Tuesday, September 17, 2013

Perfect Information versus Partial Knowledge

People know external things (circumstances) and internal things (values). They know how many potholes they run over and how much cancer research they'd be willing to forego to fix them. They know how many times they've been mugged and how much education they'd be willing to forego for more police. They know how many nights they've lost sleep because of the threat of terror and how much space exploration they'd be willing to forego for more peace of mind.

All this information would be integrated in the public sector if people were free to shop for themselves.  If you don't want people to shop for themselves then it's because you believe one of the following...

A. the political process allows this information to be adequately conveyed to congresspeople
B. resources can be put to their most valuable uses without all this information
C. congresspeople are omniscient

Which one do you believe?

Buchanan insisted on the same conclusion in an article published a few months after the conference in October 1959 in the Journal of Law and Economics. “Positive Economics, Welfare Economics, and Political Economy” opposed the positive political economy approach of welfare economics -- in which the role of the economist consists in discovering “what people want” (1959, p. 137) and “what is the structure of individual values” (1959, p. 130) -- to the normative new welfare economics -- in which the economist, seeing himself as an external and omniscient observer, is capable of “reading” the individual preferences of the individuals and accordingly of determining the best possible outcome for the collectivity - Alain Marciano, Why markets do not fail
It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of the gaps between private and public costs could interfere with individual choice. - Arthur Pigou, Some Aspects of the Welfare State.
At this point, a question naturally arises: how can we justify the fact that the central government is less capable (because of less information) of satisfying citizens' preferences (Oates 2005)? - Brian Dollery, Lorenzo Robotti, The Theory and Practice of Local Government Reform
Jay Lund's chapter explores the informational problems implied in finding the best way to allocate water resources. In this respect, the main advantage of water trading is that its effectiveness does not require having in advance detailed information on the value of water on any place and for any alternative use. Engaging in trade is a voluntary decision, thus the market is itself a preference revelation mechanism. No particular prior information on people's preferences is then required in advance for trading to find mutually beneficial deals. By definition, when a transaction takes place, the maximum willingess to pay of those buying water is higher than the minimum compensation required by the sellers of water property rights and the deal improves the welfare of those engaged in it. Allowing for water trading thus reduces the information burden of water authorities as they do not need detailed information beyond that required to reach a decision on the overall constraints on the water use in the entire economy. - Carlos Mario Gomez, Incentives and prices in water trading
Third, keeping citizens off the street meant that 99% of the eyes and brains that might solve a crime were being wasted. Eric S Raymond famously said that "given enough eyeballs, all bugs are shallow". It was thousands of citizen photographs that helped break this case, and it was a citizen who found the second bomber. Yes, that's right – it wasn't until the stupid lock-down was ended that a citizen found the second murderer - Clark, security theater, martial law, and a tale that trumps every cop-and-donut joke you've ever heard
Our discontent with the original Samuelson rule stems from its failure to account for tax payers’ response to public expenditure and taxation. The rule was derived for an omnipotent, omniscient and benevolent government, a government which, by definition, need not consider people’s responses to its actions. Drop that assumption, restrict government to the choice of tax rates and public expenditures, and the response to its actions must be taken into account. - Dan Usher, Should the Samuelson Rule Be Modified to Account for the Marginal Cost of Public Funds?
The instruments of intervention became the tools with which to apply government knowledge. Resources were directed and allocated by the state, by political and bureaucratic decision making, rather than by the elemental forces of supply and demand - forces shaped by the knowledge of those in the marketplace. - Daniel Yergin, Joseph Stanislaw, The Commanding Heights
One of the strongest arguments in favor of letting people interact freely in a market under property rights institutions is that it is the best known way to utilize the decentralized knowledge of the society— including the knowledge that each individual has about his own values. - David Friedman, The Machinery of Freedom
