Learning Economics from a Pencil
We always enjoy reading the mainstream press reaction after the Reserve Bank of Australia (RBA) releases the minutes of its monthly meetings.
There’s inevitably talk about how the RBA thinks current rates are “appropriate”, and how the RBA is going to “steer the narrative back towards the big story” – whatever that means.
It’s the whole idea the RBA is driving the Australian economy. That without its influence you, I and the entire economy would be flailing around like one of those inflatable waving arm guys you see by the side of the road:
Inflatable man or directionless economy?
I mean, really, would the economy be in such a muddle if the RBA didn’t exist?
Of course not. People and businesses don’t need a central economic command post calling all the shots.
Take the above photo as an example.
Your editor asked the guys in the editorial office what these things were called. Because we didn’t know, we had to insanely wave our arms around like a madman.
But they got the idea.
Two suggestions were “inflatable waving man” and “inflatable doll thing”. Being at work, we were reluctant to type “inflatable doll” into the old search engine for fear of what we’d get! So we went with the former.
No sooner had we typed “inflatable waving…” into the search engine, than Google gave suggestions of what we were after – “inflatable waving arm guy” seemed the closest match and Bob’s your uncle.
It’s a perfect example of how a free market economy works. There’s no directive or law passed by government instructing Google to offer search suggestions.
Google does it because it’s helpful. Because it’ll help searchers find what they’re looking for, and potentially – shock, horror – result in Google making more advertising money.
Not only that, but there’s no regulation or decree from government mandating that a photo of an “inflatable waving arm guy” be made available on the Internet. It’s just there. For whatever reason, it’s there.
That’s how markets work.
Steering through a crossroads
Besides, can you imagine a government bureaucrat sitting in an office having to think of every possible thing someone may want to search for? It’s not possible – even for a super-brainy pen pusher.
Anyway, back to central banking. Our old pal, the Sydney Morning Herald’s, Jessica Irvine wrote this just over a week ago:
“Glenn Stevens is going to have to work for every dollar of his $1 million-plus pay packet this year. The Australian economy is at a crossroads, as a resurgent mining boom fires up parts of the economy but inflicts pain on others.
“The task of steering the economy through this intersection is made all the more difficult by this year’s cyclones, floods and earthquakes, which play havoc with official jobs, economic growth and retail figures. Setting interest rates is often likened to driving a car by only looking in the rear-view mirrors, thanks to the uncertainty of the future and inevitable time delays in collecting and publishing of historic economic data.”
There you have it, the RBA has the “task of steering the economy…”
To be honest, we pity the entire thought process of those who believe in the omnipotence of bureaucrats.
There’s the old saying of “those who can, do; those who can’t, teach.” But we never use it. Mainly because ‘er indoors and half the in-laws are teachers. Besides, it could just as easily be said that “those who can, do; those who can’t, write financial newsletters!”
But either way, the more appropriate saying would be, “…those who can’t, become bureaucrats and central bankers.”
The idea the likes of Glenn Stevens, Dr. Ben S. Bernanke, Mervyn King or Jean-Claude Trichet are able to accurately “steer” an economy like a driver steers a car is ridiculous. It can’t be done.
Why?
Because of the vast number of moving parts in an economy. It’s impossible for a central banker to move an interest rate and for it to have a uniform impact on an economy.
Let me give you another example. Whenever we read articles such as Ms. Irvine’s we laugh. But when we recover, we head directly for a particular essay.
I am a pencil
It’s only a short essay, something you should be able to read in less than fifteen minutes. It was written in 1958 by a chap called Leonard E. Read. The title is: I, Pencil.
You can click here to read it in full now.
The essay relates a first “person” account from a pencil’s point of view – crazy huh?! The pencil explains what goes in to making a pencil… from the woodchoppers in Oregon to the graphite mines in Ceylon (Sri Lanka) to the rape-seed oil from the Dutch East Indies (Indonesia).
None of those hundreds of firms or thousands of people were directed to make a pencil by a central planner. In fact, in most cases they probably don’t even know or care what the graphite or rape-seed is used for.
Leonard Read writes:
“I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove…
“Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.”
The point is, that simple as a pencil seems, it’s impossible for a single person to possess the knowledge, the skill and the resources to single-handedly make a pencil. And neither would you want to when you can buy a whole box of the things for a couple of bucks.
That’s the beauty of the division of labour. There’s no need to gain the skills to do everything when others can specialise in specific skills that go towards making the end product.
As Milton Friedman points out in his introduction to the essay:
“It is even more astounding that the pencil was ever produced. No one sitting in a central office gave orders to these thousands of people. No military police enforced the orders that were not given. These people live in many lands, speak different languages, practice different religions, may even hate one another – yet none of these differences prevented them from cooperating to produce a pencil.”
The reality is an economy doesn’t need a central bank to interfere. Things just happen.
We’re often asked, “Hey wise guy, you say the government shouldn’t provide health, education, police and stuff, so how would it work then eh?”
In all honesty, we don’t know for certain. But we know private health, private education and private security are already provided by the free market. Do we really need to stretch our imagination so far to think these things are possible without government interference?
Free food or free health
To those who say only the government can provide health and education, we say, which is more important to your survival, food or education? The answer is obvious, yet government doesn’t mandate free food for all.
The entire population isn’t starving because the government has failed to provide free food. Yet somehow we all manage to eat. How is that possible without government intervention?
It’s possible because of markets.
Think about that the next time you buy something you want from a shop. Why does the local milk bar stock cans of soft drink and packets of chips? Is it because the RBA has steered the economy that way?
No, it’s because the milk bar owner judges that based on past buying patterns and customer demand, people will continue to make these purchases.
If anything, the central bankers can only steer an economy in the wrong direction. As central banks the world over (including the RBA) have done by keeping interest rates low.
The fact is, central bankers are bad drivers.
Look at how the US Federal Reserve has steered the US economy.
Or how the Bank of England and European Central Bank have steered those economies.
Now, don’t fall into the trap of blaming everything on the private banks for creating all the toxic derivatives. Sure, they’re to blame for financial manipulation.
But the banks could only create those toxic derivatives and manipulate the market due to the presence and approval of the central banks and government.
What about the RBA? Is it doing any better?
Steering the economy into a ditch
If you read the mainstream financial numpties you’d think the RBA are a breed apart in terms of economic “steering”. You’d think the pen pushers at the RBA are the Michael Schumacher of the central banking world.
But as we’ve pointed out before – which even the mainstream admits – the Australian economy isn’t in as good a shape as you’re led to believe.
A couple of weeks ago we pointed out that for the last financial year all the profit growth for the top twenty Australian listed companies came from the resources and banking sector.
The rest – the retailers, manufacturers, services companies – had seen profits drop.
If the RBA was so good at driving the economy in the right direction then how come all but the resources and banking sector are taking a hit to the bottom line? It doesn’t make sense does it?
Right now your editor is reading up on the real heroes of the economy – entrepreneurs – for the April issue of Australian Small-Cap Investigator.
Entrepreneurs are people who come up with ideas. They pitch these ideas to capitalists (investors) who then decide if the idea makes sense. If it does, they invest. If it doesn’t, they don’t.
The entrepreneurs, capitalists and individuals are the true drivers of the economy. And only they can steer it in the right direction.
Unfortunately for the economy, you’ve got central bankers putting up signs trying to point you in the wrong direction. In other words, an economy grows in spite of central bank intervention, not because of it.
Cheers.
Kris Sayce
Money Morning Australia
