F. A. Hayek and the Knowledge Problem

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There is an interesting discussion between a few blogs regarding the economy and why Keynesian stimulus is not working and why it is impossible for it to ever work. Glenn Harlan Reynolds (Instapundit) writes in the Washington Examiner:
Progressives can't get past the Knowledge Problem
"If no one among us is capable of governing himself, then who among us has the capacity to govern someone else?"
-- President Reagan, Jan. 20, 1981.
Economist Friedrich Hayek explained in 1945 why centrally controlled "command economies" were doomed to waste, inefficiency, and collapse: Insufficient knowledge. He won a Nobel Prize. But it turns out he was righter than he knew.

In his "The Use of Knowledge In Society," Hayek explained that information about supply and demand, scarcity and abundance, wants and needs exists in no single place in any economy. The economy is simply too large and complicated for such information to be gathered together.

Any economic planner who attempts to do so will wind up hopelessly uninformed and behind the times, reacting to economic changes in a clumsy, too-late fashion and then being forced to react again to fix the problems that the previous mistakes created, leading to new problems, and so on.

Market mechanisms, like pricing, do a better job than planners because they incorporate what everyone knows indirectly through signals like price, without central planning.

Thus, no matter how deceptively simple and appealing command economy programs are, they are sure to trip up their operators, because the operators can't possibly be smart enough to make them work.

Hayek's insight into economics and regulation is often called "The Knowledge Problem," and it is a very powerful notion. But recent events suggest that it's not just the economy that regulators don't understand well enough -- it's also their own regulations.
Kevin at The Smallest Minority zeros in on a key problem and reiterates it:
The United States Code -- containing federal statutory law -- is more than 50,000 pages long and comprises 40 volumes. The Code of Federal Regulations, which indexes administrative rules, is 161,117 pages long and composes 226 volumes.

No one on Earth understands them all, and the potential interaction among all the different rules would choke a supercomputer. This means, of course, that when Congress changes the law, it not only can't be aware of all the real-world complications it's producing, it can't even understand the legal and regulatory implications of what it's doing.
But Big Business is "unregulated" to hear it from some people.
One of Kevin's readers left this passage as a comment:
"Did you really think we want those laws observed?" said Dr. Ferris. "We WANT them to be broken. You'd better get it straight that it's not a bunch of boy scouts you're up against... We're after power and we mean it... There's no way to rule innocent men. The only power any government has is the power to crack down on criminals. Well, when there aren't enough criminals one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws. Who wants a nation of law-abiding citizens? What's there in that for anyone? But just pass the kind of laws that can neither be observed nor enforced or objectively interpreted -- and you create a nation of law-breakers -- and then you cash in on guilt. Now that's the system Mr. Reardon, that's the game, and once you understand it, you'll be much easier to deal with."
-- Ayn Rand, Atlas Shrugged
Yesterday, Kevin quoted from a relevant article in The Atlantic:
Today I read an interesting piece by Lane Wallace in The Atlantic, The Bias of Veteran Journalists. In that piece Lane noted that she was disturbed when she recognized her fellow journalists were asking questions that indicated that they'd already chosen a story line and only asked questions that would further that story line. I recommend you read the whole piece.

But what jumped out at me was this:
In his new book, How We Decide, Jonah Lehrer cites a research study done by U.C. Berkeley professor Philip Tetlock. Tetlock questioned 284 people who made their living "commenting or offering advice on political and economic trends," asking them to make predictions about future events. Over the course of the study, Tetlock collected quantitative data on over 82,000 predictions, as well as information from follow-up interviews with the subjects about the thought processes they'd used to come to those predictions.

His findings were surprising. Most of Tetlock's questions about the future events were put in the form of specific, multiple choice questions, with three possible answers. But for all their expertise, the pundits' predictions turned out to be correct less than 33% of the time. Which meant, as Lehrer puts it, that a "dart-throwing chimp" would have had a higher rate of success. Tetlock also found that the least accurate predictions were made by the most famous experts in the group.

Why was that? According to Lehrer,
The central error diagnosed by Tetlock was the sin of certainty, which led the 'experts' to impose a top-down solution on their decision-making processes ... When pundits were convinced that they were right, they ignored any brain areas that implied they might be wrong.

Tetlock himself, Lehrer says, concluded that "The dominant danger [for pundits] remains hubris, the vice of closed-mindedness, of dismissing dissonant possibilities too quickly."
It's not just pundits. It's the people that Thomas Sowell characterizes as "The Anointed" who gravitate into government to save us poor rubes from ourselves.

Apply Tetlock's observations, for example, to the Anthropogenic Global Warming Intelligentsia. Or the gun control organizations that constantly predict "Wild-West shootouts" and blood in the streets after each incremental repeal of gun control.

"Dart-throwing chimps" indeed.
Make that Blind Dart-throwing chimps. Deaf too. How can someone live with that level of cognitive dissonance in their lives...

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About this Entry

This page contains a single entry by DaveH published on April 9, 2010 12:12 PM.

Heh -- Bart Stupak to 'retire' was the previous entry in this blog.

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