Information Matters?

Sorry I have been absent here lately: I am in the middle of several projects that take priority.

Nonetheless in the course of one of those projects I have found myself immersed in the many faces of economic theory with respect to the role of government in an economy. That role appears to lurch from one extreme to the other, which leaves the impressionable outsider having to resort to their political predisposition in order to seek an answer. Economics, you see, has many answers. Some of which flatly contradict others.

So much for science.

The problem begins at the beginning. The beginning, that is, of economics itself. The early pioneers of the discipline were captivated by the apparent order they saw around them, and especially by the seeming ability of goods and services to turn up and satisfy demand without being ‘planned’ into being. This led them, naturally, to build into the subject a bias towards a market-centric explanation of everything. For it was the mystery of the market that they attributed this seeming order to.

Well one thing led to another and we ended up with an almost comical attachment to ‘the market’, very often with no real description of what that actually was. The market is shrouded in its own mystery, with its super-human powers flowing very much from that mystery. Strip the mystery away and the market becomes a whole lot more prosaic. Plus the elegant math used to describe its machinations begins to look very contrived.

It is one thing to marvel at what you think of as a great mystery needing explication, it is another entirely to become so fanatical that you tolerate not a single hint that the mystery might be slightly less than magical.

Yet that’s where we are.

In order to protect the object of their desire from the rude realities of its earthly manifestation, economists made a series of transitions in thought, with each adding layers of complicated theory in order to cover up or atone for what were perceived as prior weaknesses.

Towards the end of the 1800’s one such transition was so radical that it implied that all previous theory was not about economics at all. In  an effort to put economics on a more ‘scientific’ standing its subject matter was progressively narrowed. No longer were the big issues of where wealth and growth came from of any concern, what mattered now was exploring and describing the logic of the magic. Note that there was no doubt about the existence of the magic, that was presumed, all that economics was now to be concerned with was its inner workings.

In the 1930’s this led to an explosion of economic enquiry and argument.

At one extreme Oskar Lange could argue, quite plausibly, that if all the conditions of the magic obtain in a real economy, then socialist organization is not just a possibility, it is guaranteed to work. This set capitalist-leaning economists aflutter. They had to counter attack. One result was that Friedrich Hayek, whose libertarian politics could brook no morsel of socialism entering contemporary political reality, began to argue that the economy was actually a learning device and that, since knowledge was so unevenly distributed in any economy, and was thus well beyond the ken of any government, a decentralized marketplace was the best possible solution to the problem of coordination.

Note that the big problem of economics was now firmly coordination and not those older issues of wealth and growth. Although people like Hayek conflated the two traditions: the libertarians argued that market coordination was also the best longer term guarantor of ‘sustainable’ growth. By sustainable they did not – and still do not – mean sustainable in an ecological sense. What they mean is that growth can be sustained on a robust long term path, albeit with periodic interruptions due to the ups and downs of the business cycle.

Also notice that Hayek, in order to fend off Lange and his evil socialism, had to introduce a decidedly uneven vision of knowledge. In the Hayekian world knowledge was a very local and lumpy affair. Individuals were therefore likely to be much more attuned to it, whilst the government would inevitably be defeated in any attempts it made at gathering, assembling, and analyzing for policy purposes that self-same knowledge base. Such local knowledge is forever inscrutable to the central planner.

The problem with this vision is not its lack of reality. Indeed the Hayekian view on knowledge is a very realistic one. It’s that it seems to fly flat in the face of the parallel efforts being made at the same time to establish the concept of ‘general equilibrium’ as a central fact in economics. Since the days of Walras, economists obsessed with the apparent order of the economy had made attempts to describe the coordination problem in terms of all markets simultaneously. That is to say they sought to describe a world in which all markets, however diverse and seemingly disparate, would magically fall into place together at the same time. This requires prodigious calculation, but market magic was assumed to be up to the task. It was only after making a series of ever increasingly absurd assumptions that economists were able to arrive at a suitable description of such a general equilibrium. Only the very honest amongst them then stepped back and admitted the effort was worthless since those assumptions were so heroically other-worldly as to render the entire effort barren of practical use.

Amidst all those assumptions are one or two that imply information is both freely and widely available to all the players in the economy.

On the face of it this isn’t exactly what Hayek had in mind when he argued knowledge was fragmented and local. After all, how can knowledge be freely and widely available and yet fragmented and local at the same time?

On the one hand we have a theory that, in order to describe market magic as being, well, magical, has to allow us all to have equal access to all the relevant information we need in order to undertake our transacting calculations. And on the other we have a theory that depends upon that same information being impossibly divided and split apart such that no one can assemble it, least of all to undertake transacting calculations.

You might think this dichotomy would be an issue.

On one side the libertarians argue that the government has no role in the economy because it could never gather enough relevant information. The economy, they argue, is just too complicated for anyone to understand, so we ought leave it be. And others argue that the government has no role in the economy because everyone knows exactly what’s going on and can therefore both predict and defeat even the most well intentioned actions of the government. The economy they argue is perfectly understandable as long as everyone thinks and acts like economists theorize they do.

Either way the government doesn’t have a role to play.

If this sounds a tad ideological to you so be it. We are told this is all science.

Meanwhile it sounds to me as if information matters. It really matters. But as of now economists cannot quite agree on how.