I think this is both entirely true and entirely missing the point. The intuition behind meritocracy is this: if your life depends on a difficult surgery, would you prefer the hospital hire a surgeon who aced medical school, or a surgeon who had to complete remedial training to barely scrape by with a C-? If you prefer the former, you’re a meritocrat with respect to surgeons. Generalize a little, and you have the argument for being a meritocrat everywhere else.
The Federal Reserve making good versus bad decisions can be the difference between an economic boom or a recession, and ten million workers getting raises or getting laid off. When you’ve got that much riding on a decision, you want the best decision-maker possible – that is, you want to choose the head of the Federal Reserve based on merit. - Scott Alexander, Targeting Meritocracy
But 12,000 humans is much better than 12. Two days after Lehman failed the FOMC met and refused to cut rates from 2%, seeing a roughly equal risk of recession and inflation. The markets were already seeing the oncoming disaster, and indeed the 5 year TIPS spread was only 1.23% on the day of the meeting. The markets aren't always right, but when events are moving very rapidly they will tend to outperform a committee of 12. In fairness, this "recognition lag" was not the biggest problem; two far bigger problems included a failure to "do whatever it takes" to "target the forecast." That is, the Fed should move aggressively enough so that their own internal forecast remained at the policy goal. And the second failure was not engaging in "level targeting", which would have helped stabilize asset prices in late 2008, and made the crisis less severe.
Bernanke once said there is nothing magical about 2% inflation. Nor is there anything magical about 12 members on the FOMC. The wisdom of crowds literature suggests you want a large number of voters, with monetary incentives to "vote" wisely. So there are actually three approaches. The Friedman/Taylor "robot" approach. The Bernanke "wise bureaucrats" approach. And the market monetarist "wisdom of the crowds" approach. - Scott Sumner, Robots, committees, or markets?
If my life depended on a surgery, I'd prefer it to be performed by the best surgeon. Then again, I'm pretty sure that more heads are better than less heads. So what about the 12 best surgeons? Would the 12,000 best surgeons be even better? Or would it be a case of too many cooks spoiling the broth?
No two surgeons would perform the same exact surgery in the same exact way. This is because no two surgeons are equally informed or experienced. If we expanded the pool of surgeons then we'd end up with a bell curve. The outliers would perform very different surgeries. This shouldn't be too difficult to appreciate if you've ever watched a hospital show where two surgeons strongly disagreed on how to proceed.
Let's imagine that Frank, the best surgeon, is about to operate on me. Where should he make the incision? He hits the "pause" button and time stops for me. Then he waits for 12,000 surgeons to provide their input on where the incision should be made. They all have access to the streaming video. Frank sees all their X's superimposed on my body. Should he make an incision where the X's are the densest? No. The 12,000 surgeons aren't equally confident in their information/answer. Therefore, each surgeon must be given the opportunity to put their money where their answer is. The more money a surgeon spends on their answer, the more weight it will have. This means that the more confident surgeons will have more influence.
What comes to mind is a ouija board. Eh, perhaps it's not the best example to use in this context. Anyways, instead of a planchette there's a scalpel. The scalpel is guided by the spending decisions of 12,000 surgeons. In other words, it's guided by the Invisible Hand. The maximum possible amount of information and experience, weighted by confidence, would go into my surgery. Or would it?
Why not let all the surgeons in the world participate? Why not include all the nurses as well? If the premise is that people who are more confident in their information are going to be willing to spend more money on their answers, then there's no reason to prevent anybody from participating in my surgery.
The best surgeon is certainly better than the second best surgeon. But I'm pretty sure that the best surgeon is far inferior to the market.
Is the best decision-maker always the market? Yes! But in some cases the technology isn't advanced enough to overcome the logistical issues.
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