Friedrich Hayek opened his formative essay “The Use of Knowledge in Society” with a critical question:
What is the problem we wish to solve when we try to construct a rational economic order?
To be sure, he is not asking about why we form society. If he were, the answer might be a Lockean response to the deficiencies in the state of nature. Hayek had something else in mind. The question is, what is the root, structural issue that individuals seek to overcome when forming society, business and government? The answer is, in short, “information deficiencies”:
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate ‘given’ resources….It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know.
How to invest best, when is ideal to make certain purchases, where is right to settle down and raise a family – all of these decisions, if thought about economically by individuals (I grant you, they are probably not in many cases, as many of these decisions are precipitated by a host of who’s, when’s, where’s, why’s, and how’s unrelated to purely rational economic decisionmaking), are impossible to deduce with anything approaching certainty standing alone. They are contingent on a host of variables beyond the control – or the knowledge – of the individual who has to make the decision.
Thus, the question then becomes, how do we overcome this deficiency to nevertheless allow most people to make intelligent decisions whenever possible, in order to maximize their own benefit as well as the benefit of society as a whole? Stated differently, how do we structure – or plan – society and economy to overcome these informational deficits?
Proposed solutions to this problem range on a spectrum from anarchism (no coordinated planning whatsoever) to communism (completely centralized planning), so I do not want to pretend the answer is a simple binary of “(a) or (b).” However, speaking in broad generalities, it does appear that societies have clearly concluded – to great success, if the modern world is a testament to that conclusion – that some level of centralized economic planning and collective action is necessary to overcome the informational deficit and to direct and coordinate certain decisionmaking processes accordingly. Hence government.
Intuitively, it seems that more knowledge is available collectively than individually. And if planning is necessary to utilize this knowledge, then there must be planners tasked with the responsibility to obtain that knowledge and then apply it to solve social problems. The issue then shifts from “How do we overcome the informational deficits that beset us?” to “Who are the experts we want assisting us in overcoming informational deficits?” In Hayek’s phrasing, the question is “who is to do the planning.”
It may be admitted that, so far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available – though this is of course merely shifting the difficulty to the problem of selecting the experts.
In this regard, there does appear to be a much clearer binary. Either we want private (i.e., market) experts utilizing their knowledge to empower us to overcome informational deficits ourselves, or we want public (i.e., government) experts making policy to force us to overcome informational deficits collectively. Before this decision is to be made, however, Hayek makes another critical point:
Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place.
Hayek goes on:
[C]entral planning based on statistical information by its nature cannot take direct account of these circumstances of time and place, and…the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”
Setting aside the problem that knowledge is dynamic and not static (i.e., we are always learning more, both individually and collectively), knowledge is also contextual. Evidence of this fact is actuarial practice in insurance. Insurance companies hire mathematicians to crunch huge amounts of data to try to gauge the risk of coverage for the most discrete sub-groups humanly possible, in an effort to control for all the variables posed by coverage, in order to fix the cost of premiums for each insured individual. Even then, with all that predictive information at their fingertips and all that data analysis, insurance companies still make mistakes and lose money.
The hard reality is that, at least at present (until the singularity, maybe), no amount of data is sufficient to make (or impose) perfectly informed decisions that produce the best possible outcomes. This is not to say that we should not try to gather as much data as possible to make the most informed and best possible decisions, either individually or collectively. Nor is it to say that there are not some decisions that have to be made collectively (e.g., whether to expend tax revenue in order to go to war). But it is to say that a certain humility should inform our sense of our own capabilities, both individually and collectively, and lead us to conclusions about proper social ordering accordingly.
