disorderlyvision
08-03-2009, 12:00 PM
http://www2.timesdispatch.com/rtd/news/opinion/commentary/article/ED-HORW02_20090731-195206/283336/
The headlines blare that President Obama will "restructure the financial services industry" and "fix the health care crisis." A 31-yearold with no experience in the business world, but a lot of experience in politics, has been put in charge of dismantling General Motors.
Members of Congress lecture car manufacturers and mortgage lenders on how to do their jobs. Politicians keep taking on more and more responsibility for the U.S. economy, as each industry appears to be getting its own "czar." Unfortunately, more czars will not produce better cars, or health care, or mortgages, or much of anything else.
The belief that one person or group, no matter how smart, can know how best to allocate resources is a classic example of what the Nobel Laureate economist F. A. Hayek called "the fatal conceit."
In Hayek's view, what enables businesspeople to make good decisions about the allocation of resources is not that they are smarter than other people. Instead, two other factors are key.
First, businesspeople have very detailed knowledge of their particular corners of the world. They know where resources are, where their customers are and what they want, and have the experience of knowing how to deliver it. This is not about being "smarter," but about having local and contextual knowledge that others don't have.
Second, entrepreneurs develop this knowledge by making use of the signals provided by prices, profits, and losses. Prices guide entrepreneurial decision-making by enabling them to formulate budgets and estimate the profitability of the various choices they might make.
Profits and losses provide information after the fact about how well they chose. Profits signal them to continue, while losses tell them that resources need to be reallocated. By acting on the basis of that information, each entrepreneur contributes to the overall improved allocation of resources.
The lesson from Hayek is that when the rules are right, markets are collectively much smarter than any individual or group within them. This is the lesson that the Obama administration has utterly missed.
By placing Brian Deese, a 31-year-old with no business or automobile background whatsoever, in charge of General Motors, the Obama administration has signaled its belief that individual smarts is more important than the wisdom of markets.
Deese dropped out of law school to work on the Clinton and then the Obama campaigns in 2008 as an economic policy adviser. Despite his lack of relevant business experience, he has authority to make decisions about the future of GM and the allocation of resources in the automobile industry.
The administration evidently believes that experience in policymaking is an effective substitute for the local and contextual knowledge of how to produce goods and services. This is a complete misunderstanding of the way in which markets work and what kinds of knowledge matter.
Much of the same is true with Obama's supposed fixes for health care and financial services. Imposing a vision of how an industry "should" work and how it should produce and deliver its products from the top down is the height of political hubris.
The conceit behind it is one that dates back to the earliest visions of socialist central planning. Even as belief in that more comprehensive vision has died, the mindset behind it is still manifested in the belief that top-down fixes driven by well-meaning political actors are more rational than letting individuals with their local knowledge coordinate and cooperate via markets.
When politicians such as Barney Frank lecture financial executives on their lending practices, they too are guilty of the sort of hubris Hayek identifies.
How they know better what it takes to run a business is not at all clear, especially since many of them have never done so. This sort of second-guessing of business inevitably gets politicized as there is no other basis for decision-making by politicians who are ignorant of the detailed, contextual knowledge on which effective entrepreneurship relies.
Absent the signals of the marketplace, czars, presidents, and members of Congress are thrashing around in the dark in their attempts to improve upon the outcomes generated in actual markets. Top-down directives forgo the opportunity to learn from the decentralized knowledge of those actually producing the goods and services in question.
Obama's reliance on experts and czars and top-down restructuring is particularly ironic in light of his promises of change and bringing the spirit of 21st century technology to government.
The clearest lesson of the networked world is that decentralized, bottom-up collaboration works much more effectively than top-down solutions. From Wikipedia, to open source software, to the Internet itself, the 21st century is quickly becoming the century of the "wisdom of crowds."
Young people understand how contributing their own contextual knowledge to aggregating and signaling processes on the Web make all of us more effective users of information through shared knowledge. Whatever its flaws, Wikipedia could never be written by an Information Czar or Task Force.
Hayek recognized decades ago that markets work in precisely the same way. To think otherwise would be to suffer from the fatal conceit. Czars and second-guessing politicians with grand designs will only frustrate the much more effective decentralized processes of the market.
Even as they communicate constantly through the Internet, probably using open source software in the process, Obama and his administration, in their hubris, continue to believe that industries need czars and that individuals and committees are smarter than collaborating, distributed collectives. We can only hope that conceit will not be as fatal as Hayek feared.
