The Knowledge Problem

F. A. Hayek, in his Nobel speech, famously talked about what is frequently called “the knowledge problem.”  Essentially, Hayek argues that there is no way for a person, or group of people, to collect, analyze, and interpret all the information necessary to make economic choices for an entire group.  Hayek talks about the “knowledge of the particular circumstances of time and place.”  In other words, only I (or you, dear reader) have the information necessary to make decisions affecting you.  A central planner wouldn’t have the information needed.  Any decision he makes may help some, may hurt others.

The legislator (assuming he is acting not in his own self-interest but for some higher purpose) must rely upon averages. The average citizen, or the average laborer, or the average firm. The problem with this, of course, is that averages do not account for individual details; in fact, they deliberately factor them out.

Let’s assume we have a society where there are 10 people who wear size XL shirts and 10 who wear size M. The average shirt size, then, is size L. If some busybody came along and decreed some shirt legislation based upon average size, then all manufacturers would have to make size L shirts. For half the population, the shirt is too big. For the other half, it is too small.

This is why legislation often fails in its stated goals: it cannot take into account the “particular knowledge of time and place.” The legislation is either too much or too little, and thus it creates the very failures it was supposed to prevent.

Markets and Trust

Over at Cafe Hayek, Don Boudreaux quotes Steve Horwitz:

If we shouldn’t trust “strangers” to educate our children, why should we trust “strangers” to feed or clothe them either? Yet we do so every single day. Civilization is built on turning strangers into honorary kin through institutions that build trust. Education is no different. I’m not interested in forgoing the benefits of the division of labor in a world where contracts and reputation signal trust in strangers.

Steve’s point is brilliance in its simplicity.  Markets foster an enormous amount of trust among its participants.  In fact, trust is central toward market operations: remember that all market transactions are voluntary.  If one party doesn’t trust the other, no transaction will occur.

Markets also severely punish those who violate that trust.  Sure, there are legal actions that can take place, but the far worse is the judgement of the market.  If a firm is untrustworthy, they quickly find themselves facing bankruptcy and an irate customer base.

Immigration and Voting

Another fear of open borders immigration, especially by those on the Right, is that the immigrants (assuming they become citizens) will vote for someone other than their political party.

Aside from the fact that suggesting someone should be denied the right to improve their life because they might think differently from you is a pretty terrible reason, there is a larger issue here:

Isolating, demonizing, and criminalizing immigrants is certainly not the way to endear them to your cause.  Ironically, the actions taken, primarily by those on the Right, will drive them right into the arms of their political opponents.  In other words, this fear was created entirely by the Right and is driven entirely by the Right.  Not smart.

More Thoughts on Open Borders

A typical response by those who advocate closed (or, at least, tightly controlled) borders is this:

“Do you leave your front door unlocked?”

There are many things wrong with this statement, and people far smarter than I have dealt with it.  But I have two main problems with it:

1) It assumes the government owns the country. I reject that as a libertarian and a moralist.

2) It’s an inapt analogy.  I do lock my door to prevent someone from stealing what little stuff I own. That is because a good person would have no cause to enter my apartment unless I invite them in. Conversely, a good person would have many reasons to cross the border from Mexico to the US (or anywhere else). I can reasonably assume that a person who crosses my threshold wishes to cause me harm because he was not invited in. One cannot reasonably make the same assumption for national borders.

Factual Relevence

At Cafe Hayek, on this post, a commenter made the following comment:

“Reasoning” does NOT trump reality.

The essential point he is making is that facts speak for themselves.  However, that is never the case.  Facts do not speak for themselves.  Facts just are.  Science is taking observations and facts and using reasoning to draw realistic conclusions.  Reasoning does, in fact, trump reality.  Take the following scenario (this is 100% accurate, I might add):

Ever since I upgraded by satellite TV package to include NESN, the Boston Bruins have won each game they played.  This is, indeed, fact.  This is reality.

But could the conclusion be drawn that I am responsible for the Bruins’ victories?  One surely could draw that conclusion and the facts would support it.  But is it reasonable?  No.  My TV package doesn’t have any effect on how the Bruins play.  No one is saying “hey, some kid in New Hampshire is now watching our games, so we need to step up our game!”  It would be unreasonable to conclude my TV habits have causal effect on the Bruins, so the conclusion that I am causing the Bruins’ victories could be dismissed pretty easily based upon reason alone.  Reason trumps reality.

