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National Economic Planning: Will it fly?

March 26, 2003

The September 11th attacks hit no industry more directly than they did the airline industry. In 2001, this industry lost 8 billion dollars. It lost 9 billion in 2002, two thirds of which supposedly derived from 9–11. The Federal government has delivered 5 billion dollars in cash and 10 billion in loan guarantees to airlines affected by 9–11. This massive infusion of money and credit has yet to satisfy the appetites of airline executives. Some predict losses ranging from 6.3 to 13 billion for this year, depending upon how the war goes.

Outgoing Air Transport Association President Carol Hallet recently declared that "the only solution to our industry's malaise may be to nationalize the airlines". While it is certainly true that the airline industry is in the midst of very hard times, the notion that government aid or a takeover will solve the fundamental problems of this industry is fundamentally flawed.

Kevin Mitchell of the Business Travel coalition described the estimated 6 billion dollar loss from 9–11 in 2002 as 'creative accounting'. He attributes most of these losses to a decline in high yield business travel, not to post 9–11 fear. While there are certainly losses due to 9–11, we must understand what these losses mean.

Fallen revenues mean simply that consumers value the services of this industry less. The proximate cause of this industry's malaise is a change in the ordinal rankings of goods in the minds of many millions of consumers. Government aid and nationalization will not change this underlying reality. Passenger revenues fell from $16.9 billion in 2000 to $13.8 billion in 2001. Labor and management surely have much to worry about with such figures. With such losses, they cannot maintain the levels of wages and profits that they once enjoyed. These people do the same type of work with the about same skills and about the same capital as before, yet they earn less.

It is, however, important to realize that the value of wages and profits are not in the labor that go into products, but in the value that consumers attach to these products. This loss in revenue and all resulting reductions in profits and wages merely signal that resources expended in air travel have less value than had previously been the case. Consequently, the solution to this malaise is to move resources out of this industry, and into more highly valued uses.

There is more to this matter than simple resource allocation. These changes in consumer plans came about in part due to illegitimate and immoral responses by some to a series of prior government interventions. As Adam Young has pointed out, the United States Government has intervened in the Middle East repeatedly. These interventions have had the understandable result of generating some resentment towards the U.S., and unwarranted, abhorrent, but real acts of terrorism.

Twisted fanatics used airliners to deliver a blow against the U.S. on 9–11, for interventions that outraged them. While there is no justification for this kind of response to U.S. intervention, we must recognize the causal connection between U.S. intervention overseas, and resentment towards the U.S. from abroad[2]. Now, this already sagging industry has successfully lobbied for massive subsidies in response to 9–11, and may be headed for nationalization.

As Ludwig von Mises and Friedrich Hayek have argued, one intervention would generate unintended consequences that would require further intervention. Since we each see directly into our own minds alone, politicians and bureaucrats cannot predict the complex myriad of reactions that their plans for intervention will instigate. As people react and adjust to government policies, and these policies become more complex and comprehensive, we would move towards comprehensive economic planning, socialism, and tyranny[3].

No normal person could have predicted the plan that the fanatics in Al Qaeda devised for 9–11. We did have some notion that such a thing could happen. The earlier bombing of the World Trade Center and the Attacks on the U.S.S. Cole and U.S. embassies in Africa signaled danger. President Clinton's response to these attacks obviously did not deter further attacks and may have only prompted Al Qaeda to search for targets closer to home. But who could have guessed where, when, and how?

Now, we have a new department of homeland security and a war with Iraq. This war has increased fuel prices and reduced airline bookings. These effects have reduced airfares to 1988 levels even without adjusting for inflation.

The unintended consequences of past U.S. foreign policies and 'inadequacy' of current U.S. subsidies have led to calls for the nationalization of airlines. To many, this is the only way to restore the vitality of this industry. Of course, the concerns of Mises and Hayek overstate the immediate problem. Nationalizing the airline industry is a far cry from comprehensive economic planning and totalitarianism.

As Don Lavoie argued, partial economic planning suffers from the same kind of deficiencies as comprehensive economic planning. Individuals make economic decisions within a given context and according to their own subjective values. Officials at planning agencies, either for the whole economy or one sector, cannot reproduce the decisions that individuals make themselves.

Even the information that prices convey is in a coded form—contextual and tacit. Each weighs possibilities his own mind, and makes decisions that central planners cannot make for them. Each weighs future alternatives in terms of their own personal expectations, subjective values, and individual circumstances. The idea that even partial central planning can replace the market is all utterly unreal. The danger that movement in this direction could leave us less free is genuine.

The idea that economic knowledge is subjective, fragmented, and widely dispersed has two important implications here. Intervention is dangerous because those who intervene lack the knowledge to form plans for intervention ex ante that reflect all the ways that people will react to their plans.

This leads to potentially disastrous unintended consequences, as different amounts and kinds of intervention than originally envisaged unfold. Such intervention then leads to a situation where we replace competitive markets with at best heavily regulated markets, and at worst outright socialism[4]. These economic systems result in markedly lower living standards and varying degrees of political repression.

That this is all true in this case is evident from the fact that consumers are choosing to spend less on air travel. Intervention on behalf of airlines is obviously working to resist the movement of scarce resources into more highly valued uses. It is making us poorer, except for the few who collect these government transfers. 

At one level, we should recognize and respect the wishes of consumers. At another we should recognize that part of this change in consumer preference and want for more intervention derives from prior interventions. Fear and animosity generated by terrorism and intervention are what we should be wary of, not falling revenues in any one sector of the economy. Intervention is the problem, not the solution, particularly its worst form: war. 

Donnelly, Sally. U.S. Airlines, "Bad to Nationalized", Time.com March 25, 2003.

Lavoie, Don. (1985). "National Economic Planning, What is Left?" Cato Press.

Lewandowski, Beth. (November 27th 2002). "Nationalize the Airline Industry?" CNN.com March 25, 2003.

Levin, Doron. "U.S. Airlines talk Nationalization." www.bloomberg.com/feature/feature/1048170047.html  Bloomberg.com March 25, 2003.

Velocci, Amthony L. Jr. "United Flying Headlong Into An Uncertain Future", Aviation Week & Space Technology December16, 2002  http://www.aviationnow.com/content/publication/awst/20021216/~hsaw22.htm   from Aviationweekcom March 25, 2003.

Young, Adam. "A History of Folly", Mises.org http://mises.org/article.aspx?record=818 March 25, 2003.

[1] The author of this essay, a graduate student at George Mason University, dedicates it as a small, but fitting, tribute to the late Don Lavoiedmackenz_2000@yahoo.com

[2] As Menger (1871) notes at the beginning of his Principles of Economics, “all things are subject to the law of cause and effect”. This does not imply that particular causes justify or warrant associated affects.

[3] See Mises, Ludwig von, Human Action, Interventionism, Economic Analysis, and Omnipotent Government, and Hayek, F.A. The Road to Serfdom.

[4] Periods of socialism (i.e., the war communism years in the early U.S.S.R.) tend to be transitory because the failings of socialism are catastrophic. See Mises (1922) Socialism, and Economic and Sociological Analysis.

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