Monday, July 19, 2010

Everything You Should Know About Economics and Politics

The Spontaneous Order

A wealthy class results from satisfying the needs of others, making the middle class lifestyle (homes, cars, technology) possible. Living the middle class lifestyle also (by creating a market for all the things that go into being middle class) sustains the wealthy, in addition to providing opportunities for the poorest members of society to Improve their lot (job opportunities + technologies and conveniences that make poverty less grinding). Economic growth perpetuates this system, which is really like a self sustainable ecological system, with stabilizing feedback mechanisms (prices, profit, loss, interest rates). These natural checks kick in when someone gets too 'greedy', takes excessive risks, or imposes excessive costs on others or squanders resources inappropriately. The price system ensures a 'spontaneous order' in which our individual choices are made compatible in a world of scarce and finite resources and infinite preferences,cultures, and interests.

The Role of Government and Politics

Government has a role in this 'spontaneous' order, primarily to enforce property rights and prevent fraud and force. There is little power or glory for politicians, other than a reputation for fair enforcement of the law and restraint of using government to grant favors or confiscate wealth.

If a clever politician can fabricate flaws in the order, and convince people that if we give them special powers and privileges to fix the problems, they have much to gain. Clever business owners and special interests also may fabricate flaws that can only be fixed by giving
some politician the power to make rulings that disproportionately benefit their business.

These fabrications may often be described in terms of leakages from the system, cases where prices, profits, or interest rates don't keep our interests in check. Admitting that every choice will have some side effect not totally captured in the price of a good, (referred to as an externality by economists)many of these problems can be handled within the system by an appropriate assignment and enforcement of property rights, torts, or contract law. Often times technological change and economic growth will take care of many of these issues. Unfortunately these solutions have little glamor for ambitious politicians. They are often able to convince others to give them the power to take a more dramatic approach, which involves a role for government to control or influence choices and resources.

The Political Order

No longer are choices guided by prices based on tradeoffs which reflect the knowledge and preferences of free people, but now they are heavily influenced by the narrow preferences of some self interested politician, business, special interest, or politically manipulated majority block of voters.

Suddenly the natural checks and balances of the 'spontaneous order' are upset, and our many choices become incompatible. We get shortages, surpluses, booms, and busts. We face the wrath that comes within a world unequipped to deal with the problems of scarce resources in the face of infinite preferences, personalities, cultures, and needs.(often referred to as the 'calculation problem' by economists)

To deal with these problems it may seem that the obvious solution is to expand the role of government and minimize the role of individual interactions. This leaves little opportunity for the harmonizing forces of a 'spontaneous order' to work. The politician with the most dramatic fabrication and solution with the greatest populist appeal will get elected. A new strongly entrenched political order unfolds with few checks and balances but strong self perpetuating political feedback mechanisms. The elites and most well connected businesses will prosper.


The spontaneous order created by free individuals appeals to cooperation for meeting the needs of society peacefully. The political order creates masters and servants and appeals to the use of force, either directly or vicariously through some agent of the state.

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