Piet Viljoen: Be careful who you listen to, especially economists

Nine days before the 1929 crash, Irving Fisher declared stocks had reached “a permanently high plateau”. On the eve of the same crash, Keynes told a Swiss banker there would be no more crashes in his time. Piet Viljoen relishes that one. The Re:CM founder believes the wrong economist won the argument. Hayek warned that cheap money and endless bailouts keep weak businesses alive. Keynes’s heirs run the system anyway, and this year’s Nobel went to two more of them. Nice to know the copy of The Road to Serfdom that Piet received as a thank-you for his keynote to our first BizNews conference was not just read but reflected on..By Piet Viljoen*.On October 15, 1929, Yale economist Irving Fisher made one of history's most famously mistaken market forecasts when he proclaimed that "Stock prices have reached what looks like a permanently high plateau." Just nine days later, the Wall Street crash began in earnest on Black Thursday, 24 October.Be careful who you listen to, especially when it comes to economists.Friedrich Hayek was a prominent economist and social philosopher who lived from 1899 to 1992. He won the Nobel Prize in Economics in 1974. I first learned about him when Alec Hogg of BizNews gave me his book, "The Road to Serfdom", at the first-ever BizNews conference. For an economist of his stature, his views are surprisingly little known. I had always been aware of him, but the book gave me newfound insight into his work.Hayek understands how the world really works. While most economists assume people are "rational actors", Hayek argued that human beings are not perfectly rational, that their knowledge is inherently limited, and that they often struggle to anticipate the consequences of their actions. This insight was central to his economic philosophy.Interestingly, another famous economist, John Maynard Keynes, also thought humans were imperfect, but that's where their similarity ended. Keynes thought imperfect individuals create collectively undesirable outcomes and therefore sought to impose a "guiding hand" on economic systems. Keynes absolved people of individual responsibility and recommended that governments and central banks step in when things threatened to get out of kilter.By contrast, Hayek thought that order eventually emerges from the interactions of imperfect individuals, and that Smith's invisible hand would deliver good outcomes overall. He regarded the free-market system as the best allocator of resources.In fact, Edward Chancellor, in his book "The Price of Time", argues that economists such as Hayek, who seemed to have been proven right about what should have been done to avoid the Great Depression, have been “airbrushed” from history. In contrast, those who lost most of their wealth and seemed to champion the policies that led to the Great Depression, such as Keynes, are now celebrated and widely taught in universities.The current global monetary and fiscal system is built on Keynes' thinking. Governments worldwide give Hayek's laissez-faire recommendations short shrift. Conspiracy theorists would argue that unelected bureaucrats can't afford to let the market do its thing, as it would usurp their power.Keynes believed that sufficiently intelligent individuals can understand and control complex systems. Bureaucrats rule, right?This led directly to his policy recommendations: large-scale government spending and cheap money to support aggregate demand. Of course, Keynes thought his policy recommendations should apply only during recessions, not throughout the cycle, as has increasingly happened in Western economies over the past 50 years!From Chancellor’s book, this is an account of a discussion between a Swiss banker and Keynes, on the eve of the great crash of 1929:"Keynes asked me what I was advising clients.'To insulate themselves as much as possible from the coming crisis, and to avoid the markets', I replied.Keynes took the opposite view. 'We will not have any more crashes in our time', he insisted, and asked me in detail for my opinions about individual companies.'I think the market is very appealing, and prices are low,' said Keynes. 'And where is the crash coming from, in any case?' Nicholas Nassim Taleb has a great moniker for people like Keynes - IYI, or "Intellectuals Yet Idiots". These people are not stupid at all. They're just paid to be ignorant. As Munger said, "Whose bread I eat, whose song I sing."Is it any wonder the Western world, which has applied Keynesian policies for almost a century, faces such immense financial imbalances? The bureaucrats in power have to plough on, despite all the signs of an impending car crash of epic proportions. To do otherwise would be to admit defeat and give up power.Hayek argues that recognising the limits of one's knowledge is essential to sound decision-making. However, people construct explanations for complex events, identify apparent patterns, and become confident they can predict outcomes. This tendency is firmly embedded in human psychology, despite all evidence to the contrary. This week, two neo-Keynesian economists, Bob Hall and Mike Woodford, won the Nobel Prize in Economic Sciences, further substantiating the trend. The establishment does not want people to think for themselves.Hayek argues that repeated monetary and fiscal interventions, as prescribed by all economists across the Keynesian spectrum, prevent necessary economic restructuring. He would be concerned that cheap credit, government subsidies and repeated bailouts allow low-return businesses to survive, tying up capital and labour that could be employed more productively elsewhere.Hayek probably would have viewed persistent fiscal deficits as a problem of political incentives as much as of economic policy. Politicians gain immediate political benefits from spending, while shifting the costs to future taxpayers. He would therefore favour stronger institutional constraints, predictable fiscal rules, limits on discretionary intervention, and credible commitments that reduce politicians' ability to shift costs into the future..Read more:.FT: Tim Harford - Why the maths used for decades in Economics needs a rethink.But this is exactly where Hayek's recommendations run into a roadblock. Expecting unelected bureaucrats to limit their power, while letting a lightly regulated free market allocate resources, is like the frog expecting not to be stung by a scorpion while crossing the river.Incentives drive behaviour, not reason.In response to unsustainable debt levels, expect increasing regulation, intervention, and suppression of the free market. The Keynesians are firmly in charge and find the market appealing - just like Keynes did in 1929..*Piet Viljoen is the founder of Re:CM. This is drawn from his latest weekly newsletter, which you can subscribe to by clicking here. It’s free. .Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.

Piet Viljoen: Be careful who you listen to, especially economists

Related Stories

Piet Viljoen: Sasol’s spectacular comeback turns a battered stock into a market star

BN Daybreak: DiData Campus confession, SA's crime rot, SAPS budget, Viljoen on JSE delisting wave

BizNews Edge: Piet Viljoen says smart money is buying South Africa

Piet Viljoen: Rand v Dollar. The most important chart you’ll see in a long time