The more we depend on the government to make market decisions, the more we replace  individual choice with political power. This requires more reliance on lobbyists to protect individual and special interests.

A market based economy is more tolerant of individual choices, whether it be choice of religions, music, domiciles, sexual orientation, cars, reading material, art form, food, or health care provider.

The phrase “fatal conceit” coined by F.A. Hayek refers to the belief by the governing that they can solve all of our problems. Hayek noted in The Road to Serfdom that the very people who believe they can deliver better social justice using the force of government are the most abhorred by the tactics that must be deployed to enforce the outcome they desire.

Central planners are ultimately undone because they believe the ends justify the means. American voters do not agree, (except in times of war).

An neither does Federal Judge Roger Vinson in Florida.

Michael Tanner writes in the National Review Online, Contested Ground, Not Common Ground. (1/26/11)

Excerpts:

In calling for more government action, the president’s attitude reminds one of Samuel Johnson’s description of second marriages: the triumph of hope over experience.

As the economist F. A. Hayek noted, government’s ability to manage the economy is premised on a “fatal conceit” — politicians’ inability to recognize their own limitations. For example, studies show that not only do government “green jobs” policies create few jobs, but the ones they do create often come at the expense of existing jobs. To cite just one finding: A study by Gabriel Calzada of the Juan Carlos University of Madrid found that every green job created by the Spanish government destroyed an average of 2.2 other jobs, and that only one in ten of the “green jobs” created was permanent.

On the other side of this grand political divide are those who believe that government is already too big, too intrusive, and too costly. Rather than “invest” in new programs, they want to cut back the programs we already have. Rather than seeing Washington as the font of all wisdom, they see the 50 states as, in Louis Brandeis’s immortal phrase, “the laboratories of democracy..

That is not a divide that can be bridged by civil rhetoric or rearranging congressional seating.

HKO Comments- it has been said before , that the government that can give you anything you want can take everything you’ve got. By pushing to such over reaching, intrusive government the backlash may push us back to a saner vision.  It is interesting to note that Brandeis, who was considered a major progressive concerned about the negative impact of big business was also concerned about about the negative impact of big government.

In the Wall Street Journal, Culprits From Beltway Casting- The financial inquiry commission lets a crisis go to waste, (subscription required), takes exception to the partisan conclusion of the commission.   

The Financial Crisis Inquiry Commission reached a conclusion that appeared preordained. It was supported by the Democrats on the commission and rejected by the Republicans. The blame was heavily weighted to greed, derivatives and deregulation.  But greed is nothing new and apparently it isn’t quite clear from the conclusion when greed suddenly became a problem.  And it was not just derivatives, but derivatives tied to the housing and mortgage market. Fixed income derivatives seemed to have no similar problem.  And regulations have been growing, even under Bush.  Losses on mortgages, not tied to derivatives, were also severe.  Maybe it wasn’t de-regulation- but poor or misguided regulations or inattentive regulators.  Or maybe it was the interference of Congressmen with regulators after being plied with campaign contributions from the regulated.

Once again it is demonstrated that in the face of irrefutable evidence it is still possible to reach the wrong conclusion.

Blaming the economic crash on greed is like blaming an airplane crash on gravity.  It is a force to be acknowledged but serves no useful purpose in preventing the next crash.  There were clearly financial instruments allowed that should have been much more clearly regulated. But it is also true that government hubris especially at Fannie Mae and Freddie Mac drew the rules of the game that created this mess.  But the Democrats, almost by straight party line, rejected efforts to tighten controls of Fannie and Freddie, years before the crash.  But long before even the  Republicans and Alan Greenspan thought the risk was worth the potential benefit of expanding home ownership.

This crisis was a toxic mix of destructive government policy and poorly understood and poorly regulated toxic financial instruments.  Housing was the perfect tool because it served the purpose of vote buying government policy.  It was also the most dangerous because of its size and impact on so many people. By contrast Enron and WorldCom were record bankruptcies but posed no systemic risk.

But the problem was less from exotic financial instruments than from the same factor that causes all crashes: too much debt.  The greed of Wall Street villains, which is nothing new, was much less of a cause than the consumers who wanted houses they could not afford, and a government more than willing to accommodate them.

Ever since Michael Douglas’s character Gordon Gekko in the movie Wall Street declared “Greed is Good” capitalism has been cast in a sinister role that it has yet to overcome.

The movie speech was rumored to be taken from a speech given by Ivan Boesky at a college address. Boesky was indicted for insider trader, served time in jail and paid millions in fines.

Capitalism is not about greed; it is about economic self interest, and this is far more than a semantic distinction. When you take a job paying $10 an hour over the job paying only $8 an hour you are displaying economic self interest, not greed. And when you decide to take the job paying $8 an hour over the job paying $10 an hour because you like the conditions or the work at the lower paying job enough to sacrifice the higher pay you are also acting in your own economic self interest. Economics is about far more than money.

When you decide to take a steady job in a traditional workplace rather than make much more money in drugs and prostitution you are also acting in your economic self interest. It is when your economic self interest disconnects from moral and ethical considerations that it becomes greed.

The ultimate power is the power over your own destiny and environment, but power is most often considered in the control over others. Whereas economic self interest in about control over your own destiny, political self interest is about controlling others.

