The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:


According to Austrians, only individuals "on the scene" know what's going on in the market, and any attempt to manage it centrally is bound to fail.

Perhaps the best way to highlight the error of market process theory is by analogy. Suppose you are the chief of a tribe of wandering nomads, and you wander into a region that is unfamiliar to everyone. Soon the tribe becomes thirsty, and everyone agrees to start searching for water.

In the first version of this example, suppose you are an "anarchist" chief, and allow the tribe to conduct its own search without organization, coordination or planning. A lot of effort will be wasted and duplicated in the chaos that follows.

Next, suppose you are a "mixed economy" chief -- that is, you believe that individual effort should be balanced by group effort. You therefore organize the search for water, by sending everyone out in different directions. When they all return, one announces the discovery of a lake, and the tribe proceeds to the lake together. (Another possible result is that two scouts come back with different pieces of information, and putting them together results in the discovery of the lake.)

Next, imagine that you are a "central-planning" chief -- that is, you insist on controlling every action of every individual in the entire search. As they radiate from your central location, you shout out after each one of them to look under that rock, behind that bush, around that tree. As they get out of shouting range, you communicate with each other by smoke signal. One scout may signal that he has found a rock: may he look under it? You signal back: yes. Of course, this will slow down the search considerably, because you'll be overwhelmed by messages from the field. And this is terribly inefficient as well, because you don't know their local situation as well as they do, and they are much better placed to make these tactical decisions.

Austrian economists love to criticize socialism and other forms of big government on the basis of the last example. They argue that a central planner does not have the fantastic knowledge needed to control individual members to such a degree, and the members should be free to act on their own knowledge. This is undoubtedly true. But is the solution to this problem the first approach? Of course not.

In the second approach, the chief did not need to know the Absolute Truth of the land to organize an effective search. And individuals were free to search as they needed on their individual jaunts. When they returned with their reports from the field, the chief did not need to know exactly what each one of them had learned or experienced in order to choose the correct policy: send the entire tribe to the lake. The idea that the chief could not form an effective strategy because he did not personally see everything for himself is absurd.

One might then ask whether this example applies to both the public and private sectors. Austrians would probably see no problem using the tribe analogy to describe private organizations, but would object to using it to describe public ones. But why? That is an enormously difficult question for Austrians. One of their most common ploys is to appeal to the strawman of the "socialist" tribe, by pointing out that overly centralized government is inefficient. But when denied that strawman, Austrians have no obvious answer.

All the subjectivism, individualism and market process that exists in the private sector should exist in the public sector as well. Both companies and governments provide goods and services in exchange for money. Customers vote with their dollars; voters vote with their ballots. Both customers and voters are self-interested, seeking the best goods and services for the least money. Companies and politicians that do not perform well go bankrupt or are voted out of office. And if society should reduce government that has grown too centralized and inefficient, then it should do no less for monopolies, which share the same shortcomings.

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