Daniel Kuehn comments on Steven Horwitz’ piece on stimulus and business cycles. A few points of my own, in response to Daniel,
- Daniel writes, “I am much less worried about the distortions because I think the market does a good job at ensuring the survival of good arrangements of production.” This doesn’t address Horwitz’ argument, because government intervention may (and does) distort the very market processes which allocate capital throughout the structure of production. This process is in large part dominated by the ex post role of prices, or profit and loss. If government is creating artificial — that is, otherwise non-existent — profits and subsidizing losing industries, then the market process of capital allocation is being subverted;
- You can’t separate the concepts of resource allocation (“picking winners and losers”) and efficiency. The market is usually preferred precisely because the patterns of allocation achieved by means of its processes is relatively more efficient (as compared to, say, socialism). If you think that resource allocation can be more efficient, and you advocate “nudging” the market towards this utilization, then you sacrifice the alternative allocation that the market would have achieved;
- We could also touch on how can we know what is efficient (what is the best use of each and every good in the economy?);
- Daniel provides an analogy of a house suffering from a fire instigated by faulty wiring. The house also suffers the risk of being washed away, but the presence of the fire makes this consideration of secondary importance — what matters now is putting out the fire with a water hose. If I understand it correctly, the house is the economy, the fire is recession, the water hose represents stimulus, and the flooding represents structural problem. Ironically, they analogy can also be used as an extreme example of the kind of things Austrians are worried about: at the extreme, putting out the fire with water may force the homeowner to have to rebuild the house, meaning in the end the house wasn’t really saved. For the economy, not only is this a problem — with the added dimension of capital consumption —, but the alternative theories of recovery work towards the same end as stimulus (or hosing) does.