Observations

The Use Of Knowledge In Society

Apoorv Upreti -

Years ago, as a recent graduate with an engineering degree, I found myself drawn towards technocratic solutions to the problems I saw around me:

  • Too much corruption? Appoint an anti-corruption commission that will focus on finding and prosecuting corrupt officials.
  • Bread costs too much? Set a maximum price for bread and force sellers to abide by it. Have the government set up bakeries so there is more bread in the market.
  • Evil dictator oppressing his country's people? Send in the UN to force him out and install a democratic system.

Many young engineers are drawn to technocracy. After all, it's what an engineering education teaches you: find a problem, use data + ingenuity to find a solution, implement the solution, profit.

But in complex systems this approach often works poorly. Unlike bridges and roads and software, societies are complicated, dynamic, and adaptive. Your intervention may fail spectacularly if you don't take this into account:

  • The anti-corruption commission is happy to imprison corrupt officials that have fallen out of favour with the current political majority. But it may engage in corruption itself, accuse innocent people who it doesn't like as corrupt, or may simply look the other way when the official is well connected.
  • If bread costs too much, there may be an underlying reason for it that setting a maximum price won't fix. Maybe wheat has gotten more expensive due to a bad harvest, or imports of yeast have gone down because import duties were increased. Either way, forcing the price down doesn't help, in fact it makes things worse because the artifically low price discourages entrepreneurs from jumping in to provide for the market. The government is also unlikely to be able to manufacture bread at a lower cost than private individuals.
  • Forcing out the evil dictator might help, at least temporarily. Or it might result in a civil war as there's a rush to fill the power vacuum. Dictatorships often have deep structural roots and fixing them isn't just a matter of removing a particular dictator. A country with weak institutions and no history of democracy is likely to go back to its old state even if democratic norms are enforced on it temporarily.

In 1945, economist F. A. Hayek wrote The Use Of Knowledge in Society, an essay focusing on one of the issues with technocratic central planning: the central planners' lack of the nuanced, intractable, and local knowledge needed to run commercial activity in a large society.

The essay is short (13 pages) and fairly easy to read, so I would highly recommend reading it. A few choice quotes are below:

The knowledge needed for efficient allocation of resources can't possibly be held in the mind of a single person:

The peculiar character of the problem of a rational economic order
is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources – if ''given' is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know.

Central planners don't make resource allocation decisions well because needs change rapidly over time and place:

If we can agree that the economic problem of society is mainly one
of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders.
Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not-every time some small adjustment in the allocation of resources had to be made-go explicitly through all the relations between ends and means which might possibly be affected.
The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all.

The marvel of the price system:

The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction.
I have deliberately used the word "marvel" to shock the reader out
of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind.

Further Reading: