Ben Bernanke is arguable the most well equipped Fed chairman America has ever seen, and I mean that sincerely! His academic accomplishments are top notch; and his career as a public official is equally impressive. He has been a ranking member of some of the most influential and prestigious economics advisory councils and research groups in the nation. By all accounts, Ben is the best conceivable man for the job of Chief Central Banker! The obvious question remains, what’s up with this economy?
Bernanke is a tragic hero. In the ancient Greek plays, the hero of the story had a tragic flaw which he struggled against mightily but which always caused him to fail in the end. Because of a flaw in their character, usually hubris (extreme pride), the tragic Greek heroes were always doomed to fail from the very outset of their journey. Ben Bernanke is steeped in the complexity and nuance of mainstream economic theory and is The Central Banker that central bankers envy and adore. But a fundamental misunderstanding of Economic Law has tragically undercut his mission to restore the economy.
Bernanke doesn’t acknowledge methodological individualism, he falls into a tragic economic error. This error skews the way he sees and understands the economy. Bernanke falls into the error of scientism, a term coined by Nobel Prize winning economist FA Hayek. Scientism is the belief that mathematical measures can discern economic matters and give you an accurate picture of the economy. It’s the assumption that mathematical models based on deeply abstract aggregate data are the only thing that can show us how the economy works. But statistical abstractions like GDP and aggregate measurements such as economy-wide supply and demand are misleading and don’t give an entirely accurate picture of the economy.
Because mathematical measures are assumed to explain the economy, many modern economists gravitate towards using measures that are inherently easy to quantify. They view the economy as a hydraulic machine or a pump that must be primed in order to work; but the economy is not an “it” at all. The economy is an organic network of individual people trying to satisfy an incredibly vast array of desires for different goods.
Because all of economics is grounded in human choice, not in abstract measures of aggregate supply and demand, Bernanke’s approach leads him to an inaccurate understanding of economics. This is not to say that GDP is not important, it is an excellent way to measure monetary flows, it’s just not the be-all and end-all of economic measures. Also, the modern economic conception that aggregate supply and demand can be managed makes no sense when you understand the economy is driven by the actions of everyone who buys and sells things in society. For example: If the economy is producing $3 billion worth goods, and people demand $3 billion in goods, modern scientism approaches would call that an economic equilibrium, a perfect economic situation! There is no conception about market coordination, are producers making the things that consumes want, and can the consumers find the goods that they want?
Every individual in the economy (that is, every individual that has ever bought or sold any goods and services at any time) has a complex and changing collection of priorities they want to fulfill. These priorities can be satisfied by taking action, using things to solve the problem and bring about a more favorable state of affairs. Because of the complexity and dynamic nature of each individual’s needs, snapshots of the economy, in the form of statistical aggregate measurements, cannot be used as benchmarks for a central banker’s grand plan.
Because people’s preferences for goods and services are always changing, even the most complex and advanced computer will never be able to coordinate production in a way that satisfies everyone’s needs as fast as a decentralized market. The second all the ‘variables’ are gathered by the central planning computer, the situation radically changes. Only the price system can coordinate supply and demand.
When Bernanke looks at GDP, net spending, saving and consumption, he is looking at a snapshot in time. To think that he, as a technical expert, can guide fiscal policy and modify, exactly, a complex economy to his exact specifications is really assuming a lot!
Hayek called this attitude the Pretense of Knowledge; it goes hand-in-hand with the scientism that pervades the modern economics profession. Economics is certainly a science, but it deals with the actions of people, it’s a social science. There is no shame in that, and like many other social sciences, economics can make use of all sorts of mathematical measures. Economics, because humans are at its core, is not like physics. In physics or chemistry, the physical sciences, you can make discreet changes that yield very precise and predictable results but this approach makes for bad economics. When people either ignore or forget that the unique actions and preferences of individuals drives the economy, they fall into the economic error of Scientism and start to have a Pretense of Knowledge.
When Ben Bernanke looks over the financial data every day and attempts to plan and fine tune the economy, he may be trying his best and he probably wants the economy to do as well as it can, but his methods are flawed. As Nobel Laureate FA Hayek explained, prices coordinate the massive amount of knowledge dispersed through the economy. No single person can ever have enough raw information to know what is best for the economy. But the tools that central bankers are acquainted with and given are not the ones necessary to do the job!
Market Watch calls Ben Bernanke a Superman. He certainly has a towering intellect and an impressive resume; unfortunately, his office, the Federal Reserve Bank, is permeated with the kryptonite of bad economic thinking. He cannot win! No central bank or central banker can ever truly steer the economy to stable ground because their economic paradigm is fundamentally flawed. Hopefully, one day, great economic minds like Ben Bernanke will throw off the Central Bank Kryptonite and recognize that all economic phenomenon begin with individual human action, and, like Hayek, become a real Economic Superman.