Monday, April 5, 2010

The Knowledge Problem

(Hat tip, Morning Jolt.)

From an opinion piece written by Glenn Reynolds:

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.

Glenn goes on to explain that both Generally Accepted Accounting Principles and SEC regulations require companies like Caterpillar and AT&T to restate earnings when something material happens to affect them. So while Henry Waxman is all in a dither about the bad publicity that these restatements are for Obamacare, what he is actually demonstrating is his own lack of knowledge regarding some pretty basic regulations.

And these are the people we are entrusting to remake 1/6 of our economy. It scares the beejeebers out of me but folks on the left seem delighted by the whole prospect. It's like watching a bus barreling down on a bunch of deaf folks who are oblivious to its approach. No matter how much you holler and scream, they're going to ignore you because they simply cannot hear. Maybe we have to keep waving our arms, though, in the hope that one of them will look up and see.

Bruce talks about a quality of "knowingness." It's where you want to appear knowledgeable about a certain subject (I guess you could actually want to have that knowledge), but you are not willing to put in the work required to BE knowledgeable. So your actual knowledge is about half an inch deep but you speak as though you are an expert in the matter. It works as long as your audience knows even less than you do but as soon as you run across a REAL expert, you're cooked. I think this is what has happened in Waxman's case. He didn't read the bill (NONE of them read the bill, despite Phil Hare's statement that he read it THREE TIMES) but wants to look like he's an expert on it.

Look, here's the thing. There is no one among us who can understand all of the federal rules and regulations that exist. And even more true is the case that no one can understand all of the real-world implications of a piece of legislation--we have that knowledge problem that Hayek wrote about. This is why we must proceed with caution--why embarking on a wild ride to remake health care in this country (the finest health care in the world) ought to have been an intimidating venture, one approached in pieces, one step at a time. If this evil is not repealed, we will regret it--and sooner, not later.

Stay angry about this!

More later...

1 comment:

  1. It never ceases to amaze me how the laws of nature present themselves in the creations of man like a fractal—a self-replicating, repeating pattern.

    What Hayek describes sounds like a perfect analogy to Heisenberg's Uncertainty Principal (which states that it is impossible to know both the location and direction of travel of an electron simultaneously).

    God is a pretty smart guy, he covers all the angels. He's given us the universe as a model and it's when we try to depart from these natural laws that we run into trouble. Free market capitalism is nature—survival of the fittest. Planed economies violate the uncertainty principal, spending more than you take in violates the laws of thermodynamics (you can't get more energy out of a system than you put into it). The universe works the best possible way it can because energy always takes the path of least resistance. No central bureaucracy has to order it to do so.