A general representation of a closed loop feedback system (Photo credit: Wikipedia)
In our previous post, Thomas Woods does a great job of explaining The Austrian Business Cycle Theory. In this article by Charles Hugh Smith titled, Why Suppressing Feedback Leads To Financial Crashes, he explains the same basic concept in a different way. F. A. Hayek said an economy is a system that utilizes knowledge which is widely dispersed among the people. This knowledge can’t possibly be known by one person or a committee of people. The knowledge gained by success and failure in the market is important for the coordination of production. Scarce resources, labor, capital, time, and land that is being wasted on unproductive activity will be kept to a minimum if knowledge is allowed to be transferred unhindered through the market.
Charles Hugh Smith says suppressing feedback leads to financial crashes, and Thomas Woods says that interest rates contain knowledge that coordinate production across time. Both are making the point that when knowledge is allowed to flow unhampered through the market, mainly through the price system, it works to coordinate all activities as optimally as possible. But when Government interventions don’t allow this knowledge to flow freely, malinvestments, dislocations, and financial crashes are the result.
The interventions into the market by Government through regulation, taxes, stimulus, and the Fed’s policy of credit expansion [through artificially low-interest rates and printing counterfeit money to fund this expansion of credit], has created a situation where nobody can possibly know where all of these malinvestments are located. The only way to cure these problems is for the interventions to stop and allow the market to purge itself of these wasteful activities. Unfortunately no politician, bureaucrat, or Fed policy maker wants to have this correction happen on his watch.
Getting a different explanation about the same basic concept allows us to better understand these abstract ideas. Watch the video by Thomas Woods, and read the article by Charles Hugh Smith. For a little lighter explanation, read Federal Reserve Policy Makers Have An Incestuous Intellectual Relationship With Each Other, and Geithner: “I Never Had A Real Job”, Another Example Of Intellectual Inbreeding, by austrianaddict.com.
If you really want some home work, read The Use Of Knowledge In Society, by F. A. Hayek at mises.org.
AUSTRIAN ECONOMICS ADDICT 