Capitalism is about people acting in each other’s own self interest and the society benefiting as a result. This works because achieving your self interest requires serving others.

Advanced economic theory also realized that self interest and sharing is not mutually exclusive. In “A Beautiful Mind” John Nash had a Eureka moment courting ladies at the beer hall with his college buddies. He realized that Adam Smith was wrong, or at least incomplete. He developed a theory of equilibrium in competitive game theory. Basically this meant that he realized that your best outcome was not to grab as much as you can for yourself, but that your chance of success was enhanced by assuring at least some success for your competitors. Not only are consumers’ well being enhanced by competition, but the outcome for the competitors themselves is improved.

In order to profit you have to provide a product or service some one else values. Bill Gates, Michael Dell, and Stephen Jobs are very, very wealthy because everyone values Microsoft Windows and Office, iPhones, Macs, and laptops.

Few people complain about the wealth of these techno entrepreneurs because they all provide value we understand. The same can be said of Warren Buffet.

Yet we are outraged at the fortunes made in the financial industry where record amounts of value have been destroyed while CEOs made millions in bonuses. We do not understand derivatives, collateralized debt obligations, and financial models: Apparently neither did the CEO’s and boards of the companies selling these products.

The Wall Street mess was the product of “crony capitalism” which is to capitalism what National Socialism (Nazism) is to socialism. Crony Capitalism is a perversion of the principles of capitalism that includes the freedom “for every man to make himself” to use the phrase of Abraham Lincoln. “Crony capitalism” has its roots in the mercantilist tradition of Alexander Hamilton. During our early years Hamilton saw a need for financial interests and the government to work “closely”. He favored a central bank and such “public private partnerships.”

Hamilton was strongly opposed by Jefferson who favored decentralization and saw the favoritism fostered by mercantilism and the influence such financiers could have over our government as a threat to liberty.

Fannie Mae for example was given special treatment and access to low interest funds available to no other financial institution, and exempted from both SEC and FDIC regulation, Fannie Mae lobbied Congress and plied their special regulators with large campaign contributions. Senator Chris Dodd, head of the Senate Banking Committee and then Senator Barak Obama were the two largest recipients.

But the real damage was not compromising two high profile Senators. Fannie Mae was given special privileges in order to carry out the political will of Congress to make housing affordable for people who shouldn’t buy homes. They created the hunting grounds for the unscrupulous.

Bonuses and bailout funds for Fannie Mae did not elicit near the outrage of AIG and the Wall Street banks. The public still thinks it was the ‘Gordon Gekko’ greed of Wall Street rather than the political greed of K Street.

We still blame the economic self interest instead of the political self interest. Articles decry the old capitalism and herald the new era of state capitalism. The last time we heralded state capitalism was in Italy in the 1920’s and 30’s.

Crony capitalism was not limited to Fannie Mac and Freddie Mac. There has been a revolving door between Wall Street and Washington for decades. As long as the complicated instruments served the political greed, political leaders were willing to ignore prudent financial principles and assume that the overpaid magicians knew what they were doing.

The financial scandals of the 1980’s, the S&L collapse under George H Bush, the collapse of Long Term Capital in 1998, The collapse of the high tech bubble should have been a warning that high salaries and bonuses are not synonymous with competence.

But the solution is not to promote more crony capitalism, also called state capitalism or my favorite term used in the book “Nudge” (Richard Thaler and Cass Sunstein) , ‘Libertarian Paternalism’  (my vote for oxymoron of the year).

By now we should have learned that when business gets in bed with the government, somebody gets screwed.

Economist Scott Grannis writes in his excellent blog, The Calafia Beach Pundit, Coach Obama still doesn’t understand the game.

Excerpts:

If he learned anything in the past two years, it was that the public doesn’t like the concept of stimulus spending, and it doesn’t like a lot of new government programs. Solution? Call the stimulus spending something else, and don’t say it’s government that is taking over healthcare, energy research, high-speed rail and education, just say it’s all about investments that will make our economy stronger. That may sound great to other liberals, but to those working in the trenches it’s just more spending, more regulations, and more suffocating government presence. Competitiveness comes from the bottom up, not from the top down: from entrepreneurs, inventors, risk-takers, and just about anyone who is willing to work and wants to improve his standard of living. Policymakers’ ability to influence things is limited to setting the ground rules that in turn maximize the private sector’s growth incentives. The chances are slim that Coach Obama can direct tens and hundreds of billions of dollars to the companies and industries that are going to revolutionize the future; there are millions of people at work all over the world trying to do this already, and there is no shortage of capital ready and willing to finance economically viable projects.

If Obama really understood the economy, he would have showed much more interest in cutting spending. Proposing to freeze discretionary spending while also proposing to spend a whole lot on “investments” is not going to avoid the fiscal train wreck we are headed for, and it’s not going to help the economy. Federal spending has increased hugely under his watch, and is scheduled to absorb an unprecedented amount of the economy’s resources in the future. This is sapping the economy’s strength by allowing inefficient government programs and bureaucrats to waste the economy’s scarce resources. Cutting spending now is the best way to strengthen the economy, since it returns money to the private sector where all true growth originates. Cutting spending also reduces expected future tax burdens, which in turn encourages more investment and work effort.