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February 9, 2008

The Information Problem: Pull Out of Iraq


David R. Henderson

On February 5, I gave a luncheon talk on the Iraq war at the World Affairs Council in San Francisco. About 60 people attended. I spoke after fellow Antiwar.com columnist Ivan Eland. Ivan laid out a plan for partitioning Iraq or at least having a very weak central government with relatively strong regional governments representing various factions. The audience was presumed to have read an article by Anthony Cordesman titled "Iraq: Strategies for Dealing with Uncertainty" in Great Decisions, 2008 edition, and I was asked to, among other things, address his article. What follows is my speech.

I want to start by quoting from a Republican congressman's speech on the floor of the House of Representatives. He gave this speech in opposition to his own Republican President's decision to keep troops in Iraq. I quote him because his speech essentially sums up my opinion. This Congressman stated:

"The fundamental question is: What is the United States' interest in Iraq? It is said we are there to keep the peace. I ask, what peace? It is said we are there to aid the government. I ask, what government? It is said we are there to stabilize the region. I ask, how can the U.S. presence stabilize the region?... The longer we stay in Iraq, the harder it will be for us to leave. We will be trapped by the case we make for having our troops there in the first place.

"What can we expect if we withdraw from Iraq? The same as will happen if we stay. I acknowledge that the level of fighting will increase if we leave. I regretfully acknowledge that many innocent civilians will be hurt. But I firmly believe this will happen in any event."

Who was this Congressman? It sounds as if it could have been antiwar Congressman and presidential candidate Ron Paul. Well, actually, it was a different presidential candidate named John McCain. I cheated in one little way: I substituted "Iraq" for "Lebanon." The year was not in the 2000s; it was 1983. The President was not George W. Bush; it was Ronald Reagan. McCain had voted against President Reagan's decision to keep American troops in Lebanon as part of a multinational "peacekeeping" force.

I quote John McCain, not to embarrass him – he's plenty capable of doing that for himself, such as when he summed up his foreign policy on Iran with a Beach Boys song. Rather, I quote him to point out, with the notable exception of the previous speaker's talk, how sensible thinking seems to be lost in our mainstream political discussion of foreign policy.

I wrote a piece recently titled "The Fatal Conceit in Foreign Policy." In it, I pointed out that the case against the U.S. government, or any government, intervening in other countries' affairs is like the case against governments intervening heavily in our domestic affairs. The information they would need to do it well is information that a government can't have: it's the local knowledge of the millions of flesh-and-blood individuals. Politicians have what economists call "an information problem." Economists have shown that using centralized information to plan an economy simply doesn't work – and attempting to plan another country's government will fail just as dismally.

The big breakthroughs in thinking about planned economies came from two economists from Austria, Ludwig von Mises and his student Friedrich Hayek. Hayek later won the Nobel prize in economics. Part of what earned it for him was his insight on this issue. Although it was von Mises who, in 1922, had the original insight about information, Hayek elaborated and added to the argument. In a series of essays in the 1930s and 1940s, Hayek drove the final intellectual nail into the coffin of socialism. He pointed out that even if central planners had pure motives – so that we wouldn't have to worry about their incentives – they simply could not have the information they would need to plan an economy well. In any complex economy, there are hundreds of thousands of items, and central planners, having thrown out the free market, cannot know relative supplies and demands for these products. This, wrote Hayek, is precisely what the market tells us. The free market, he argued, works so well because the information that really matters in any economy exists in a decentralized form in the minds of the millions of participants in the market. In his famous 1945 article, "The Use of Knowledge in Society," which I have my students work through in every course I teach, Hayek writes:

"[P]ractically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation."

The term that modern economists in Hayek's tradition use for this "unique information" is "local knowledge."

Hayek goes on to argue that this local knowledge can't possibly be aggregated in the minds of a few central planners, no matter how brilliant. And if the government does not leave people free to act on their own local knowledge, most of it won't be acted on.

