Skip to comments.Glenn Harlan Reynolds: Progressives Can't Get Past The Knowledge Problem
Posted on 04/04/2010 7:44:08 PM PDT by DogByte6RER
Glenn Harlan Reynolds: Progressives can't get past the Knowledge Problem
By: Glenn Harlan Reynolds
April 4, 2010
"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.
This became apparent when various large businesses responded to the enactment of Obamacare by taking accounting steps to reflect tax changes brought about by the new health care legislation. The additional costs created by Obamacare, conveniently enough, weren't going to strike until later, after the November elections.
But both Generally Accepted Accounting Principles and Securities and Exchange Commission regulations require companies to account for these changes as soon as they learn about them. As the Atlantic's Megan McArdle wrote:
"What AT&T, Caterpillar, et al did was appropriate. It's earnings season, and they offered guidance about , um, their earnings."So once Obamacare passed, massive corporate write-downs were inevitable.
They were also bad publicity for Obamacare, and they seem to have come as an unpleasant shock to House Energy and Commerce Committee Chairman Rep. Henry Waxman, D-Calif., who immediately scheduled congressional hearings for April 21, demanding that the chief executive officers of AT&T, John Deere, and Caterpillar, among others, come and explain themselves.
Obamacare was supposed to provide unicorns and rainbows: How can it possibly be hurting companies and killing jobs? Surely there's some sort of Republican conspiracy going on here!
More like a confederacy of dunces. Waxman and his colleagues in Congress can't possibly understand the health care market well enough to fix it. But what's more striking is that Waxman's outraged reaction revealed that they don't even understand their own area of responsibility - regulation -- well enough to predict the effect of changes in legislation.
In drafting the Obamacare bill they tried to time things for maximum political advantage, only to be tripped up by the complexities of the regulatory environment they had already created. It's like a second-order Knowledge Problem.
Possibly this is simply because Waxman and his colleagues are dumb, and God knows there's plenty of evidence that Congress isn't a repository of rocket scientists. But it's just as likely that adding 30 or 40 IQ points to the average congressman wouldn't make much difference.
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 161,117pages long and composes226volumes.
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.
There's good news and bad news in that. The bad news is obvious: We're governed not just by people who do screw up constantly, but by people who can't help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or "better" rules will do any good: Incompetence is built into the system.
The good news is less obvious, but just as important: While we rightly fear a too-powerful government, this regulatory knowledge problem will ensure plenty of public stumbles and embarrassments, helping to remind people that those who seek to rule us really don't know what they're doing.
If that doesn't encourage skepticism toward big government, it's hard to imagine what will.
A rather amazing quote, considering that we have a Treasury Secretary who failed to govern himself by paying his taxes and who now oversees the IRS, not to mention Charlie Rangel, and all of the other myriad of scoundrels running the government.
That quote really stuck out to me as well.
Walter Williams has spoke about this on Rush’s show also.
I like the description “a confederacy of dunces” regarding the IQ of elected officials.
Completely accurate. May make a good tea party poster.
And even if you could gather it and decide what to do, it would be impossible to execute in a timely matter.
Indeed, they are collectively no more than ordinary men.
Enacted in the wake of Enron.
Ironic, the Liberals wanted to punish Enron, and all other companies, for what Enron did, now it came back to bite them!
As far as “knowledge” goes, thank God once again for the new media of talk radio, Fox News, and (mostly) the internet. The scumbags can’t hide anymore, and they can’t hide their agenda behind the comfort that the Democrat newsrooms of the NY Times and the networks will spin, and spike, and spew lies on their behalf.
I was thinking about that the other day in relation to the fact that jobs in the public sector are much higher paying than those in the private sector. Couple that with the greater difficulty one has in trying to fire someone who holds a public sector job. The ability of the public sector to react quickly to changes in market forces must be incredibly sluggish and costly. The difference must be akin to comparing the maneuverability of a speed boat with a cruise ship.
No, this was the law before Enron.
If I recall correctly, that was the critique the other great Austrian School economist, von Mises, gave of central planning, based essentially on processing speed.
Excellent post—never heard of Hayek till now. I’ve thought the same thing many times, buy Hayek elegantly put it into words.
The immeadiate reporting?
LOL!!! -- So true. Even the MSM, with its smoke and fog machines, is having a difficult time keeping the truth from its customers!
The issue was impairment of deferred tax assets, so that was a pre-Enron thing. As for when, that I am not sure of, but it didn’t help the Democrats that they passed this right before Q1 earnings season.
The real issue here, the one that caused the corporations to report this immeadiately, was the accounting change that required companies to account for these changes as soon as they learned about them.
That’s what brought this to the forefront during the first week post HC, and required them to include the loss during the first quarter of the year.
I’m not 100% on whether it happened because of Enron, but that’s how I recall it.
Von Clausewitz , I hear, said that a plan of battle doesnâât survive the first contact with the enemy. The economy is sort of that: apparent confusion which is beyond the power of any man to sort out completely, but order buried within, order that continually changes direction. Easier to stop things from happening than to make things happen. Maybe the indeterminate principle applies here. By measuring things you change things so your measurement is inexact.
What a wonderfully straightforward piece. Thanks for posting.
By spreading expertise across the market, capitalism should run at light speed compared to a socialist bureaucracy. Innovation with the desire to seek profit would accelerate productivity and efficiency. Socialism therefore should show itself quickly to be an extremely inefficient and expensive alternative. The privatization of bureaucracy, with competition, would be more efficient and cost-effective to government. It would also shrink government, and improve the information feedback from those privatized bureaucracies.
Our country would also do well to apply the same formula to education.
Make that a speedboat and a garbage scow...
Bump to bookmark this outstanding article...
Bump for RAJ.
For those interested, Thomas Sowell’s book Intellectuals and Society thoroughly explores issue of collecting and acting on information. He provides a very good explanation of intellectual’s disastrous infatuation with central social and economic planning.
Thanks for posting this well-written article that explains Hayek’s principles in a current application. A succinct piece of work that it seems some of our Congresscriters could not understand in a semester, if ever.
Never heard of Hayek!! This is an emergency - click here instantly!
Who or what is RAJ? Is it me?
Thanks—I don’t get out much.
What Reynolds doesn’t mention is the other half of the equation: “The knowledge problem” doesn’t matter to liberals because only intentions matter. Solutions are irrelevant as long as we demonstrate that we “care.”
Central planning is always, at its essence,an emotional solution to a physical problem.