Knowledge And Decisions

The variation in the fineness of sorting categories, from one organization to another in the same field, is sometimes cited as proof of the irrationality or arbitrariness of the rules of the organization with the coarser sorting procedure. But acceptance of a Rockefeller’s personal check by the owner-operator of a small retail shop is no reason why a department store clerk should accept it — given that there are very different knowledge costs when the immediate salesperson and the financially responsible official are one and the same person, compared to the situation where the two functions are performed by different individuals widely separated in a large organization. Similarly, a student with modest S.A.T. scores may be rejected by a large and mediocre state university and yet be accepted by a higher-quality small college which takes into account other evidences of his intellectual ability. Neither institution’s admissions procedure may be defective. A state university admissions committee with over 100,000 applications to go through in a few weeks may have to immediately reject all those below some cutoff score, in order to give any personal attention at all to choosing among those remaining. However, a college with a total enrollment of 500 students may be able to give all applicants individual consideration from start to finish, at relatively little cost. Neither process is inherently more efficient. What would be more efficient would be for Rockefellers without credit cards to shop in places where officials empowered to approve checks are near at hand, and for talented youths with low scores to apply to colleges where applications from such persons can be accurately assessed more cheaply.

Most objections to sorting and labeling in general — and particularly to the sorting and labeling of people — are based on ignoring the costs of knowledge, or ignoring differences in the cost of knowledge between one decision-making process and another. Even objections on purely moral grounds to “discrimination” against various groups often turn out to involve ignoring knowledge costs. When an individual from a group with a certain behavior pattern has a very different behavior pattern himself, judging him according to the group pattern, and making decisions accordingly, may impose serious costs on that individual. It also imposes costs (foregone opportunities) on the other person who made the incorrect assessment — and therefore provides an incentive for seeking alternative methods of assessment, if such are available at a cost commensurate with the benefit. However, insofar as the factual basis of the group assessment is accurate, the only cost paid by the group as a whole are costs created by its own behavior.

Those group members who do not in fact create such costs may pay a high price for being in the same category with others who do — and the cost-creators in turn pay correspondingly less than the costs created by their own behavior. It might be desirable from a moral or political point of view that public policy diffuse those costs over the general population rather than leave them concentrated on blameless individuals in the same category. That is a question of policy which depends on more variables than those being considered here. For the present analysis, the point is that group discrimination — costs imposed by group A as a whole on group B as a whole — is not proved by showing (in retrospect) that individuals of identical relevant characteristics are treated differently (in prospect) when they come from group A rather than group B. The two individuals may have identical probabilities of repaying credit, abstaining from violence, being a considerate neighbor, and contributing intelligent ideas. But only God can know that in advance free of charge. The cost of knowledge of these individuals’ characteristics may be very different when the individual comes from Group A than from group B, if these two groups as a whole differ in any of these characteristics.

Psychological and political “realities” often lead to rhetoric which camouflages, or even boldly misstates, the causes of cost burdens, as well as the nature of proposed remedies. For more than a century, individuals fleeing ethnic ghettos have bitterly complained of resistance to their movement into other neighborhoods as an imposition of costs on the whole group from which they were fleeing by those groups toward whom they were fleeing. This pattern has occurred repeatedly, from the time of the Irish immigrants in the middle of the nineteenth century to blacks, Hispanics, and others today.