Is artificial direction transmitted to capital and labour better than natural direction?
Complete Works, Volume 2, pages 25 to 39 (in French)
Here is an article that was initially published in the Journal des Economistes that seems fundamental to me in order to understand the issues of capital misallocation, a concept that will be studied later more thoroughly by Ludwig von Mises. The editor Guillaumin identified its importance when he added three footnotes referencing to other texts of the Complete Works that allow to study further the various issues at stake. These were:
- Chapter 20 of the Economic Harmonies explaining how bad decisions are “punished” in a liberal institutional framework.
- Chapter 7 of What is seen and what is not seen in which he exposes the smoke and mirrors of the wealth displacement by government substituting the true wealth creation through free trade.
- Chapter 5 of the Economic Harmonies explaining how and why free trade is creating wealth.
The answer to the quoted question today is obviously that artificial direction, which he exposes regularly when he criticises the constructivists, is way more inferior than natural direction. One of the fundamental reason for this is that, when innovation is considered (which is what will allow for productivity gains), “at the end of each experience there is an acid test, the profit and loss account, which is the most sincere, the most logical, the most assertive rectifier of errors.” I would add that Friedrich Hayek also gave another reason for this in his speech when receiving the Nobel Memorial Prize as we have seen when Frédéric Bastiat marvelled at the daily food supply in Paris.