Knowledge And Decisions

Another historic change in the past century has been the rise of intellectuals to prominence, influence, and power. The expansion of mass education has meant an increase in both the supply of intellectuals and in the demand for their products. They have become a new elite and, almost by definition, competitors with existing elites. The very nature of their occupation makes them less inclined to consider opaque “results” than to examine processes, quite aside from such other incentives as may operate when publicly discussing their elite competition. Intellectuals have spearheaded criticisms of price-coordinated decision making under individually transferrable property rights — i.e., “capitalism.” As far back as polls, surveys, or detailed voting records have been kept, Western intellectuals have been politically well to the political left of the general population.¹

Another way of looking at all this is that there has been a political isolation of residual claimants to variable incomes as a small special class operating in response to incentives and constraints no longer generally felt throughout the society. Knowledge of changing economic options and constraints conveyed through price, investment, and employment decisions by this class (capitalists) has all the appearance of having originated with this class, and thus serving the sole interests of this class. The extent to which this is true or false in particular instances is not the central point here. The point is that this appearance is necessarily pervasive — and politically important — regardless of what the particular facts may be. It is only after the conceptual separation of questions of causation from questions of communication (the slain bearer of bad news problem) that the factual issue can even be addressed.

Finally, no discussion of the trends of the past half century would be complete without one of the great socially traumatic episodes of this era, the Great Depression of the 1930s. Both in magnitude and duration it outstripped all other depressions in history. The unemployment rate reached 25 percent and corporate profits in the United States as a whole were negative two years in a row. This depression was unique not only in its magnitude and duration, but in the degree of government intervention — episodic and enduring — occasioned by it. Although questions might be raised as to whether these three characteristics of the Depression were related, the popular explanation has been that it was a failure of the market economy and demonstrated the need for government economic activity. While this thesis can be, and has been, challenged on the basis of scholarly analysis,² the point here is merely that this central economic episode of the past century reinforced other trends toward the political isolation of residual claimant decision makers and price-coordinated economic systems. To some extent, the Great Depression undermined political support for traditional Western values in general, including freedom and democracy — as shown by the rise of the Nazis in Germany, fascism in Spain and parts of Latin America, and the post-World War II spread of communism around the world.

The next three chapters deal in detail with specific developments in social institutions, and their consequences — especially as regards the crucial question of how any system coordinates its scattered and fragmented knowledge for optimal social effectiveness, and the even more momentous question of the implications for human freedom.

Chapter 8 Trends in Economics

Economic systems have been seen as institutional processes for weighing costs and benefits. Costs in turn are foregone alternative benefits. Costs and benefits are ultimately subjective, but that does not mean that they vary arbitrarily or that one way of weighing them is as rational as the next. The physical and psychic costs of digging a ditch are subjective to whoever digs one. However, the compensating inducement necessary to get A to dig a ditch is objective data to B. If B simply wants a ditch dug, and does not care who digs it, then the lowest of the various subjective costs of ditch digging — among A, C, D, E, etc. — becomes his necessary objective cost. Conversely, how much someone wants a ditch dug is subjective to him, but is objective data to anyone else considering doing such work.

Prices convey the experience and subjective feelings of some as effective knowledge to others; it is implicit knowledge in the form of an explicit inducement. Price fluctuations convey knowledge of changing trade-offs among changing options as people weigh costs and benefits differently over time, with changes in tastes or technology. The totality of knowledge conveyed by the innumerable prices and their widely varying rates of change vastly exceeds what any individual can know or needs to know for his own purposes.