in 1947, and the fiasco that followed when they attempted to generate electricity with five gas powered nuclear reactors, and the incredible destruction and poverty and crime and ruination that followed the public housing Title 1 programs of the US detailed in Martin Anderson's The Federal Bulldozer. Kay attributes these disasters to the attempt to plan by a single voice without feedback from customers. This leads to sluggishness, lack of accountability, misleading information, lack of pluralism, waste, deadweight costs, misallocation of resources, and enormous unintended consequences involving cronyism and perquisites. All these examples played out over years and involved losses in the 10-figure range.

A much better example of the disaster of central planning is the recent month’s destruction of wealth set off by the coordinated set of plans to jawbone the economy and inflation down set off by the Fed Open Market Meeting of May 10, 2006. It started with an attempt to show that inflation was rampant, the public didn’t get it, and the markets needed a dose of tightening to bring things back to proper order. The attempt was imposed from above, based on the vision of a single personage who coordinated a series of staged speeches about how vigilant the Fed was and how concerned about the failures of the knowledge of individuals they were. The loss of wealth that it set off was in the $3 to $4 trillion range as all the emerging markets, Asia, Europe, and Latin America declined 10 to 20% in lockstep from a $45 trillion or so base. By June 29, 2006 it was all over. The last Open Market meeting emphasized how restrained inflation was, how the Fed would be guided by markets in the future, and how the tightening might be near its end. The world markets recovered an average of 5% from their recent lows, and will undoubtedly move back to their former levels in the due course of reasonable time, perhaps a few months. But what deadweight costs, what frictional costs, what individual hardship and poverty was created by it all.

What fools these central planners must think we are. What arrogance of power Khrushchev, Mao, Fred Lee and Ben Bernanke displayed in trying to consolidate power about them. What stooges the media and other bit players in the debacle were as they fanned the flames of total economic Armageddon as if puppets in a performance.

Let the story of this recent disaster in centralized planning, this superposition of the vision of a single leader for the wisdom of the market, this attempt to consolidate power behind a single voice (possibly engendered by the pretty woman transgression), serve as a vivid, and compact episode in the US of why market based solution, and pluralism, and suffering the consequences of failure are so necessary to the common good. And let us learn how to profit from such orchestrated forays in the future.

J. P. Highland responds:

Mexico's nationalization of the oil industry in 1938 is another example of poor central planning. Pemex is so inefficient that in a few years Mexico will become an oil importer despite its being seated on vast oil reserves in the Gulf of Mexico.

They don't have the technology or the people to drill in deep waters and as outsourcing is forbidden by the law those reserves will remain under the sea.

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