Glenn Harlan Reynolds: Progressives can't get past the Knowledge Problem

[fossten]

Glenn Harlan Reynolds: Progressives can't get past the Knowledge Problem

By: Glenn Harlan Reynolds
Contributor
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.

Read more at the Washington Examiner: http://www.washingtonexaminer.com/o...Knowledge-Problem-89780997.html#ixzz0kE4fjgrE

 

[shagdrum]

Great find. I reposted it on my facebook page.

This is why leftist policies always make things worse for society; they assume they have the knowledge to do better then systems that have evolved over time through trial and error. They prefer social constructions based on abstract postulations, dictated by rational principles and run directly by man to socially evolved systems that are developed over generations through trial and error.

The difference is, one system has proven itself to work very efficiently while the other is based in high minded speculations that are rooted in conceit and are abstracted from the real world.

Obamacare is a prime example.

Looking at past programs like this and seeing how the programs necessarily change when it's assumptions don't line up with the real world is why Conservatives and Libertarians have no doubt that the "Comparative Effectiveness Panels" set up currently to "advise" healthcare will inevitably turn into death panels.

 

[shagdrum]

In fact, assuming that humans can directly plan an economy (in part or in whole) is what Hayek famously called the Fatal Conceit:

Socialism’s “Fatal Conceit”
by Ralph R. Reiland

The appeal of socialism, wrote Nobel-winning economist F. A. Hayek, “depends on the instinctual appeal of promised consequences.”

The problem, argued Hayek, is that “socialism cannot possibly do what it promises.”

Socialism fails, unavoidably, because it is based on the flawed concept, the “fatal conceit,” that one man or one group, one cabinet of commanding officials or one central committee, or one team of planners from Harvard and Yale, can gather and understand enough information in order to reshape the world around them according to their wishes, reshape human nature, and design an economic system that can outstrip the overall and long run performance of the decentralized and basically self-ordering and spontaneous processes of the marketplace.

Prior to the “economic failure of Eastern European socialism, it was widely thought” that “a centrally planned economy would deliver not only ‘social justice’ but also a more efficient use of economic resources,” explains Hayek. “This notion appears eminently sensible at first glance. But it proves to overlook the fact that the totality of resources that one could employ in such a plan is simply not knowable to anyone, and therefore can hardly be centrally controlled.”

That’s why the results of the “plan” seldom work out as its intellectual and political leaders intended. It’s why what starts out as idealism often ends up as disillusion, and then tyranny. As evidence, Hayek points to “a seemingly endless string of ‘utopias,’” i.e., failed systems with unintended consequences on a massive scale, “the Soviet Union, then Cuba, China, Yugoslavia, Vietnam, Tanzania, Nicaragua.”

Here in the United States, it’s exactly the same two flaws that Hayek warned of, i.e., lack of knowledge and conceit, that are simultaneously present in our political leadership and got the ball rolling to produce our current economic crisis.

“Congress and regulators pushed Fannie Mae and Freddie Mac to become a vast duopoly in the mortgage finance industry,” writes David Boaz, executive vice president of the Cato Institute and author of Libertarianism: A Primer. “Their debt was implicitly backed by the Treasury Department, and they were able to expand their debt and engage in risky transactions.”

With big bonuses to be made at Fannie Mae and Freddie Mac for increased volume and the government, i..e., the taxpayers, standing by to pick up any losses, the stage was set for some top level central planning and high-priced social engineering.

As Larry Summers, Obama’s chief economic advisor, explained, “Little wonder with gains privatized and losses socialized that the enterprises have gambled their way into financial catastrophe.”

The central plan for housing? No money down, more homeowners, more happy voters, all by way of cheap mortgages and rising house prices.

“There was substantial agreement in Washington that homeownership was a good thing and that more homeownership would be even better,” writes Boaz. “Thus Congress and regulators encouraged Fannie, Freddie, and mortgage lenders to extend credit to under-qualified borrowers. To generate more mortgage lending to low- and moderate-income people, the federal government loosened down-payment standards, pressured lenders to increase their percentages of ‘affordable’ loans, and implicitly guaranteed Fannie and Freddie’s dramatic expansion.”

The result was a flood of non-prime mortgages, a corresponding surge of bad loans, the development of convoluted financial products to finance and redistribute the substandard paper, rising home prices and an inevitably bursting bubble.

“In 1996, the department of Housing and Urban Development gave Fannie and Freddie an explicit target: 12 percent of their mortgage financing had to go to borrowers with incomes less than 60 percent of their area’s median income,” reports Anna J. Schwartz at the National Bureau of Economic Research. “That number was increased to 20 percent in 2000 and 22 percent in 2005. The 2008 goal was to be 28 percent. Between 2000 and 2005, Freddie and Fannie met those goals every year.”

Everything went according to plan, in other words, except that our collective nest eggs in the market dropped by $10 trillion over the past 17 months and the politicians are handing out trillions that they’re borrowing from China or pilfering from our kids and grandchildren.

As Hayek explained, central plans go haywire with unforeseen and unintended consequences because everything isn’t knowable to the central planners. In other words, they don’t know what they’re doing.​