Interestingly, some of the economists who had dismissed Hayek and von Mises in the 1940s and for decades after came around to their way of thinking in the late 1980s. Exhibit A is socialist economist Robert Heilbroner, who, in two articles in the New Yorker and one article in my Concise Encyclopedia of Economics (then The Fortune Encyclopedia of Economics), said that von Mises and Hayek were right after all. In a 1989 New Yorker article, Heilbroner wrote:

"Less than 75 years after it officially began, the contest between capitalism and socialism is over: capitalism has won. . . . Capitalism organizes the material affairs of humankind more satisfactorily than socialism."

And in a 1990 article in the New Yorker, Heilbroner wrote, "It turns out, of course, that Mises was right" about how badly socialism would work. Note his use of the term "of course." And in his 1993 article in my Encyclopedia, Heilbroner leads with the following:

"Socialism – defined as a centrally planned economy in which the government controls all means of production – was the tragic failure of the twentieth century."

Heilbroner went on to write, "In fact, we now know that their [von Mises' and Hayek's] argument was all too prescient."

Although Hayek himself never, as far as I know, applied this thinking to foreign policy, it applies beautifully. Just as central planners can't know how much, and what kinds of, steel to produce, they can't know how to intervene well in a foreign country. None of them, even the most brilliant and informed of them, has enough knowledge. The odds are, therefore, that by meddling in those countries' affairs, they will do more harm than good.

The analogy between centrally planning an economy and centrally deciding to intervene in another country's affairs is not perfect. Analogies seldom are. The main difference is that a government that forswears central planning and leaves individuals free to make their own decisions within a system of property rights will typically end up being the government of a prosperous country. A government that forswears planning other countries' affairs, by contrast, will not, by doing so, cause people in that other country to make good choices about their own governments. But the point of the analogy is that a government that refuses to interfere with choices about another country's government will avoid making a bad choice, whereas a government that tries to meddle will almost inevitably make a bad choice.

And the information problem brings us to the problem with Cordesman's article and to the problem with the U.S. government staying in Iraq. Cordesman bounces back and forth between being a hard-headed realist and a wishful thinker.

Here are two examples of his hard-headed realism:

"The U.S. cannot, however, predict the future, and must accept the fact that Iraq is now a sovereign nation and can make its own decisions in ways that dictate events regardless of U.S. plans and policy." (p. 6)

To which I say, "Exactly." Cordesman also writes:

"One way or another, the Arab Sunni states will almost certainly react to any U.S. pullout by backing Arab Sunnis in Iraq, while Iran would back the Shi'is. No one can predict how violent this would make things in Iraq, or how much it would increase tensions in the gulf and around it. No one can predict how serious continued Iraqi religious struggles between Sunni and Shi'I will be or how much impact they will have on the region." (p. 6)

To which I say, "True."

Here's an example of Cordesman's wishful thinking:

"What is needed, however, is a fully integrated aid program – with clearly defined actions, costs, effectiveness measures and a unified interagency approach – and one that clearly reflects the fact that Iraq is a nation at war." (p. 9)

When did we ever have a foreign aid program that worked? The history of government-to-government foreign aid is the history of failure. In 2005, when I spoke at an event at Goldman Sachs in New York, where one of the other speakers was foreign-aid advocate Jeff Sachs, I challenged him to give me examples of foreign aid that worked. Both examples he had given in his talk were of voluntary, privately-funded foreign aid. I noted that and asked him, in light of his advocacy of hundreds of billions of dollars in government-to-government foreign aid, to give me an example of one that worked. He couldn't think of one off-hand.

And how about this example of wishful thinking from Cordesman?:

"The resulting mix of U.S. and Iraqi programs should include efforts that really can revitalize Iraq's oil industry and exports under wartime conditions: providing essential water and power services in the field rather than vain efforts to try to reinvent the national infrastructure; salvaging state industries; distributing aid at the local and provincial level to meet urgent needs; creating a credible plan to revitalize agriculture; funding serious employment efforts rather than bragging about creating 130,000 aid jobs...." (P. 9)

And while we're at it, let's get the tooth fairy to help out.

In his profound faith in government to do complex planning of other people's lives, Cordesman is like the "man of system" whom Adam Smith refers to in his book The Theory of Moral Sentiments. Adam Smith writes:

"The man of system... seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board...."

What, in Smith's mind, was the problem with this? Smith wrote:

"[I]n the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it."

