Inflation chicken and centrally planned failure

Another Xinhua story reveals a rather Pavlovian command economy response to the problem:

Efforts would be made to ensure market supplies, improve subsidy systems, make price controls more targeted and strengthen market supervision, said a statement released Wednesday after a State Council, or Cabinet, executive meeting presided over by Premier Wen Jiabao.

The statement said the government would further support agricultural production to maintain steady growth of agricultural output and put state reserves of grains, edible oils and sugar on the market when necessary in order to guarantee supplies.

The authorities should keep a close eye on winter vegetable production to increase supplies through the winter, take measures to cut delivery costs of agricultural products, and increase cotton transportation from Xinjiang Uygur Autonomous Region.

They should also continue to reduce prices of power, gas and rail transport for chemical fertilizer producers, ensure coal supplies for power generation companies and increase production of oil, especially diesel oil, to guarantee a sufficient supply.

Chinese officials have also agree to sell sugar from China’s strategic sugar reserves (who knew they even HAD a strategic sugar reserve), crack down on speculators and hoarders, and figure out a way to prevent excess liquidity (Fed money) from driving up consumer prices.

Do you see the problem here? That is an awful lot of micro-economic management to engage in for a nation of 1.2 billion people. The government is trying to decide, on a daily basis, how much of what key goods and services should be available and at what price. It’s impossible.

Not only is it impossible ... it is an enormous act of cognitive hubris, or just arrogant. This, of course, is what Hayek referred to as “the fatal conceit”. He was simply pointing out the problem of knowledge in a command economy. No one man or group of men and women can ever have enough knowledge to allocate the productive resources of an economy efficiently. The more control you assert, the more scarcity you generate.

By contrast, in a more open market system (we acknowledge there really aren’t any free markets left ... just weird corporatist hybrids) there is only single factor which determines the allocation of resources and production: the customer. Based on his ever shifting tastes and preferences and substitutions, the customer tells business what he’s willing to buy and at what price.

It’s really the only truly benevolent dictatorship ever produced by civilised society. The dictator is the economic liberty of every man and woman in the economy. And they don’t exercise their power autocratically. The order and prices generated by this system happens without the design or oversight of a State committee.

Of course every time we write something like this some crank writes in accusing of us being a free market fundamentalist and/or a tool for big business. But those people are generally socialists and morons. And more importantly they are betraying the fact that they believe the State ought to exercise control over what people produce, what they can buy, how much they should pay, and many other more private and intimate aspects of your life.

The important economic point is that even though not everyone perceives it as equitable, a free market system (which necessitates a liberal political order guaranteeing personal liberty and the rule of law) produces better outcomes and improving standards of living for people. The State doesn’t control prices or production. An economy’s resources are allocated based on the aggregate likes and dislikes of millions of people living their lives in the way they choose.

The trouble today is that there is no free market anywhere. In the West, unsound money and an intrusive State have cosied up in bed with big business, big banks, and big weapons manufacturers to systematically put people in debt and create a permanent Welfare/Warfare state. This is not capitalism. It’s gangsterism.  It’s the War of the State against All, all the time.

And the model in the developing world, especially China (where the political model is still the war of the State against all and has been since Mao’s revolution) seems to imitate all the worst elements of the unsound money policies of the West. Of course the Chinese have a long tradition of treating gold as money. Culturally, the idea of sound money has deep roots in China.

But politically and economically, it’s a pretty open question of whether this generation of Chinese central planners can manage the transition from the command model of export growth at any cost (air and water quality, labour standards) to an equally flawed central bank system that tries to manage the economy with unsound money and force everyone into permanent financial servitude to the banks.

What is Australia’s position in all of this? It’s along for the ride. Last week’s capital spending figures from the Australian Bureau of Agricultural and Resource Economics revealed that Aussie firms are planning nearly $133 billion in new resource projects. Seventy per cent of those projects are in Western Australia and energy projects dominate the list with mining chugging along nicely.

But the success of all those projects - indeed the assumption that there will be steady demand for those resources down the track - assumes that Ben Bernanke will not drive the Chinese economy off the road and into a ditch by exporting uncontrollable inflation. Of course if the Chinese allowed their currency to appreciate and de-pegged from the devaluing US dollar, they could avoid a lot of this suffering.

If, however, inflation goes from being merely problematic to the kind of social force that causes people to start fires and break windows, well then we’ll have reached a brand new phase in the currency wars. And while everyone will eventually lose a lot, the immediate loser could be China and by extension, Australia.