We Can't Collect Economic Information
It turns out that economists who have stressed the significance of the knowledge problem and the importance of information had it all wrong. At least, that’s the case if the socialist writer Nathan Robinson is to be believe. On Twitter (yes, I refuse to call the platform X, and you can’t make me), Robinson explains his solution:
Who knew the answer could be so simple? Unfortunately, while there is some virtue to be found in simplicity, this goes too far and ends up being woefully simplistic.
The first mistake here is similar to the one made by Daron Acemoglu when he suggested that the knowledge problem Hayek was focused on could be solved with a sufficiently powerful supercomputer. Both treat information as a static thing that just exists out there somewhere, perhaps in people’s heads, and all you need to do is collect that existing information and properly compute or aggregate it. But economic information isn’t something with its own independently active existence, just waiting to be collected and computed in the right way. Economic information exists only as part of the process that generates it. You can’t simply collect information and then use it to decide how to carry out economic activity, because the information itself doesn’t exist until after economic activity has generated it.
This is also true of the “information” that is in people’s heads. One reason is that simply asking people for information about what they want (perhaps through polls or when casting a vote) will often result in them giving you an expressive preference, rather than an instrumental preference. The “information” you get by “asking people is often contradicted by the information you would get by observing what people actually choose – and as the old saw goes, actions speak louder than words.
A deeper problem is that the information isn’t clearly available in pre-existing form even in our own heads, not even to ourselves. As James Buchanan put it in his book The Logical Foundations of Constitutional Liberty, “Individuals do not act so as to maximize utilities, described in independently-existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post, (after the choices), in terms of ‘as if’ functions that are maximized. But those ‘as if’ functions are, themselves, generated in the choosing process, not separately from such process.” As a consequence, Buchanan goes on to explain, “The potential participants do not know until they enter the process what their own choices will be.”
Here’s a straightforward example of what Buchanan is describing in practice, taken from my own personal experience. You would think that I could easily answer the question of “Do I want a PlayStation 5 console?” For a while, the answer to that seemed like an obvious yes to me. If asked, I would have certainly said yes – indeed, I was known to mention it from time to time without anyone needing to ask me at all! But in the first few years after the console was released, it was all but impossible to get without a combination of good luck and good timing. But some retailers would let you sign up on a waiting list, and once they got some in stock, a random selection of people on the waiting list would receive an invite to buy the console. One day, I actually got such an email. I immediately clicked on the link to buy the console.
But then I stopped. I waited. Did I actually want one? I wasn’t so sure all of a sudden. I could certainly afford it – money wasn’t my constraint. But I started to consider another variable – time. When would I actually have time to play any games? I started thinking about what the opportunity costs were. Spending less time with my kids in order to make time for video games was a nonstarter for me. Cutting into my reading time was also off the table as far as I was concerned. I do weight training five days a week along with six days of cardio exercise – but especially as middle age sets in, keeping up on my fitness has only become more important to me, so I wasn’t willing to cut back on my exercise time. As I thought about it, I realized that there would only be small, intermittent pockets of time where I would ever be able to play any games – and as this thought process was carried out, new “information in my head” was generated, and I decided that I didn’t actually want a new video game console. But you couldn’t have gotten that information out of my head by simply asking me for it, as Robinson’s simplistic take would suggest. Even I didn’t have that information in my head, until the actual act of choosing was carried out to generate it.
Now, it might have worked out differently. Suppose when the time came, I immediately bought the console and never regretted it. Would that mean that in this case, the information really was there “in my head” and could have been accurately collected by asking me? No. What it means is that the answer you would have gotten by asking me was an accurate prediction of what the information would turn out to be. But it doesn’t always work out that way. What people say they want and what they actually choose when the time comes are very often different from each other. And I’m sure, dear reader, if you introspect a bit, you can come up with examples from your own life where you were surprised by your own choices when the time came to decide.
For his part, Karl Marx very much insisted on seeing the world as a series of ongoing processes, rather than collection of static things. Marx’s theory and analysis of those processes was irreparably deficient, but he deserves some credit for at least being ahead of many of his modern-day followers, who see the world in terms of snapshots and outcomes, rather than ongoing processes, or who make the mistake of treating information as nothing more than merely collectable data points.