I said earlier that even the most brilliant and informed officials are unlikely to make good choices when interfering in other countries' affairs. But my case is even stronger than that because there is nothing in the competition for political office that causes the most brilliant and informed to be the ones elected. Hillary Clinton, for example, one of the two main contenders for the Democratic nomination for president, showed abysmal ignorance of the Pakistani political system recently. In a December 28 interview with CNN's Wolf Blitzer, Clinton stated, "If President Musharraf wishes to stand for election, then he should abide by the same rules that every other candidate will have to follow." But Clinton was mistaken, as anyone who has followed Pakistan's news closely would know. The elections to which she was referring, originally scheduled for January 8, were not to choose Pakistan's president, but to choose its parliament. Clinton repeated the same mistake two days later in an ABC interview with George Stephanopoulos. She said of Musharraf and the January 8 elections, "He could be the only person on the ballot." So, even with two days to learn more, Clinton was still in the dark. And remember that this is not some underfunded fringe candidate but, rather, the best-funded candidate in the whole pack – which means that no one in her large staff corrected her mistake. Indeed, the December 28 transcript from which I quoted was issued by her very own staff. And she presumes to tell people in other countries how to act? As ABC's John Stossel says, give me a break.

And in her Los Angeles debate with Barack Obama, Hillary Clinton claimed:

"We bombed them [the Iraqis] for days in 1998 because Saddam Hussein threw out inspectors."

Her claim is false. Her own husband ordered out the inspectors so that he could bomb Iraq. Either she knew this and she lied or she didn't know it. Either way it's bad. Nor did her opponent, Barack Obama, or the interviewer, Wolf Blitzer, correct her. Did they even know?

Partly because the U.S. government, like other governments, can't know how to plan another country well, my solution is for the U.S. government to get out of Iraq as soon as possible – lock, stock, and barrel.

And speaking of barrels, one thing that concerns Cordesman and many others is what would happen to the world supply of oil if the U.S. government were not intervening in the region.

Cordesman writes:

"The U.S. needs a security plan for Persian Gulf oil, of which Iraq is part, not only to meet its own import needs but also to provide fuel to a global economy on which it is increasingly more dependent." (p. 14)

Cordesman's worry is unjustified. As I laid out in my recent policy analysis from the Independent Institute, "Do We Need to Go to War for Oil?," the sellers of oil will always be at least as dependent on selling their oil as we consumers are on buying it. Trade creates mutual dependence. The only way a country's government can hurt another country using the "oil weapon" is by cutting output; doing so will hurt all oil consumers, not just the target country, will help all oil producers, friend and foe alike, and will hurt the country that cuts its output. Nor need we worry about selective embargoes by oil-producing countries against the United States because oil is sold in a world market. Imagine that a hostile foreign oil producer wants to target the United States using the "oil weapon." So, it cuts sales to the United States by, say, one million barrels a day. What happens next? People in the United States who had been buying that oil will scramble to find other sources of oil. Where will they find them? Let's consider the hostile country that cut its shipments to the United States. If it doesn't want to cut output, it needs to find people in other countries to sell this freed-up million barrels a day to. Let's say it ships the oil to buyers in China. Then those buyers in China will find that they want to buy one million fewer barrels from their suppliers. Presto! The American buyers' problems are solved because they can get their million barrels from those countries that had been selling to China. In short, when the government of one country tries to selectively target people in another country, but maintains its own output, it can't succeed. The selective "oil weapon" is a dud. It's like a game of musical chairs with the same number of chairs as players. The game would be awfully boring, which is why it is not played that way. But in the case of international trade, boring is good.

Let me summarize. The case against the U.S. government intervening in other countries' affairs is much like the case against the U.S. government intervening in our affairs: even if the incentives were right, which they are not, the U.S. government doesn't have the information to do it well. Moreover, the political system, here or anywhere, does not attract the best and brightest. And we need not worry about what would happen to U.S. oil imports if the U.S. government left Iraq.

It's true that if the U.S. government leaves, there could be chaos in Iraq. It's also true that, with the U.S. government in Iraq, there is chaos. John McCain used to understand. Whatever is true of his understanding, let's not let his failings, or those of Obama, Clinton, Romney, or Huckabee, get in the way of our clear thinking.

