More on Soros

His last name is an archaic form of the Latin for "sister," for one.

More importantly, the article Bryan linked leads into another interest of mine- the parallels between the Austrians and Keynes (Keynes himself, not what has become "Keynesianism"). One of Keynes's central insights was the existence of what Donald Rumsfeld famously called "unknown unknowns," or unknowable, inestimable risks. Keynes argued that the classical model of markets that always clear fails because of the existence of deep uncertainty- people cannot effectively plan for the future, because they cannot, in a deep way, know what the future holds. They cannot have any idea whatsoever about some future events. Economic actors in 12th century Europe could have had no inkling of the coming of the Black Death, and in our times no one on September 10th, 2001, knew what the next day would bring. Sometimes they underestimate the perils the future holds, and bubbles follow, and other times- often in reaction to those bubbles popping- they overestimate the danger they are in, and slumps endure.

If any of this sounds familiar it's because it's a version of the same sort of information argument Austrians and other free-marketeers often use to inveigh against the same sorts of policies Keynes advocated. Keynes understood the limits of knowledge as they applied to investors and entrepreneurs, while Hayek (and those who came before and after him) understood the limits of knowledge as they applied to government. I synthesize the two insights with my General Theory, which runs as follows: life's a bitch and then you die.

More seriously, I think Keynes was right- we will always have bubbles and slumps, booms and busts, because our lack of knowledge causes us to make decisions that are then made to look foolish by future events. I also think Hayek was right, and that the best economic planning is that made by individuals, because individuals, while they may not have all the information needed to create a perfect plan, they do have the best information available in order to make the best plan possible.

But as many modern day Keynesians have pointed out, Keynes's insights do not necessarily mandate central planning of the economy (whether or not Keynes advocated such planning is a hotly debated question), but merely counter-cyclical policy, where the government takes up the slack in the economy until investors settle down and resume investing. If I think Keynes's theory of depressions is correct, then how can I avoid counter-cyclical policy prescriptions?

The answer lies in the externalization of costs framework I sketched below. When the government interferes in the economy, even through simple buying and selling, it does not respond to market incentives, which is another way of saying that "with political incentives, discretion's a joke" and the government cannot help us "find the most valuable ways to serve one another," as the song goes. The government gets money by force, and need not concern itself with profitability, so its investments show no tendency to be economically optimal.

Government spending distorts markets, and these effects compound over time, steadily warping society further and further from what anyone ever actually wanted. There's a depression with mass unemployment, and the government must do something, so the government builds roads. These roads employ people, but they crowd out other methods of transport. Or the government electrifies vast rural areas, selling power at a discounted rate. So people keep living in places that perhaps would have been abandoned or at least heavily depopulated. Or the government builds port facilities, artificially lowering the transaction costs in foreign trade. Or, in the worst case, the government creates a massive 'defense' establishment and then gets an itch to use it.

Government spending may well provide a boost to the economy in the short run, but over the long run, the cost-shifting effects of government spending lead to further instability and transform society itself, throwing it out of equilibrium with its environment and leading, eventually, to an unrelenting succession of ecological, humanitarian, and political crises.