Cognitive biases and blindness

Boyes makes a strong and reasonable case for the difficulty of policy making by the state, central planners or the knowledgable elite. Hayek has clearly and I think convincingly presented an analysis in Knowledge and Economics and The Use of Knowledge in Society.

The former essay is directly on Boyes' posting yesterday and, while it would be nice if the elite read and thoughtfully considered this essay (I wonder if Paul Krugman is aware of this nice overview of the limits to science, knowledge and economics) it is worthwhile to consider several key points surfaced by Hayek.

He wrote:

There seems to be no possible doubt that these two concepts of 'data', on the one hand in the sense of the objective real facts, as the observing economist is supposed to know them, and on the other in the subjective sense, as things known to the persons whose behaviour we try to explain, are really fundamentally different and ought to be kept carefully apart. And, as we shall see, the question why the data in the subjective sense of the term should ever come to correspond to the objective data is one of the main problems we have to answer.

Elites fail repeatedly to acknowledge this key distinction. Models and the apparatus that are devised to approximate reality are just that imperfect approximations. The plans, directions and policies of the planner, elite spokesman or policy maker are doomed to be constructed on faculty foundations due to the key distinction between reality and theory.

Moreover, in Economics and Knowledge, Hayek goes on to remind us of a constraint or limit imposed by knowledge that no planner can overcome. In fact, the elite planning that is based upon a model of rationality has observably in the past lead to perverse and unintended consequences.

It is clear that if the concept is to have any empirical significance it cannot presuppose that everybody knows everything. I have already had to use the undefined term 'relevant knowledge', that is, the knowledge which is relevant to a particular person. But what is this relevant knowledge? It can hardly mean simply the knowledge which actually influenced his actions, because his decisions might have been different not only if, for instance, the knowledge he possessed had been correct instead of incorrect, but also if he had possessed knowledge about altogether different fields.

Clearly there is here a problem of the Division of Knowledge which is quite analogous to, and at least as important as, the problem of the division of labour. But while the latter has been one of the main subjects of investigation ever since the beginning of our science, the former has been as completely neglected, although it seems to me to be the really central problem of economics as a social science.*46 The problem which we pretend solve is how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affaris in which prices correspond to costs, etc., and which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all those individuals.

The enigma for me is why this lesson needs constant repeating. The answer is that we are all human I suppose and that our failings and blindness overwhelm the insights of the past (and present).

Moreover, Boyes and I have blogged and discussed at length the hubris of the intellensia and elites in attempting to dictate plans and policy. Both Hayek and Sowell have analyzed this phenonmon at length and the tendancy of elites (on both the right and left) to argue for planning is evident in our society today. Perhaps it is a "marvel" at the success of these elites in convincing the populace that is worth examining.

I return again and again to Samuel Gregg's work in The Commerical Society - it is indeed through mutually beneficial and voluntary exchange that civility emerges and shapes society - both through discourse and through actual interactions. Emergent institutions develop that support and in fact encourage this civil society. Gregg's subtitle captures part of the problem - Foundations and Challenges in a Global Age. These challenges are the ones that have motivated my participation in this blog and the ongoing work to constructively and civilly engage with those who are diametrically opposed to the assumptions and foundations of a liberal order.

I am thinking about our book discussion of Gordon Woods Empire of Liberty and the blogging on that book here. Jefferson, I think, captures both the essential humanity of our society and the often contradictory behavior that agents engage in. I am thinking of the Louisiana Purchase here - an executive action that Jefferson's entire political philosophy opposed. I appreciate the anguish he may have endured but, in this case expediancy trumped believe and principle, as I suppose it always has and always will. Further if we think we live in an age that lacks civility - the vicious level of attack and smearing that Jefferson and his trained dogs Monroe and Madison vomited was on par with the Federalist invective. So, from an historical perspective perhaps Krugman, Limbaugh, Maddow, Hannity, Obermann (nice parachute) and the other quislings on the right and left in the media are mere posers.

Looking to the current debate - and there is plenty of incivility, anger and hatred to go around - I think at least part of the lack of perspective is due to an absence of participation by elites in commercial society. Most have never worked in the private sector - think academe, corporatist media outlets or NGOs. Paul Krugman, for example, earns his wages from Princeton and a media outlet with an agenda an perspective to be advanced.

These elites have, for the most part, been sheltered from the necessity of participation in a commerical society. Their lack of engagement in this important arena allows for the almost pathological distrust for voluntary exchange.

I believe I blogged here that I long and hope for the day that my grandchildren can go into Wal Mart (or the dominant retail outlet of their day) and decide to not buy heroin.

It is this mechanism of volunatary and individual decision making that lies at the heart of a liberal and responsible society. As Dan Klein argues - our responsibility as economists is to make civil and clear arguments to both the populace and the elites who oppose a liberal and responsible society.

For me this is a challenge that at times is almost unbearable. On the left I encounter pleasant colleagues who now hold as an article of faith that elite planning is not only desirable but necessary. This belief is seemingly unshakeable, and while they "tolerate" my consistent plea for liberty, individual responsibility and voluntary exchange I tend to be ignored at best and belittled at worst. To maintain and really value civility in this environment is so difficult.

That said, if we did live in a free and liberal society with mutual respect and civility we would be in utopia.