How Little We Know
As the Fed proves, we can never know enough.
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Photo: Susan Walsh / AP
Life is Complicated
I think it is safe to say that life is complicated. Whether it is planning for the future, dealing with people, or figuring out the right thing to do, it is clear that the world is full of surprises and complexity. In fact, the older that we get the more obvious this becomes even though we theoretically gain more knowledge as we age.
This is true in spite of the fact that we are complete experts on ourselves. We know all about our experiences, goals, motivations, thoughts, and desires, but we still struggle to make decisions and plan for the future. How accurately could you describe how your life will look a year from now? What about 5 years from now? 10 years? This isn’t because we are stupid, but because the world is far too complex for one person to know and analyze all of the variables.
If you, an expert in yourself, cannot accurately predict and plan your future life, then we can dispense with the idea that you can accurately predict and plan the lives of other people, right? While I would certainly say this is the case, too often people ignore this reality and put a significant amount of trust in the ability of other people to do this. This is particularly true when people are considered experts by society and put into positions of power due to their expertise.
The latest example of the limitations that even experts have is the Federal Reserve’s handling of inflation over the course of the last year. Last summer, the Fed Chairman Jerome Powell calmed inflation worries by saying that the increase in prices were likely transitory and inflation levels would cool off closer to the Fed’s 2% goal. At the end of November, Powell started to backtrack and say that is time to retire the word “transitory” in relation to inflation. Now, the Federal Reserve is raising interest rates in measures not seen in decades as inflation has been more persistent than they originally predicted.
I don’t think the Federal Reserve is full of a bunch of economic illiterate fools that are ignorant about inflation, but they have been tasked with the impossible. There are 7 Board members that are tasked with setting “U.S. monetary policy to promote maximum employment and stable prices in the U.S. economy” according to the Federal Reserve website. If we include all of the people that work with the Federal Reserve Board, then the number of people tasked with this mission increases to approximately 3,000. They are tasked with promoting “maximum employment and stable prices” in an economy that contains over 330 million people.
There is simply no way that the Federal Reserve can have enough information and analyze it to make the right decisions regarding monetary policy. Not to mention, the ability to accurately predict all of the consequences of the decisions that they make. It’s an impossible task.
Dispersed Knowledge
If this knowledge problem is true, it may seem like humans are faced with an impossible predicament. Fortunately, the economist Friedrich Hayek wrote all about the knowledge problem in his famous essay “The Use of Knowledge in Society.” The solution, according to Hayek, is that “knowledge should be used that is dispersed among many people.” Rather than rely on the incomplete knowledge that a central body (such as the Fed) possesses, we should rely on incomplete bits of knowledge that are widely dispersed throughout society.
According to Hayek, this dispersed and incomplete knowledge is communicated throughout the economy in the form of prices. The price of a good or service communicates information such as input costs, total amount available (supply), and desirability (demand). A gallon of whole milk costs $4.20 on average in the United States, not because a central body determined that is how much it should cost, but because each economic actor in the process made their own self-interested calculations using the limited knowledge that they possessed. The result is a market of goods and services that adjusts to changes as quickly and efficiently as possible.
While the Federal Reserve is the latest example of the knowledge problem, it certainly is not the only example that we see in our world. Any centrally planned economic action, such as minimum wage, tariffs, subsidies, price-cap, and regulation, is a central body imposing a “solution” based on its incomplete knowledge in favor of the dispersed knowledge of the marketplace.
This is the reality whenever someone says that [insert profession] should get paid more, we should raise the minimum wage to $15 an hour, make more things in America, or make price gouging illegal. It is the epitome of arrogance to assume that you as an individual or group has more knowledge than all the other members of society combined.
The knowledge problem isn’t just a reality in economics but politics as well. Every law and regulation that the government passes is done with the limited knowledge of whatever central body is doing the legislating. No matter how many climate experts the EPA pulls together, there is simply no way that they can calculate all of the effects that a particular environmental regulation will have. I’m doubtful that they could even calculate all of the environmental effects of a regulation, not to mention the economic or social effects.
That doesn’t mean that the political solution is to let every person act in whatever way that they want; that would be anarchy. Instead, the political solution is to devolve as many political decisions to the most local levels possible. This allows for the potential consequences of legislation to be worked out in a limited fashion which can be observed and stopped or extended to a broader scale.
This is also why free expression is so vital to a healthy society. A central body doesn’t have enough knowledge to accurately determine what thoughts or words are true/good. An opinion may be in the minority, unpopular, or downright abominable in a society and still be true; just look at the early days of Christianity in the Roman Empire as an example. A society that does not permit free expression is willingly harming itself. As John Stuart Mill wrote:
“The peculiar evil of silencing the expression of an opinion is, that it is robbing the human race; posterity as well as the existing generation; those who dissent from the opinion, still more than those who hold it. If the opinion is right, they are deprived of the opportunity of exchanging error for truth: if wrong, they lose, what is almost as great a benefit, the clearer perception and livelier impression of truth, produced by its collision with error.”
Knowledge and Conservatism
The ever pressing knowledge problem is critical in understanding American conservatism. Conservatives fight against regulation, not because they hate the climate or people, but because they understand the limitations of a regulating body’s knowledge. They are slow to support change because every change brings with it some sort of unintended consequences. They advocate for federalism and state’s rights because they want the states to be laboratories of democracy where kinks are worked out on a small scale instead of nationwide.
The bigger the change, regulation, or power transfer, the more skeptical conservatives tend to be.
God Bless,
Hunter Burnett