--------------------------------------------------------------------------------
Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and a member of the Board of Scholars of the Virginia Institute for Public Policy
The headlines blare that President Obama will "restructure the financial services industry" and "fix the health care crisis." A 31-yearold with no experience in the business world, but a lot of experience in politics, has been put in charge of dismantling General Motors.
Members of Congress lecture car manufacturers and mortgage lenders on how to do their jobs. Politicians keep taking on more and more responsibility for the U.S. economy, as each industry appears to be getting its own "czar." Unfortunately, more czars will not produce better cars, or health care, or mortgages, or much of anything else.
The belief that one person or group, no matter how smart, can know how best to allocate resources is a classic example of what the Nobel Laureate economist F. A. Hayek called "the fatal conceit."
In Hayek's view, what enables businesspeople to make good decisions about the allocation of resources is not that they are smarter than other people. Instead, two other factors are key.
First, businesspeople have very detailed knowledge of their particular corners of the world. They know where resources are, where their customers are and what they want, and have the experience of knowing how to deliver it. This is not about being "smarter," but about having local and contextual knowledge that others don't have.
Second, entrepreneurs develop this knowledge by making use of the signals provided by prices, profits, and losses. Prices guide entrepreneurial decision-making by enabling them to formulate budgets and estimate the profitability of the various choices they might make.
Profits and losses provide information after the fact about how well they chose. Profits signal them to continue, while losses tell them that resources need to be reallocated. By acting on the basis of that information, each entrepreneur contributes to the overall improved allocation of resources.
The lesson from Hayek is that when the rules are right, markets are collectively much smarter than any individual or group within them. This is the lesson that the Obama administration has utterly missed.
By placing Brian Deese, a 31-year-old with no business or automobile background whatsoever, in charge of General Motors, the Obama administration has signaled its belief that individual smarts is more important than the wisdom of markets.
Deese dropped out of law school to work on the Clinton and then the Obama campaigns in 2008 as an economic policy adviser. Despite his lack of relevant business experience, he has authority to make decisions about the future of GM and the allocation of resources in the automobile industry.
The administration evidently believes that experience in policymaking is an effective substitute for the local and contextual knowledge of how to produce goods and services. This is a complete misunderstanding of the way in which markets work and what kinds of knowledge matter.
Much of the same is true with Obama's supposed fixes for health care and financial services. Imposing a vision of how an industry "should" work and how it should produce and deliver its products from the top down is the height of political hubris.
The conceit behind it is one that dates back to the earliest visions of socialist central planning. Even as belief in that more comprehensive vision has died, the mindset behind it is still manifested in the belief that top-down fixes driven by well-meaning political actors are more rational than letting individuals with their local knowledge coordinate and cooperate via markets.
When politicians such as Barney Frank lecture financial executives on their lending practices, they too are guilty of the sort of hubris Hayek identifies.
How they know better what it takes to run a business is not at all clear, especially since many of them have never done so. This sort of second-guessing of business inevitably gets politicized as there is no other basis for decision-making by politicians who are ignorant of the detailed, contextual knowledge on which effective entrepreneurship relies.
Absent the signals of the marketplace, czars, presidents, and members of Congress are thrashing around in the dark in their attempts to improve upon the outcomes generated in actual markets. Top-down directives forgo the opportunity to learn from the decentralized knowledge of those actually producing the goods and services in question.
Obama's reliance on experts and czars and top-down restructuring is particularly ironic in light of his promises of change and bringing the spirit of 21st century technology to government.
The clearest lesson of the networked world is that decentralized, bottom-up collaboration works much more effectively than top-down solutions. From Wikipedia, to open source software, to the Internet itself, the 21st century is quickly becoming the century of the "wisdom of crowds."
Young people understand how contributing their own contextual knowledge to aggregating and signaling processes on the Web make all of us more effective users of information through shared knowledge. Whatever its flaws, Wikipedia could never be written by an Information Czar or Task Force.
Hayek recognized decades ago that markets work in precisely the same way. To think otherwise would be to suffer from the fatal conceit. Czars and second-guessing politicians with grand designs will only frustrate the much more effective decentralized processes of the market.
Even as they communicate constantly through the Internet, probably using open source software in the process, Obama and his administration, in their hubris, continue to believe that industries need czars and that individuals and committees are smarter than collaborating, distributed collectives. We can only hope that conceit will not be as fatal as Hayek feared.
--------------------------------------------------------------------------------
Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and a member of the Board of Scholars of the Virginia Institute for Public Policy