Some Thoughts On The Use of Knowledge in Society

With the economic downturn usually reported meaninglessly by the media, I was most appreciative of a well written article in the Australian Newspaper entitled “Legacy of Free-Market Thinker Pinpoints Government Failure” by Geoff Hogbin, a senior fellow at the Australian Centre for Independent Studies

In the article Hogbin takes a stance against Kevin Rudd’s proposition that the economic theories of free-marketers such as those expressed by Friedrich Van Hayek have gone the way of Leonard Brezhnev’s totalitarian theories.

The basis of Hogbin’s argument is that workers at the coalface of the market will always know more about the progress, risks, competition, evolution and opportunities their services or products offer than any government policy or incentive could attempt to influence or promote. Hogbin points out that every time the consumer spends a dollar they are voting for those outcomes the worker has produced and this is the ideal incentive to encourage the worker to keep on innovativing and experimenting.

I want to thank Hogbin for drawing my attention to Friedrich Van Hayek’s article The Use of Knowledge in Society written in 1945. For those interested in trying to understand what’s going on in the world economy at the moment this is a must read!!

Comments

[Michel Bauwens]

Dear Ralph,

Don't compare the neoliberal disaster with centralisation, but with distributed open decision making, and that gives another story altogether. John Robb says is so much better:

"“The 20th Century’s central struggle was between the ideological systems that advocated governmental control of the economy and those that relied on market control. The market-based systems won. Why? In short, market-based systems made better investments, over the long term, than government managed systems. The lesson: systems with large numbers of decision makers, each with capital to invest, make better decisions.

As is often the case, the emerging victory of the market-based system created yet another problem/struggle. Specifically: is it better to trust that individuals empowered with growing salaries/wages will make the best investments for future economic success — or — is it better to grow corporate profits (at the expense of wages/salaries) and let capital markets invest the excess?

Between WW2 and 1974, while still engaged in a bitter struggle with Communism, the US hedged its bets on that question. Both individuals and the capital markets received an equal share of the benefits of productivity growth. Incomes rose mightily and we became broadly wealthy, mirrored by generous growth in the capital markets, relative to the start of the century. As a result of this shared decision-making system, smart investments in infrastructure, industry, education, and much more made America the economic powerhouse of the world. In short, we prospered.

However, the shared decision making system ended. From 1974 onwards, the rewards of productivity growth (economic expansion) went exclusively to the capital markets and not into income growth for individuals. This was likely done, although the mechanism is unclear, under the assumption that the discipline of capital markets produced better investment decisions than individuals. Regardless of the motive or the specific mechanism, where the flow of capital from American economic activity went, couldn’t be clearer:

* Median per capita incomes in the US are the same as they were in 1974 — there hasn’t been any income growth at all.
* In contrast, we have seen torrential capital accumulation / concentration and the capital markets have enjoyed a nearly 30 year run of unbridled expansion.

So, what was the result of this concentration/narrowing of decision making power in the hands of the capital markets? How did they invest thirty-four years of American productivity growth for the future?

As of this year, the final results of this American experiment in financial decision making are in. The allocation of this capacity exclusively to capital markets, rather than sharing that decision making with hundreds of millions of Americans, has produced a horrible result. Instead of investing the accumulated wealth of America in productive assets that yielded long term benefits, the money was invested in derivatives (illusory financial products) that yielded nothing of tangible value. In short, the narrow group of actors that operate within the capital markets made the decision to forgo the long and difficult process of growing investments in the tangible world in favor of the outsized returns available through investments in virtual products. That investment is now evaporating.”

from http://globalguerrillas.typepad.com/globalguerrillas/2008/09/decentralized-i.html