Reasoning is an important part of the scientific method, but all too often, it is omitted from economic discussion.

Ways to Improve Welfare: Guaranteed Income

One of the main problems with a welfare system (or “safety net” as it’s now more commonly called), is that the incentives can often work against the person on the system, rather than for it.  The point of a welfare system is to help those who need it, but not to enable them.  Many studies, such as this one by CATO, find that those on welfare often face huge tax burdens the moment they go off of welfare, incentivizing some to remain on the system, and can lead to problems like this.  This is a problem that is acknowledged on both sides of the aisle.  So, how can it be fixed?  Some advocate simply doing away with the welfare system as a whole.  I used to hold such a view, but I’m not sure it’s really feasible.  Others try to fix the system through the legislative process, but that tends to lead to confused and often contradictory policies (for example: minimum wage legislation reduces the quantity demanded for workers but the EITC increases it.  The two essentially cancel each other out).

Here is what I propose: guaranteed income for all adults.  This would be in lieu of, not in addition to, the current system.  So, scrap everything: Social Security, SSI, food stamps, WIC, minimum wage, etc etc, and replace it with a guaranteed income that falls as one’s income increases.

Let me try to explain how this would work with some contrived numbers:

Every adult is guaranteed an income of at least $10,000/yr.  If s/he get a job that pays them $3,000/yr, they now get $7,000/yr from the government.  If they get a raise that pays them now $5,000/yr, their government check is now $5,000.  If they make $10,000+, they get nothing.

I believe this would solve many of the problems with the current US welfare system, such as the disincentive to work or the fact that even billionaires get Social Security.  Is it ideal?  No.  But it certainly would be a step up from the current system, and I think both Republicans and Democrats could get behind it (although perhaps not as it would take away much of their power to hand out special interests).

Minimum Wage and Overseas Cash

A favorite “man-on-the-street” argument for minimum wage, especially now, is that “corporations are sitting on mountains of cash overseas” and that minimum wage would force these organizations to bring the cash home and invest it here.

There are many problems with that argument, but the largest is the idea that minimum wage firms are multinationals.  To be fair, some are (Wal-Mart, for example).  The majority are not.

The majority of minimum-wage jobs are in three sectors: Education & Health Services, Retail/Wholesale, and Leisure & Hospitality.  The majority of those are small businesses, not likely to be sitting on a mountain of cash; they are the ones most likely to be hurt by such legislation.

Cronyism is not Realism

Forbes.com ran an opinion piece today by Mr. Dan DiMicco, a self-described “trade realist.”

Mr. DiMicco’s article is a prime example of how cronies try to game the system all in the name of “fair play.”  By decrying the actions of others, he demands that the US government match what other governments are doing and labels all of us who oppose such actions as “the true protectionists.”

Mr. DiMicco’s arguments are unconvincing for several reasons: they are largely disjointed.  He jumps around from talking point to talking point without really justifying any of them.  He also relies heavily on arguments based upon emotion rather than anything of substance.

His biggest mistake (and the one I take issue with the most as a moralist) is the “they do it so we must too!”  With respect, this is an extremely childish argument, but also all it does is create an economic arms race.  Mr. DiMicco rightfully argues that some governments ignore trade rules and trade agreements; he labels these people “Trade Cheaters.”  He then calls on the US, not to fight these breaches, but to embrace them!  One person cheating to get back at another for cheating doesn’t make the game fair; it just makes both parties cheaters.

What Mr. DiMicco is asking is not for a level playing field, but for the government to pick winners and losers.  That is an extremely dangerous proposition.  It would also lead to wasted resources and often contradictory government policy.  It would also increase lobbying as more and more firms look to get the special privileges he advocates.  In short: it creates a system of cronyism.

Competition is not something that should be shunned; it should be embraced.

There are many other issues wrong with Mr. DiMicco’s article, which I may cover in a future post, but his main argument is very unconvincing, despite the appeal it might have on an emotional level.