Individuals express preferences about changes in the state of the world virtually every moment of the day. The medium through which they do this is the market place. A vote for something is revealed by the decision to purchase a good or service. A vote against, or an expression of indifference, is revealed by the absence of a decision to purchase. Thus the market place provides a very powerful indicator of preferences. - David Pearce, Dominic Moran, Dan Biller, Handbook of Biodiversity Valuation A Guide for Policy Makers
Individuals’ actions necessarily rest on imperfect knowledge, and people often appear to act without sufficient information. However, intractable problems of knowledge and incentives impede government officials’ attempts to improve on market-generated knowledge. Knowledge, consisting of information plus judgment, is highly subjective. Therefore, the optimal amount of information varies from person to person, depending on the expected costs and benefits. It should not be surprising that government attempts to improve consumer knowledge frequently are disappointing. Hayek labels as the fatal conceit the idea that human beings can determine what is best for society and use the political process to shape the world according to their wishes. - E.C. Pasour, Consumer Information and the Calculation Debate
Hayek stressed that the knowledge needed to achieve a rational economic order consists of dispersed bits of knowledge held by individuals. This knowledge is highly specialized: only individuals involved in deciding resource use know the relative importance of the various ends or purposes for which resources might be used. Thus, the crucial problem confronting society is how to use the specialized knowledge of different people in the production of goods and services to satisfy consumers. - E.C. Pasour, Consumer Information and the Calculation Debate
Economic planning in a socialist system must necessarily founder on the rocks of ignorance. First, the data necessary to find out the pattern of production that best fits consumer preferences are never given, as often assumed by planning proponents. Second, and even more important, the central planner cannot obtain the necessary data. Much of the data on available resources, production alternatives, and consumer demand constantly changes as economic conditions change. Thus, decentralization is the only means of coordinating economic activity through which the specialized knowledge of individuals can be taken into account and used promptly. - E.C. Pasour, Consumer Information and the Calculation Debate
Governments, like private firms, do not necessarily have ‘the necessary information’ about people’s demand functions to provide public goods at efficient levels. Without non-exclusion there does not seem to be a compelling role for government provision, that is, there is no 'public' in 'public goods'. The general consensus seems to be that it is better to restrict public goods, and hence the a priori case for government intervention, to goods that are both non-rival and non-excludable. - Frances Woolley, Why public goods are a pedagogical bad
It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little. This is as true of business as of other spheres of activity. The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge. - Frank H Knight, Risk, Uncertainty, and Profit
To the naïve mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions, and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account. This is the main reason for rejecting the requirements of constructivist rationalism. - Friedrich A. Hayek, The Fatal Conceit
It may be admitted that, so far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available...[Yet] scientific knowledge is not the sum of all knowledge...[A] little reflection will show that there is . . . the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation. - Friedrich A. Hayek
The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world. - Friedrich A. Hayek, The Use of Knowledge in Society
It is the extensive cooperation among highly specialized workers that enables advanced economies to utilize a vast amount of knowledge. This is why Hayek's emphasis on the role of prices and markets in combining efficiently the specialized knowledge of different workers is so important in appreciating the performance of rich and complex economies. - Gary S. Becker
A free society is one in which individuals are free to discover for themselves the available range of alternatives. In his masterly critiques of the theory of central planning, Hayek directed attention to the circumstance that the information available in an economy is always scattered among countless individuals, never concentrated in the mind of a single central planner. Hayek pointed to the need for a social institutional structure capable of organizing the scattered scraps of available information so they can be used for the efficient allocation of society’s resources. The competitive market, Hayek showed us, is a discovery process, one in which society discovers what options are feasible and how important they are. - Israel Kirzner, Perception, Opportunity, and Profit
