Monday, April 5, 2010

The Knowledge Problem

Glenn Reynolds (the Instapundit) has a very interesting analysis of why government is so totally incompetent:

"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.

Hm, very interesting, don't you think?  I'd say we've got more than enough evidence of this truth throughout history, and there's no reason to think that Obama's burgeoning command economy in America will be any different.  In fact, anyone who has paid any attention to the federal government already realizes that...well, they suck at just about everything they do.  So what can be done to help out?

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.

The Founders knew this, and that's why they took so many deliberate steps to ensure that the free market would be the primary operator of the American economy.  Over the past century or so, however, government has been creeping ever forward, expanding constantly with the occasional major leap.  The New Deal in the 1930s, the Great Society in the 1960s, and now Obama's bald-faced takeover of huge swaths of the nation are those leaps.  And here's where it gets really interesting (emphasis mine):

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.

But don't bother a liberal with facts, history, or details, right?  Nope:

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!

And, with the media acting as the trained poodle for Obama, the effort to spin a blatantly obvious reality into unicorns and rainbows continues daily.  It would be funny if they weren't in the process of ruining the country.

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.

Flat tax, anyone?  A single page with a handful of questions should do the trick.

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.

Good stuff.  Once again, there's an important principle here: an economy is vastly more complex than any control of a human government can handle.  The decisions about buying, selling, and worth need to bubble up from the consumer level, which means that the American economy has roughly 308 million variables constantly fluctuating on a daily basis.  To try to clamp down and control all of these variables from the top down is as astoundingly arrogant as it is completely destined to fail.  Unfortunately, we're all going to see the American economy crippled in the process of that failure.  I've often heard the comparison that the field of economics was invented to make meteorologists look accurate.  But, the basic understanding of historically proven principles like taxation and free markets are very, very simple.  Every American is capable of understanding those things, and make political decisions (i.e. votes) based on that understanding.

America is a sinking ship heading toward the rocks, and needs a fast change of direction.  If we can't turn this thing around, we're going to experience a violent crash that will severely damage -- if not destroy -- this nation.  The Knowledge Problem doesn't need to be a problem at all - in a free market economy, the knowledge transfer takes place on a consumer level basis, with each transaction.  It's what works, and it's what we need to get back to if we're to avoid this crash.

Funny how it goes hand in hand with freedom, too.

There's my two cents.

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