Planner vs. Market – Market Wins…

An amusing little story accompanied the news that a plan has been made to raise the US debt ceiling. John Carney of CNBC.com reported that:

 

I just got off the phone with a source on Capitol Hill who has spent the past few days trying to convince Republicans to vote for a debt ceiling hike.

 

He told me that the biggest obstacle he faces has been “market complacency.”

 

“Frankly, a bit of panic would be very helpful right now,” he said. [Emphasis Added]

 

As usual, these theatrics seem to be a case of planner vs market and, as usual, the market seems to be alluding the planners…


What is it that makes the movements of the market so allusive to the planners of Washington? It may be their confusion with natural and social phenomena. In contrast to — say — a stone, man acts. The future is unknowable to him, and he has to view himself and other men with a man’s apparatus of perception. It is understanding, then, not empirical groping in the dark that is suitable for the grasping social matters.

 

The folly of the guys at Washington was to assume that the behavior of the market during 2008 was repeatable in the ways that they would have liked. In Human Action, Ludwig von Mises explained how the dynamism of changing market conditions render the assumption of mechanistic human behavior obsolete:

 

Constancy and rationality are entirely different notions. If one’s valuations have changed, unremitting faithfulness to the once espoused principles of action merely for the sake of constancy would not be rational but simply stubborn. Only in one respect can acting be constant: in preferring the more valuable to the less valuable. If the valuations change, acting must change also. Faithfulness, under changed conditions, to an old plan would be nonsensical. A logical system must be consistent and free of contradictions because it implies the coexistence of all its parts and theorems. In acting, which is necessarily in the temporal order, there cannot be any question of such consistency. Acting must be suited to purpose, and purposefulness requires adjustment to changing condi- tions.

 

Presence of mind is considered a virtue in acting man. A man has presence of mind if he has the ability to think and to adjust his acting so quickly that the interval between the emergence of new conditions and the adaptation of his actions to them becomes as short as possible. If constancy is viewed as faithfulness to a plan once designed without regard to changes in conditions, then presence of mind and quick reaction are the very opposite of constancy.

 

When the speculator goes to the stock exchange, he may sketch a definite plan for his operations. Whether or not he clings to this plan, his actions are rational also in the sense which those eager to distinguish rational acting from irrational attribute to the term “rational.” This speculator in the course of the day may embark upon transactions which an observer, not taking into account the changes occurring in market conditions, will not be able to interpret as the outcome of constant behavior. But the speculator is firm in his intention to make profits and to avoid losses. Accordingly he must adjust his conduct to the change in market conditions and in his own judgment concerning the future development of prices. [Emphasis added.]

 

See here for our collection of rare historical economic data.

Posted Aug 1, 2011
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