The Key Logical Fallacy of Statism
I just read an article in Bloomberg View yesterday by Cass Sunstein, who is a law professor at Harvard. It was a roundup of a number of books published last year on “behavioral economics”. For those who don’t know it, behavioral economics typically focuses on the biases and systematic errors in human behavior.
Surely everyone has heard an argument along these lines before: socialism would really work if only it were done right! For starters, it would need to be administered by a host of angels, so what you see above should be considered the ideal communist bureaucrats.
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In his review of the book Phishing for Phools by George Akerloff and Robert Shiller, Sunstein concludes that one of the major contributions of the authors “is to show that if we care about people’s well-being, the invisible hand (i.e., free markets) is often the problem, not the solution.”
Cass Sunstein, a committed, and as we believe, truly dangerous statist, who would likely have felt right at home in Stalin’s politburo. We have discussed this crypto-communist weirdo previously in these pages (see The Taming of Deluded Conspiracy Theorists) and so has incidentally Dr. Machan (see Rights and Government). Sunstein is not only an enemy of the free market, he inter alia once opined (in an academic paper, no less) that Americans should henceforth only be fed government-approved information. In order to achieve this, he proposed that government agents should infiltrate the web sites of “conspiracy theorists” (=anyone who thinks the government may be lying about something) to spy on them and discredit them, and if that doesn’t help, government should tax them or outright ban “conspiracy theorizing” (wise men like Mr. Sunstein would presumably determine what does and doesn’t constitute a “conspiracy theory”). He failed to mention how those breaking the ban should be punished (forcible relocation into a reeducation camp perhaps?)
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I guess that this is the fundamental difference between the statist and the libertarian mindset. A statist looks at the results of behavioral economics and concludes that, since peoples’ decision making is clearly fallible, we need someone else to make decisions for them.
A libertarian mindset looks at the same results and concludes that if people are fallible, then the absolutely last thing in the world we should do is to give them sovereignty not only over themselves but over other people as well. Because, if people are prone to make bad decisions in their own lives, at least we know that:
- They will bear the direct consequences of those decisions, which will give them a strong motivation to avoid errors and certainly not repeat them ;
- Their bad decisions will affect only one or a limited number of people, as opposed to having the widespread effects of a government policy; and
- Their poor individual decision making will not be magnified through highly imperfect political processes, including voting and the distorted incentives of bureaucracies.
The collective decision making of politics contains none of these limitations on human fallibility. This makes it a total non sequitur to conclude that, since people are fallible, we should expand their power to coerce others.
Of course, the way that statists rationalize this is to assume that only “the best and brightest,” preferably someone a lot like them, will be empowered to make these decisions. In other words, they rationalize this by ignoring the entirety of human history and common experience.
This logical fallacy is another manifestation of a phenomenon I have often discussed in this blog. This is the totally destructive belief that, if it can be demonstrated that a free market is not perfect in some way, then this automatically creates an argument for government intervention.
This standard is way too low. The real test should be whether an imperfect – but small-scale, competitive, subject to learning, non-coercive, incentivized, “antifragile” and informationally efficient – market is better than a hugely imperfect political process. By this correct standard, the case for intervention becomes far rarer.
 One of the fundamental flaws of behavioral economics, and much thinking about consumer choice, is that it ignores the ability and incentives of people to learn from their mistakes. For example, much is made by certain social thinkers about the ability of marketing to influence consumer choice. This ignores the fact that most things people do and buy are repeated, and whereas someone might be induced to try something through marketing, they are far less likely to be convinced to continue with it unless it performs. This thinking also ignore the role of acquisition costs: it generally costs a lot of money to “acquire” a client. A business that is built around acquiring clients and then losing them through poor performance will not last long.
 I am using term this in the way of Nassim Nicolas Taleb in his book Antifragile: Things that Gain from Disorder. Taleb draws heavily on the work of Friedrich Hayek for this book.
Image captions by PT
This article was originally posted at Economic Man.
Roger Barris is an American who has lived in Europe for over 20 years, now based in the UK. Although basically retired now, he previously had senior positions at Goldman Sachs, Deutsche Bank, Merrill Lynch and his own firm, initially in structured finance and latterly in principal and fiduciary investing, focussing on real estate. He has a BA in Economics from Bowdoin College (summa cum laude) and an MBA in Finance from the University of Michigan (highest honors).