Guest Post: The Problem With Centralization

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Submitted by John Aziz of Azizonomics 

The Problem With Centralisation

Nassim Taleb slams the European project. Perfect timing to counteract the Nobel Peace Prize nonsense.

Via Foreign Policy:

The European Union is a horrible, stupid project. The idea that unification would create an economy that could compete with China and be more like the United States is pure garbage. What ruined China, throughout history, is the top-down state. What made Europe great was the diversity: political and economic. Having the same currency, the euro, was a terrible idea. It encouraged everyone to borrow to the hilt.

 

The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It’s not even a city-state environment; it’s a municipal state. Most decisions are made at the local level, which allows for distributed errors that don’t adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe — Switzerland. It’s not united! It doesn’t have a Brussels! It doesn’t need one.

The future is unpredictable. In economics some decisions will be lead to desired results and others will not. Real-world outcomes are ultimately impossible to predict, because the real world is chaotic and no simulation can ever model the real world in precise detail; the map is not the territory.

Centralisation concentrates decision-making. Centralisation acts as a transmission mechanism to transmit and amplify the effects of centralised decisions throughout a system. This means that when bad decisions are bad — as inevitably happens in economics — the entire system will be damaged. Under a decentralised system, there is no such problem. Under a decentralised heterogeneous system, mistakes are not so easily transmitted or amplified. Centralisation is fragile.

And central planning is mistake-prone. Central planners are uniquely ineffective as resource allocators. Free markets transmit information; the true underlying state of supply and demand. Without an open market to transmit price information, central planners cannot allocate resources according to the true state of supply and demand. Capital, time, and labour are allocated based on the central planner’s preferences, rather than the preferences of the wider society.

These two factors taken together mean that centralised systems tend to be both fragile and mistake-prone. That is a dangerous — and unsustainable — combination.