Betting billions on economic ignorance

The federal government is already planning a deficit of nearly $400 billion this fiscal year, and there may be another $100 billion or so in the spending pipeline.

“Deputy ministers asked about spending parameters,” John Ivison recently reported for Postmedia, “and were told there were none.”

There is no limit, apparently, to how much money the government is willing to spend.

The federal government has described its spending plan as one that would transform the economy to make it greener, fairer, and more equitable. A more accurate assessment is that it is a plan based on economic ignorance and wastefulness.

The harmful consequences of a government re-engineering the economy to make it greener were well demonstrated by Ontario’s disastrous Green Energy Act of 2009; however, the economic logic behind characterizing the federal fiscal plan as rooted in ignorance and waste actually goes back much further—three quarters of a century, in fact.

In September 1945, Friedrich A. Hayek’s famous essay, “The Use of Knowledge in Society,” was published in the American Economic Review. The main lesson from Hayek’s essay is that it is impossible—not just improbable, but impossible—for the government to have the economic information it would need to centrally plan and allocate economic resources wisely.

Economic knowledge, Hayek observed, is widely dispersed among individuals. It is impossible for the government—even assuming that all politicians and bureaucrats are perfectly well-intentioned—to gather up all the knowledge, all the data, and all the facts needed to make economic decisions.

The economy is complex. Decisions as to what goods and services should be produced and consumed next year, next week, and tomorrow, and how these goods and services should be produced, and when, and by whom, depend on more factors than can be counted.

The preferences of individual consumers, the risk tolerance of individual investors, the ability of producers to supply all the goods and services we consume, the ideas of entrepreneurs, the discoveries of researchers, and countless other pieces of economic information are ever-changing. And almost all of this economic information is held locally, and is in many cases available to only one or a few individuals.

The government cannot possibly collect and make use of all this economic data to inform its decision-making. Consequently, government decisions about how to allocate capital and labour, whether to make the economy greener or for any other reason, are invariably made without the necessary information. In other words, government spending decisions are made from a place of ignorance.

The issue, as Hayek put it, is not about “whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.” Since economic information is divided among many individuals, economic planning and decision-making should be too.

Indeed, to substitute government spending in place of private sector activity, as the federal government wants to do on a massive scale, is to substitute the ignorance of government, which cannot amass all the necessary facts for economic decision-making, in place of the widespread knowledge dispersed among millions of private individuals.

By replacing knowledge with ignorance, the certain results of the current plans to expand government programs will be slower economic growth, more poverty, and a pile of debt for taxpayers of this and future generations.

Matthew Lau is a fellow at the Montreal Economic Institute. The views reflected in this op-ed are his own.

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