Alan Greenspan v. Adam Smith: The Fatal Conceit

Adam Smith wrote in The Wealth of Nations:

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can in his local situation judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

The principle in action is recorded by Johan Norberg in Financial Fiasco:

Many have spoken admiringly of how Federal Reserve Chairman Alan Greenspan would sit in his bathtub perusing statistics of manufacturing, inventories, and trade to understand what was going on in the economy so that he could determine the appropriate price of money. After 10 years at the Fed, Greenspan had doubled the number of data series monitored by his institution to over 14,000, including a complex system to monitor inventories that his colleagues joked only their boss understood. This enabled him to spot economic shifts long before anyone else and quickly change the direction of monetary policy.  

This adulation is an expression of the dream of the planned economy–the idea that some enlightened man in a bathtub will understand the market better than all the millions of market players and that he will be able to use his insights to steer them in the right direction. There can be no doubt that Greenspan was unusually talented at reading the economy, but giving him such huge powers also made huge mistakes possible. Writer Jim Grant notes:  

If you accept that interest rates are the traffic signals of the financial economy, Greenspan said, “Turn them all green.” By imposing this 1 percent interest rate, the Fed invited everyone and his brother and sister-in-law to go out and get a new mortgage and take on more debt.

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Daniel Bier

Daniel Bier

Daniel Bier is the executive editor of The Skeptical Libertarian.

View all posts by Daniel Bier

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