An individual is fully sensible of the value of the article he is consuming; it has probably cost him a world of labour, perseverance, and economy; he can easily balance the satisfaction he derives from its consumption against the loss it will involve. But a government is not so immediately interested in regularity and economy, nor does it so soon feel the ill consequences of the opposite qualities. Besides, private persons have a further motive than even self-interest; their feelings are concerned; their economy may be a benefit to the objects of their affection; whereas, the economy of a ruler accrues to the benefit of those he knows very little of; and perhaps he is but husbanding for an extravagant and rival successor. - J.B. Say, A Treatise on Political Economy
It must be remembered, besides, that even if a government were superior in intelligence and knowledge to any single individual in the nation, it must be inferior to all the individuals of the nation taken together. It can neither possess in itself, nor enlist in its service, more than a portion of the acquirements and capacities which the country contains, applicable to any given purpose. - J.S. Mill, Principles of Political Economy with some of their Applications to Social Philosophy
The fact that such a tax institution always exists conceptually does not, of course, imply that it can be determined independently of the revealed choices of individuals themselves. If an omniscient observer should be present, and if he were asked to "read" all individual preference maps, he could then describe the "optimal" structure of tax prices. Failing this, there is no means of ascertaining with any degree of accuracy the "efficient" tax structure or institution. - James M. Buchanan, Public Finance in Democratic Process
Individuals are not, of course, omniscient, even those who think themselves to be. The securing of information about the predicted effects of alternatives is a costly process, even in a world with reasonable certainty. Recognizing this, individual utility-maximizing behavior remains “rational” when choices are made on the basis of less-than-perfect information. There is some “optimal” investment in fact-finding and analysis for the deciding individual at each stage of his deliberation. - James M. Buchanan
Markets, for instance, are usually prima facie diverse because they are made up of people with different attitudes toward risk, different time horizons, different investing styles, and different information. On teams or in organizations, by contrast, cognitive diversity needs to be actively selected, and it's important to do so because in small groups it's easy for a few biased individuals to exert undue influence and skew the group's collective decision. - James Surowiecki
Pareto-optimal provision clearly also requires full knowledge of individual preference functions by the central planning agency. The preference-revelation problems involved in practice are a familiar theme in the modern public goods literature. - John G. Head, Public Goods and Multi-Level Government
If the knowledge problem identified by Mises and Hayek make rational central planning impossible for something as simple as a quart of milk, what chance do central planners have to make rational, effective plans for something as complex and difficult as educating the children of a diverse nation of more than 300 million? - Kevin D. Williamson, The Politically Incorrect Guide to Socialism
As we've seen, socialism cannot serve citizens' interests because central planners have no way of knowing what those interests are. In the absence of the information conveyed through marketplace activity - particularly through prices - economic planners are left with highly defective sources of information: opinion polling, surveys, stated preferences (which normally differ dramatically from real or revealed preferences), and the like. - Kevin D. Williamson, The Politically Incorrect Guide to Socialism
This process of redistribution of wealth is not prompted by a concatenation of hazards. Those who participate in it are not playing a game of chance, but a game of skill. This process, like all real dynamic processes, reflects the transmission of knowledge from mind to mind. It is possible only because some people have knowledge that others have not yet acquired, because knowledge of change and its implications spread gradually and unevenly throughout society. - Ludwig M. Lachmann, The Market Economy and the Distribution of Wealth
If well-meaning policymakers possess all the relevant information about individuals' true preferences, their cognitive biases, and the choice contexts in which they manifest themselves, then policymakers could potentially implement paternalist policies that improve the welfare of individuals by their own standards. But lacking such information, we cannot conclude that actual paternalism will make their decisions better; under a wide range of circumstances, it will even make them worse. New paternalists have not taken the knowledge problems that are evident from the underlying behavioral and economic research seriously enough. - Mario J. Rizzo, Douglas Glen Whitman, The Knowledge Problem of New Paternalism
Deprived of this guidance, and without the incentive of personal interest, accounts and statistics, however complete, would be of very little use, and unless they were the mundane representatives of an omniscient providence, the directors of production would be quite unable to avoid occasional excess or deficiency of supply, which would cause terrible disorder and confusion, with effects infinitely more serious than mistakes made by private enterprise, which, as a whole, is never actuated by precisely similar motives; thus its errors correct each other, and being uninfluenced by prejudice, or amour proper, it shows a marvellous quickness of adoption; mistakes committed by the state would be not only far more serious, but far more difficult to remedy. - Paul Leroy Beaulieu, Collectivism
