Argentina needs a new way of understanding public policy

Consejero Académico en Libertad y Progreso

Most managers and specialists are trapped in ancient traditions, practices learned too long ago.

INFOBAE: The 2009 Nobel Prize winner Oliver Williamson published “The Economic Institutions of Capitalism” in 1985. There, he highlights that looking at transaction costs, the institutions of capitalism emerged to facilitate business between different people, including public officials and their clienteles.

On several occasions, I highlighted how the ups and downs in the average income of the residents of the different countries, GDP per inhabitant, originate from the difficulties of providing the benefits demanded. Thus, we see wide gaps, ranging from between less than USD 300 per year per inhabitant in Burundi to USD 14,000 in Argentina and more than USD 100,000 in Ireland. Few issues can be so relevant.

In 1945 Nobel laureate Friedrich Hayek published that “the main economic problem of society is to adapt quickly to changes in particular circumstances of time and place.” He observed how easy it was for an inefficient manager to dissipate the productivity differentials that sustain profits, even with the same machinery and equipment, and produce at a large cost difference.

Michael Polanyi revealed that assuming that the size of firms and entities are determined exclusively for technical reasons is outdated. “Even in modern industries, indefinable skills are essential components of technological knowledge. In communist Hungary I have seen a new imported machine for making light bulbs, it couldn’t produce a single one for a whole year. It worked perfectly in Germany”. Economists do not seem familiar with these experiences.

Idiosyncratic knowledge

Antonio Stradivari (1644-1737) was barely literate. He still made thousands of violins and musical instruments of a quality unobtainable, even today. Idiosyncratic knowledge is similarly relevant in language.

Hayek recognized that adaptive systems analysis would be facilitated by recognizing the importance of idiosyncratic knowledge that cannot be consolidated into statistical measurements, but has great value in adapting to change. To the extent that the complexity of interpersonal interests is relevant, it should be recognized.

In “Risk, Uncertainty and Profit” (1922) Frank Knight anticipated the main problem in understanding human actions is to understand how their minds think and work, including their abilities and opportunism in their behaviors.

Another advance came fro John Commons, for whom the transaction is the basis of the analysis and its purpose is to harmonize relations between the parties to overcome their conflicts and achieve what is demanded, 1934. Economic organizations aim to favor exchanges by adapting specialized governance, without need to resort to the courts.

Ronald Coase’s classic 1937 Nobel article stated that, while markets were seen as the most relevant means of economic coordination, companies and organizations frequently fill that role.

Far from sizing companies and different entities with certain technical limitations, contracts take place both between independent companies and within them. Markets and organizations are alternatives that adapt to facilitate exchanges.

Another Nobel laureate, Kenneth Arrow (1959), emphasized along with Hayek that the needs of the economy in equilibrium and in disequilibrium differ. “Traditional economics emphasizes the sufficiency of the price mechanism as a source of information. And that’s right on balance. Out of equilibrium, we pay a premium for the acquisition of information other than price and quantity”.

Arrow believes that the difficulties of economic organizations should be appreciated in broad contexts where the integrity of the contracting parties is expressly considered. The effectiveness of alternative forms of hiring will vary across cultures due to differences in trust, confirm the income gaps between, for example, Burundi, Argentina and Ireland.

Hence, it is essential for Argentina to face a change in public policies with a constructive spirit, in favor of freedom, security and continuity of transactions and the incentive to productive investment; individual and property rights, to reinvigorate aggregate activity and, thus, raise the average income per inhabitant.