The Knowledge Problem

April 30, 2010 at 15:26 (Economy, Politics)

Makes sense to me, but it makes too much sense. It’s logical. That must be why progressives have so much trouble figuring it out.

“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.

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