Each individual is unique, not fully duplicated anywhere else. Therefore, each individual possesses considerable knowledge that is not and cannot be fully known by anyone else - by government or by any group of people. Each individual has preferences - needs and wants - of which only he can be cognizant at any point in time; he also has a unique capacity to envision new wants when old ones have been partially or fully satisfied. The individual knows, within limits, what gives him gain and causes him pain; and he knows this before any of his actions are revealed to others. He can understand the subjective basis for his actions before he acts; others can only observe his actions after the fact and guess at his motivation by reflecting on their own, different preferences. - Richard B. McKenzie, Bound to Be Free
True, consumers do demand a given product, say, a certain model automobile. But how, outside the market process, can the government know what consumers want? Can the government simply ask consumers what they want? - Richard B. McKenzie, Bound to Be Free
The very division of knowledge increases the necessary ignorance of the individual of this knowledge. The division of knowledge increases the need for a decentralized decision-making system - the market. - Richard B. McKenzie, Bound to Be Free
Expositions of welfare economics typically assume that the analyst possesses knowledge that is in no one’s capacity to possess. A well-intentioned administrator of a corrective state would face a vexing problem because the knowledge he would need to act responsibly and effectively does not exist in any one place, but rather is divided and dispersed among market participants. Such an administrator would seek to achieve patterns of resource utilization that would reflect trades that people would have made had they been able to do so, but by assumption were prevented from making because transaction costs were too high in various ways. A corrective state that would be guided by the principles and formulations of welfare economics would be a state whose duties would exceed its cognitive capacities. - Richard E. Wagner
We can never possess tomorrow’s knowledge today. We can never know what innovations, creative ideas, and useful improvements will be generated in the minds of free men in the years to come. That is why we must leave men and their minds free. The man of system, the social engineer, who sees only the apparent problems from these global changes, wants to plan America’s place in the new, emerging global economy. But to do so, he must confine and straitjacket all of us to what his mind sees as the possible, profitable, and desirable from his own narrow perspective with the knowledge he possesses in the present. - Richard M. Ebeling, Free Markets, the Rule of Law, and Classical Liberalism
There is no need to prove that each individual is the only competent judge of this most advantageous use of his lands and of his labor. He alone has the particular knowledge without which the most enlightened man could only argue blindly. He alone has an experience which is all the more reliable since it is limited to a single object. He learns by repeated trials, by his successes, by his losses, and he acquires a feeling for it which is much more ingenious than the theoretical knowledge of the indifferent observer because it is stimulated by want. - Turgot
We know that the essence of markets is that individual cost and value information is private and dispersed, and that command and control economies inevitable must fail to deliver the goods because the appropriate information is not, and cannot be, given to any one mind. - Vernon L. Smith, Commonwealth North Forum
Nevertheless, even without perfect knowledge, the government must decide whether or not to provide the public good. It also must decide how much of the public good it should provide. Finally, the government must decide, all without guaranteed information, on a tax schema. Under such circumstances, it is not possible for the government to reach an optimal solution and a Pareto distribution of taxes for the public good. - Wilfried Eecke, Ethical Dimensions of the Economy
Development happens thanks to problem-solving systems. To vastly oversimplify for illustrative purposes, the market is a decentralized (private) problem solving system with rich feedback and accountability. Democracy, civil liberties, free speech, protection of rights of dissidents and activists is a decentralized (public) problem solving system with (imperfect) feedback and accountability. Individual liberty in general fosters systems that allow many different individuals to use their particular local knowledge and expertise to attempt many different independent trials at solutions. When you have a large number of independent trials, the probability of solutions goes way up. - William Easterly, The Answer Is 42!

No comments:

Post a Comment