Which leads me to the regulatory state, by which I mean that social ordering premised upon “rule by experts” – often referred to as “command and control regulation” – who, by virtue of their (alleged) superior knowledge, are empowered to make decisions that (ostensibly) increase efficiency and other positive outcomes, which are worth the trade-off of the reduction of autonomy. Woodrow Wilson, one of the first avid presidential proponents of rule by administration in the modern sense, dreamt of what this might look like:
The field of administration is a field of business. It is removed from the hurry and strife of politics; it at most points stands apart even from the debatable ground of constitutional study. It is a part of political life only as the methods of the counting house are a part of the life of society; only as machinery is part of the manufactured product. But it is, at the same time, raised very far above the dull level of mere technical detail by the fact that through its greater principles it is directly connected with the lasting maxims of political wisdom, the permanent truths of political progress. The object of administrative study is to rescue executive methods from the confusion and costliness of empirical experiment and set them upon foundations laid deep in stable principle.
Wilson’s dream, and the administrative state that has grown vast over the course of the past century, is typically premised upon two core principles: 1) That governance can successfully be removed from “the hurry and strife of politics” in a democratic system so as to allow experts to make the best decisions possible, uninfluenced by irrelevant considerations and unburdened by unnecessary “experiment”; and 2) That administration is capable of better arriving at and implementing “the permanent truths of political progress” by virtue of its comparative expertise.
Both of these are flawed assumptions. First, as Hayek pointed out, even if we decide that we should trust experts rather than ourselves, we are still left with the problem of “which experts?” If we are to maintain any semblance of self-governance, this choice must be left to “the people” in some way. And in our modern administrative state, it is, albeit indirectly. The people select a president, who is then tasked with staffing the administrative state with experts chosen by herself or himself. This is fundamentally political. As such, it is subject to the same vicissitudes that any political decisionmaking is subject to. “Experts” will be selected for a host of reasons – many being essentially political ones – not merely the reason that they are the best expert on a given subject who will make the most informed and disinterested decisions possible. And usually, one of the main considerations in their selection is their loyalty to the appointing entity – in this case, the President – which allows the appointer to retain influence over bureaucratic decisionmaking. Second, administration suffers from the knowledge problem Hayek pointed out, namely, the problem of “the particular circumstances of time and place.” Big data and its concomitant modeling, which experts invariably have to rely on (think back to the insurance example), by necessity omit critical variables, which are omitted because they are unknowable and unable to be accounted for prior to their occurrence. Administrators may in some instances be in a better position to obtain larger amounts of knowledge than individuals standing alone; but they are also in many instances less suited to applying that knowledge to inform the decisions any individual might have to make at any given point in time, or how those individual decisions should be made in order to obtain preferable collective outcomes. This diminishes the justification for command-and-control significantly.
The defenders of the command-and-control regulation model at times handwave away these problems by merely reasserting (often baldly) that it is better suited to making better decisions to obtain better outcomes for more individuals and, ipso facto, society as a whole. But these are basically unfalsifiable presuppositions. For one, analogously to taking a peek at Schrodinger’s Cat, the act of regulating distorts the regulated object/market, meaning that counterfactuals are in most cases hypothetical (and, in any case, always distinguishable). Debates end up devolving into disputes about alternative hypothetical outcomes that did not obtain by virtue of the regulatory regime in place. And failures occurring thereunder are often attributable to the commingling of private action and regulation, rather than discretely attributable to either/or, so it is very difficult to look at the results of this commingling and argue from that data that more (or less) of one or the other would have led to better outcomes.
What I mean to say, in short, is that the argument that we need any regulation or more regulation, in light of a given issue or over a given industry, in many cases no more logically follows than to say that we need no regulation or less regulation, in light of a given issue or over a given industry. Assumptions about the capability of particular “experts” usually precede the former argument. Just as to a hammer every problem is a nail; so also to a regulator (and defenders of regulatory governance regimes) every problem is manageable and solvable through more regulation.
These justifications are fictions predicated upon faulty assumptions. There may be alternate bases to justify regulation – issues of morality and equity may in some cases independently justify the imposition of a regulatory regime – but the notion that administration is better than fortuitous market operation by virtue of control by experts is not a sound basis upon which to defend the regulatory state.