Monday, October 15, 2012

Some Current Economic Considerations Base on Hayek's "The Use of Knowledge in Society"

Friedrich Hayek's "The Use of Knowledge in Society" is one of the most cited and read pieces of economics of all time. The piece was advanced as a defense of free markets against centralized planning and,while Hayek has been tentatively adopted by some parts of the political right, it has a depth of thinking that means he cannot be reduced to a "wooden insistence" on the free market above all else. Times have changed and the free market is here to stay. But I wish to revisit his discussion of "special knowledge" in light of income inequality and the environment. I see the key bit of the piece revolving around "special knowledge of circumstances of the fleeting moment not known to others." This is also expressed as "knowledge of the particular circumstances of time and place." Examples Hayek points to are knowing that a machine is not fully employed and can be put to better use, or that some person has skills that can be better utilized, or knowledge of tramp-steamers that are only partially filled so a few extra goods can be shipped at a good price. Hayek sees this kind of special knowledge as generally held in disrepute, and seen as slightly unfair or crass. Thus the value of markets, which do a good job of communicating this kind of information to individuals engaged in non-coordinated or decentralized planning, are also disparaged. Now for my points. Herbert Simon has noted that ever since Adam Smith (who disparaged all institutions, including Oxford), we have in fact seen a rise in the amount of economic activity that occurs within organizations. 80% of current economic activity occurs within organizations and only 20% outside in what can properly be considered markets. This means a large portion of economic activity is coordinated, organized, and standardized. I suggest that this means all special knowledge is not of the same value. A special knowledge of how a particular machine works will only be of great value if there is something special about that machine. The machine may very likely be replaced, or moved to China. A special knowledge of particular tax codes, and how to use them with your business strategy if you're head of a major corporation, however, may be very valuable. As may a special knowledge of the personalities and bottom lines of a few other CEOs. Thus the relative availability of valuable special knowledge could explain inequality. This would also suggest that it will be very hard to root out such inequality. Broad based simplifying the rules of the game might be a start which Hayek would approve of. Environmental externalities are well known to not be communicated through markets. They can be dealt with through "command and control" or economic policy instruments, but in both cases intervention of a centralized planner is generally called for to set up the policy regime. Standard setting is an engineering (command and control) task and one that the U.S. EPA has been able to do generally well. But as the costs of meeting standards has risen, interests in economic policy instruments has risen. One solution is to start pricing ecosystem services, i.e. the market value of goods people receive from nature. While I support this effort, I am skeptical that it will yield the rational policy instrument many of its backers hope for. In many cases the value of a particular environmental feature is tied up in special knowledge. The value of that stream may be partly tied to sediment and nitrogen reduction and flood control. But whether it is valued by someone because it is far away and pristine, or whether it is next to houses and a group of children particularly enjoy wading in it, is very much a case of special knowledge. One with apparently identical characteristics may be viewed as a nuisance. Thus, I would suggest that the ecosystem services work will generally be more useful for educational purposes rather than yielding any strong rational planning framework.

Wednesday, February 1, 2012

Neurath's Boat

Neurath's boat metaphor for how we seek and apply knowledge seems popular among pragmatists, I've seen it feature quite prominently in recent defenses of pragmatism by Richard Rorty and Bryan Norton.

The basic metaphor is pretty simple (and no doubt they like being able to bring the positivists back into their camp), so there is intuitive appeal to it. We start out with the boat we have, rotting timber and all. And we don't have the luxury of replacing all the planks (which one would think of as propositions with relative degrees of truthfulness corresponding with how "sound" they are as planks), so we have to stand on other planks to replace those that are failing. As one is forced to stand on other planks, one can never start at the beginning, i.e. adopt a position of radical doubt. To not take a pragmatic stance, fix those planks most urgently need or repair while standing on those in ok, but perhaps not ideal condition, is to go into the drink. Given that the whole point of the knowledge boat in the first place is to avoid the drink, Descartes' project, er, founders.

My sympathies are with the pragmatists on this one, I mostly agree with Rorty's characterization of radical skeptics as "obsessive" is often apt. But it does seem pretty clear that the selection of the metaphor preselects the pragmatic conclusion. A boat is to keep you out of the water, that's what it's for. Of course it fails as a boat and you fail as a boat operator if you let it go down. Why are you voyaging might be a better question. Is it for pure knowledge and discovery, for conquest, to escape something, for profit, or to catch a tasty fish?

Having sailed a little, I also hate to let Neurath know, that most boats are made of fiberglass or steel these days, and if your boat is in trouble, you'll bring it into dock. The decision making will mostly involve which boat you decide to get on in the first place, not which non-existent planks you repair. So boat design actually is the pressing concern. What is it designed for, what tradeoffs has the designer opted for, how does it fit your purpose, how does it compare to othe boats designed for similar purposes.

I don't think that picking boats, instead of picking planks is at all problematic to the pragmatist project. How does one pick a boat, one finds a community of practitioners who generally shares the same purpose for boating, and looks at the types of boats they use. As one learns more about that specific area of boating, one may find one particular design suits oneself best, and will take a stance on various design choices. If one gets REALLY into boating, one can design and build a boat of one's own, and build it from the ground up. This might be an exercise in skepticism of current designs, and exercise in learning and understanding them, or simply a way to try one's hand at something new. At the end of the day the design will be judged by how well it performs in accordance to what it was designed for. So skepticism, even radical skepticism is permitted, but the proof is in a very pragmatic pudding.