* * * * *

The talk was well received. Many issues came up during the question and answer period. I'll highlight two questions and my answers:

Question: (This was presumably in response to my claim that government-to-government foreign aid didn't work.) I was in occupied Europe and one foreign aid program that worked well there was the Marshall Plan. Also MacArthur's reforms worked in Japan. How do you respond?

Answer: The main evidence people give that the Marshall Plan worked is that shortly after it began, Europe had economic growth. But concluding that one follows from the other is to commit the fallacy of "post hoc, ergo propter hoc" – that is, "after the fact, therefore because of the fact." More-recent research casts doubt on the idea that the Marshall Plan had a large positive effect. Much of it is in a 1986 article by George Mason University economist, Tyler Cowen. Let me summarize a few nuggets from his article. First, which country do you think received the most Marshall Plan aid? ("Germany," said someone in the audience.) Actually, it was Great Britain, which received twice the aid Germany did. And Great Britain's economy grew more slowly than Germany's. Moreover, Belgium achieved much of its recovery well before the Marshall Plan was implemented.

So why did Germany do so well? It was mainly because of one man, Ludwig Erhard, who was the director of the bizonal Office of Economic Opportunity, under General Lucius Clay, the military governor of the U.S. zone. Clay looked around for Germans who he could be sure where not Nazis. One such man was Konrad Adenauer, who had been mayor of Cologne when Hitler took over. When Hitler had visited Cologne, Adenauer had refused to fly the Nazi flag and was thrown in prison. His wife was also thrown in prison and died there. So Clay figured he could trust Adenauer. Adenauer recommended Ludwig Erhard to be Clay's economic advisor. Erhard implemented a currency reform to switch from the reichsmark to the Deutschmark, cut marginal tax rates substantially, and ended price controls that were causing food shortages and starvation. Walter Heller, a young U.S. economic advisor who much later became President John F. Kennedy's chairman of the Council of Economic Advisers, wrote an excellent article in the National Tax Journal documenting the drop in tax rates and their electric effect on West Germany's economy.

In Japan, MacArthur implemented the Dodge economic reforms, named after Joseph Dodge. But after the U.S. government ended its occupation of Japan, the Japanese repealed most of the reforms. So there's not a strong case for the claim that the U.S. government was responsible for the economic revival of Europe or Japan.

Question: Is it possible, with all the in-fighting among the factions in Iraq, that the U.S. could play them off against each other?

Answer: It's possible, but it's not desirable. Think of how well the U.S. government has done that in the past. In the late 1930s, the U.S. government, upset that Japan had invaded China, wanted to protect the Chinese from a totalitarian government. So it imposed a series of embargoes on Japan, including an embargo on oil. That upset the Japanese – it's strange how people react when they think you're trying to strangle their economy – and the Japanese government bombed Pearl Harbor. Then that brought the U.S. into war with Japan and with Germany. The U.S. allied itself with one of the most vicious governments in the world, that of the Soviet Union, to fight another vicious government, that of Nazi Germany. They defeated the Nazis and then, allied with the West Germans, turned on the Soviets. The U.S. vanquished Japan and then chose Japan as its ally in the fight against a government (the Chinese government) that imposes totalitarian rule on the Chinese. Later the U.S. chose that totalitarian government as its ally against the Soviets. And with all these moves come huge costs. So, no, I don't think the U.S. government is good at playing off one party against another.

Copyright © 2008 by David R. Henderson. Requests for permission to reprint should be directed to the author or Antiwar.com.

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David R. Henderson is a research fellow with the Hoover Institution and an associate professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School. He is author of The Joy of Freedom: An Economist’s Odyssey and co-author, with Charles L. Hooper, of Making Great Decisions in Business and Life (Chicago Park Press.) His latest book is The Concise Encyclopedia of Economics (Liberty Fund, 2008.)

He has appeared on The O’Reilly Factor, the Jim Lehrer Newshour, CNN, and C-SPAN. He has had over 100 articles published in Fortune, the Wall Street Journal, Red Herring, Barron’s, National Review, Reason, the Los Angeles Times, USA Today, and the Christian Science Monitor. He has also testified before the House Ways and Means Committee, the Senate Armed Services Committee, and the Senate Committee on Labor and Human Resources. Visit his Web site.

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