from Peter Radford
This is second stab at a question that vexes me …
I have been reading too many historians lately. So when I read the usually very smart Brad DeLong say something that seems straight from Hayek I get a greater jolt than I used to. And that’s saying something. This is what he wrote that caught my attention:
“The true genius of the market system lies in its capacity to decentralize decision-making, to push choices and authority out to the periphery—out to the individuals and enterprises who are closest to the ground, who possess the granular, local knowledge that no distant central planner or bureaucratic committee could ever hope to match. In this way, the market harnesses and aggregates the dispersed intelligence of society, transforming millions of individual judgments, preferences, and bits of information into a coherent pattern of production and allocation.”
Pure Hayek.
Notice the enthusiastic use of words like “genius”. Notice too the typical comparison between decentralized decision making based upon “granular, local knowledge” and the implied plodding foolishness of “distant central planners”. Apparently “the market” harnesses dispersed intelligence and so on, thus transforming it all into a wonder of coherence of production and allocation.
Mercifully DeLong does not then go on and argue that “the market” solution arrived at by all that genius is in any way “efficient”. That would have been too much.
The problem I have with such gushing and broad-brush praise of “the market” is that no one seems to be able to tell me what this “market” is. Or where it is. Or who participates in it. Or how it operates. Or …
Let’s just start with basics.
This miraculous creature economists call “the market” seems to be entirely co-terminus with society at large. So why distinguish between them? Why not just call it “the community”, or “the polity”, or “the society”. After all the market as imagined by economists is simply a process of harnessing and aggregating society’s intelligence. It is an intensely social activity. So why not simply discuss society’s ability to do social stuff. Why create a special thing called “the market”?
Hayek’s influence just overwhelms such sense. The glitter of the ideological preference for decentralization distracts from the impossibility of the computation of anything aggregate from all that dispersed and granular knowledge. So whilst a bureaucratic committee might be utterly incapable of handling all that dispersed knowledge, nor can anyone else. Including economists trying to work out if any outcome from all that effort is remotely close to being something they call efficient.
They just don’t know. They cannot know. By their own admission. The solution is incalculable.
So economists become magicians. They set up the problem in typical Hayekian style: there’s just too much information for those dumb central planners to coordinate everything. So the real world of computational impossibility is used to bash bureaucrats. But then something miraculous happens: the supposedly decentralized alternative is seen as “genius”. It coordinates where no one else can. It produces coherent patterns of production and allocation. Apparently the accumulation of lots of local pockets of “mini-solutions” produces — hey presto! — something that we are supposed to believe is an aggregated “coherent” pattern.
Huh?
Why? How? More to the point: how do we know it is coherent? And coherent in what sense?
No one has any idea. It might be completely stupid. It might be arbitrary. It might be corrupt. It might be suffused with distortions produced by asymmetries of power. Goodness knows what might be going on in all those distant corners as “the market” does its harnessing and so on. So, I repeat, how does anyone know if what “the market” produces is remotely coherent? Or that there is a pattern? And what can anyone possibly say about the ultimate allocation?
What is that saying about “the eye of the beholder”?
It is. That’s about it. All we can say is that the allocation just is. Whether it is good, bad, or indifferent, we have no idea. Why? Because no one can gather the necessary information to calculate anything. Except locally. And that gives us zero insight into the global solution. If central planners, dumb fools that they are, cannot gather sufficient information and do the calculations, nor can economists, no matter how good they are at math. Or statistics. It is computationally impossible.
So economists cannot make any worthwhile claims about the efficiency, or otherwise, of “the market”. Which means that when they do — as when DeLong gushes about the market’s genius. — they are either utterly foolish or that they are actually referring not to the real world, but to some conceptualized version of the world, aka a “model”, that produces results they like. That’s an ideological stance. It is not a scientific stance.
Once we embrace Hayek’s insights into the problems of knowledge and society we realize that we are no longer capable of making sense of something like a society-sized pile of information. All we can do is make assertions. And such assertions will usually rest on political preferences. As in: central planners are just dumb. We can congratulate Hayek for his contribution to complexity science. And recognize that he also blew up the foundations of economics in so doing.
Why my reference above to historians?
Because there seems to be an effort underway to challenge the complacency of economists. Why should anyone pay any attention to a discipline that appears unable to give any precise definition of its target of investigation?
What is “the economy”? Some historians, noticing the gap, have set out to discover for themselves. Jonathan Levy is one such historian, and he points out on page four of his excellent new book “The Real Economy”, that economists often slide past precision and serve up pablum when defining an economy. He quotes this passage from Greg Mankiw’s textbook:
“There is no mystery to what an economy is. Whether we are talking about the economy of Los Angeles, the United States, or the whole world, an economy is just a group of people dealing with one another as they go about their lives.”
In which case, as Levy asks, why not just refer to such a group as society? Or humankind? “Just a group of people”? Really? So economics is the study of “groups of people dealing with each other”? So is sociology. So is business organization. So are other social sciences or the law for that matter.
This is unfair of me. I apologize. Economists have narrow vision. They are only concerned with those groups of people when they are not simply “dealing with each other” but are interacting for very specific reasons.
Besides, as Levy says earlier, economics is really not about “groups of people”, no matter where they are. It has become obsessed with the mechanics of the interaction of those people. It is no longer concerned with people as a group, but with the nature of individual interactions within the group. So features of the group that exist only at the group level are diminished in importance, while economics specializes on individual behavior. Put alternatively, any so-called solution that we observe at the group level is emergent from the behavior below, but not attributable to it directly. There’s just too much interaction and thus information for us to aggregate upwards and predict the group.
There is no macro from micro. But there might be micro from macro. Who knows?
So economics is about models of individual behavior, the creation of those models, and their mathematics. It is about the method associated with such modeling. So references to “the market” or “the economy”, which are groups, are simply side comments meant to create the illusion that economics is discussing some aspect of the social real world, when, in fact, it is not. It is, in essence, discussing itself.
And in this context Delong makes perfect sense.
His reference to “genius” is not to an attribute of the real world, it is a reference to attributes of models of decentralized decision making under certain constraints. It is reference to economics not to reality.
So the trick played by economists goes something like this:
Step 1: make a statement about reality, observing the impossibility of computation because of its vastness and complexity — this rules out central planning which is your ideological target
Step 2: switch quickly to make observations about a model or highly stylized reality where you have eliminated all that vastness and complexity — this establishes the theoretical, but unprovable, superiority of decentralization
Step 3: switch back to reality and repeat the claim made about the model as if it is about the real world — your purpose being to double down on the hopelessness of central planning [no matter how well-intentioned it may be! — you can afford to be generous here to those lesser folk who see things through a more social lens, after all they are deluded and naive]
Step 4: hope that no one notices the switch and that they fail to see your substitution of a model for reality — your success often depends upon the level of enthusiasm you express for decentralization and the amount of gushing praise you heap on “the market” and its “genius”
But people have noticed. People are noticing.
It is odd, is it not, that economists gleefully dismiss the possibility of central planning whilst ignoring that, by so doing, they have erased their own ability to make claims about the economy. Yet they carry on. Hoping that no one notices.
But people have noticed. Anyone used to dealing with complexity will appreciate the problem economists have given themselves. Through their relentless focus on simplification they have cut themselves off from reality.
Perhaps the historians can bail them out.
You will learn a lot by reading Levy’s book. More about “the economy” at least.