Here’s a letter to a new correspondent:
Thanks for your e-mail.
Responding to this blog post of mine, you write that Hayek “underestimated the capacity of government agents to get enough detailed knowledge for intervening productively.”
I disagree for several reasons. Here are two: First, the detailed knowledge in question is simply unavailable to anyone who’s not actually on the spot to learn it.
Consider, say, the owner of a machine-tool factory who one day, while observing his workers work, suddenly notices that he can alter their manner of working such that the factory’s daily output rises by four percent. Among the eventual results will be some combination of a fall in the prices of machine tools and a rise in the wages of workers of that type. The economy improves.
How likely is a government official, one unfamiliar with the details of the factory’s operations, to notice such a thing? Answer: Not very.
My second reason for disagreeing with you is related to the first: The factory owner has incentives to notice such details that no government official – even one who daily visits the factory – can possibly have. The owner’s income rises as a result of his learning this piece of knowledge and of acting on it. The government official has no strong incentive to do either.
Here’s a recent example of my point. The New Orleans Saints were scheduled to open their 2021 season next week against the Green Bay Packers at home, in New Orleans’s Superdome. That plan was unexpectedly disrupted by hurricane Ida. The Saints, being the home team, were then given by the NFL the responsibility of choosing an alternative venue. The Saints have decided to play the game in Jacksonville. But as this report reveals, this choice was made only after Saints officials weighed carefully the detailed costs and benefits for them of each option. The Saints, for example, researched the record of Green Bay’s star quarterback’s, Aaron Rodgers’s, performance in different locales. They discovered that Rodgers has a history of playing worse in Florida than in other states. Also, Saints officials reasoned that Jacksonville would be less likely than Miami to attract to the game Green Bay fans.
Saints officials had powerful incentives to carefully explore details, and to learn and act on these. Had the venue decision instead been made by NFL officials in New York, those distant officials would have had far less incentive than do Saints officials to discover and act on detailed knowledge.
This sports analogy – like all (especially sports) analogies – is imperfect. But it does highlight the important point that noticing and acting on knowledge of details doesn’t happen automatically. Incentives are required.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030