Based on Nick Szabo’s strong reccomendation, I read Friedrich Hayek’s essay “The Use of Knowledge in Society” this weekend and couldn’t help but draw more connections for my theory. Hayek’s essay concerns the role of central economic planners in society. Hayek argues that having a well informed central planner is only theoretically possible. In order to accurately predict actions you have to know what people value, which varies across a myriad of factors(person, time, price, availability…). This information is generally averaged out to create a preferences preferred by no one. Think of it like averaging 100 people’s favorite color: brown will leave very few people happy.
Instead of averaging, a perfectly informed central planner would need to be updated about every person’s preferences at all times. When the essay was written in 1945, that concept was entirely impossible. It is more plausible today given technology’s advances, but under deeper scrutiny it remains seemingly impossible. While our information is gathered today by companies today mostly in hopes of selling to us, or selling what they know about us, but it is done so by many competing parties. The only entities I know of that collect that much information are government agencies like the NSA, and they don’t do seem to do it for economic reasons. (Yup, taking them at their word on that one.) Even still, the amount of data the NSA collects is miniscule compared to what would be needed to know all prefernces across all people. (Not only would they need to know how much we would pay for products we’ve viewed, but how senistivities to price change as we buy more or earn additional money. Then what is the potential from people who haven’t seen this product yet but are likely to…) Not only is the data seemingly unattainable, only really inferrable at the moment, but the sheer amount of data to be sent is unheard of.
Assuming that compression technology improves, we can skip the ineffciency of continually piping massive amounts of data(mainly preferences and prices) back and forth, to and from a single central repository, as it changes. But, the problem of crunching the data still remains, and that is a tremendous problem. Each change in circumstance would trigger massive recalcuations, rebalancing interconnected preferences, which in turn trigger more recalculating of related but separate preferences, potentially rebalancing endlessly. This would be kicked off after any change in availability, anywhere. Hayek stresses that economic problems arise specifically as a consequence of change, meaning that increasing the changes, and recalculations, required across the system is just asking for trouble. All this, and the idea of a omniscient planner is actually only hypothetically possible.
So what’s a central economic planner to do? Pollish up the résumé according to Hayek. If the problem of preference is a relative one, why not leave the decisions up to the actors themselves? Preferences do not need to be communicated to others, people can make their own informed decisions about the preferences available to them at the time. Balancing of resources will happen naturally due to basic economic forces like supply and demand. The balancing may happen slower than in the hypothetical “omniscient planner” scenario, but it will naturally happen.
Hayek ends up reinforcing the idea that free markets and competition are efficient, probably not a surprise to many. What I imagine does come as a surprise to many is that decentralization doesn’t lead to anarchy, but a more efficient system instead. I’ve seen the argument for efficiency of distributed systems made in the engineering world, but never such a clear economic argument. Not only does this solution preserve options like privacy and autonomy, but we’ve already seen it work in practice instead of just in theory.