Wednesday, February 18, 2009

The Knowledge Problem

The idea that even the brightest person or group of bright people, much less the U.S. Congress, can wisely manage an economy has to be the height of arrogance and conceit. Why? It is impossible for anyone to possess the knowledge that would be necessary for such an undertaking.

Imagine you are trying to understand a system consisting of six elements. That means there would be 30, or n(n-1), possible relationships between these elements. Now suppose each element can be characterized by being either on or off. That means the number of possible relationships among those elements grows to the number 2 raised to the 30th power; that's well over a billion possible relationships among those six elements.

Our economic system consists of billions of different elements that include members of our population, businesses, schools, parcels of land and homes. A list of possible relationships defies imagination and even more so if we include international relationships. Miraculously, there is a tendency for all of these relationships to operate smoothly without congressional meddling.

~Walter Williams

19 Comments:

At 2/18/2009 9:25 AM, Anonymous peterargus said...

The same argument can be applied effectively to understanding global climate.

 
At 2/18/2009 9:35 AM, Blogger Chris Janc said...

"I Pencil" is a great illustration of this point. For all of Professor Perry's followers: if you have not yet read it, please do! The mind you save may just be your own. Tou can find it here: http://www.econlib.org/library/Essays/rdPncl1.html

 
At 2/18/2009 10:20 AM, Anonymous knowledge is impossible said...

There are also n! possible arrangments of n elements, in the sense of prioritizing.

For 6 elements that amounts to 720 arrangements.

Knowledge is impossible because the number of possible relationships exceeds the number of available particles in the universe.

 
At 2/18/2009 10:40 AM, Blogger Donald said...

In 1989 the Berlin Wall came down. In 1991 that 74 year experiment in government central planning collapsed in failure. So Congress believes it can do in a week what the Soviet Union failed to do over three or four generations? And they say Bush was guilty of hubris!

 
At 2/18/2009 10:46 AM, Anonymous knowledge is impossible said...

Suppose you have a nation of 51% losers and 49% productive, hard working people that produce wealth.

The FACT of the matter is that Democracy will put the losers im charge of the wealth producers with the objective of taking away their wealth.

 
At 2/18/2009 10:57 AM, Anonymous Anonymous said...

Letting go of the economy and letting it run wild has worked quite well as we have all seen lately.

There has to be oversight or greed and money mongers not unlike yourselves will take take take until you can take no more and then light a match and burn the whole thing down. The reason you beg for less oversight is so that you can have your turn at making millions and screwing people over when it all comes craching down.

 
At 2/18/2009 11:59 AM, Blogger @sethstorm said...

That's why they do well with approximations.

 
At 2/18/2009 12:01 PM, Blogger Donald said...

Oh here we go already. Ad hominem attacks only show the poverty of a poster's arguments.

When in the last 80 years has the economy ever been allowed to run wild and free? Since 1913 there's been a Fed which has never been independent and always owed fealty to the political whims of Congress. Congress has always meddled with regulation, mandates, and tax policies. If we really had a free economy there would not be thousands of lobbyists engaged in "rent seeking" in Washington.

If someone wants to claim the economy was brought down by a lack of regulation they should come armed with facts and arguments, not sophistry.

 
At 2/18/2009 12:22 PM, Anonymous Mika said...

It takes quite a bit of unmitigated gall for anyone to keep beating the anti-government involvement drum when our economic system has just totally tanked as a result of liassez faire government.

Thank God at least 51% have seen the light and we will now begin to turn things around.

 
At 2/18/2009 12:54 PM, Blogger NoWhining said...

It takes quite a bit of unmitigated gall for anyone to keep beating the anti-government involvement drum when our economic system has just totally tanked as a result of liassez [sic]faire government.

Probably the most eloquent response I have read to this was posted on another blog. I include it here since it completely answers the posts from Anon and Mika, echoes Donald's sentiments, and certainly captures how I feel on the topic. Below, where he uses "unregulated free market" just substitute laissez faire:

Mark K wrote:
If we had an unregulated free market, the organizations and individuals that made stupid investment decisions -- those "jokers on Wall Street" -- would now be bankrupt, to be replaced by more competent organizations and managers.
Instead, under the current system, they are “bailed out” -- at your expense -- and allowed to continue operating.

If we had an unregulated free market, the investment rating agencies that rated securities containing subprime loans as “AAA” would be disgraced, bankrupt and out of business -- no one on earth would deal with them any longer -- they wouldn't be able to pay people to use their services. Instead, under our current system, not only are all those rating services still in business, the S.E.C. requires that all issuers of investments use those rating agencies.

If we had an unregulated free market, no one would be forcing bankers to make riskier loans than they wish to, as is currently done by legislation such as the Community Reinvestment Act and threats of lawsuits from organizations like ACORN and from the Federal Government‘s Justice Department (Clinton‘s DOJ filed 13 major lawsuits against banks for failure to lend to “minorities“).

If we had an unregulated free market, there would be no central banking entity in charge of a fiat money supply with the ability to:
a) Make vast amounts of credit available at below-market interest rates.

b) Follow such a persistent policy of inflation as to convince virtually everyone in the country that purchasing a house is “a good investment”.

c) Eliminate ( or at least significantly reduce) risk aversion by guaranteeing bankers that they (the Fed) will always be there as “lender of last resort”.

d) Condone and make possible a preposterously over-leveraged fractional reserve banking system under which banks currently hold total reserves of only about 4% and are thus extremely vulnerable to any sort of a run or loss of confidence in the bank.

If we had an unregulated free market there would be no quasi-government entities like Fannie and Freddie and the FHA to insure that trillions of dollars of that cheap credit made possible by the Fed was directed into the residential housing market, producing an unsustainable boom in housing construction, which, when it ends, leads inevitably into an economic bust.

If we had an unregulated free market, the Federal Government would not now be contemplating looting the American taxpayers of another trillion dollars or so to pay off various special interests that helped the latest collection of looters get into power.

We don’t have an unregulated free market. We have a “mixed economy”, with a few elements of capitalism struggling under the weight of literally thousands of pages of rules and regulations and dozens of government agencies interfering in virtually every aspect of our economic lives.

And under this set-up, it is you, the “little guy”, the individual who doesn’t have a powerful lobby in Washington to get the rules bent in your favor -- you, who cannot command an audience with Congress to beg for your personal bailout -- you, who can do nothing as government uses your funds to save the incompetent and the dishonest from the consequences of their own actions -- it is you who gets screwed.

We don’t have an unregulated free market; we have an out-of-control government intent on looting us blind.

 
At 2/18/2009 1:21 PM, Anonymous Anonymous said...

This is just a rehashing of Hayek's classic essay The Use of Knowledge in Society

You free market guys should know about this stuff. Of course most of you haven't studied any Austrian literature. You just get it second hand through people like Williams and Sowell, the lesser scions of greater kings.

 
At 2/18/2009 1:41 PM, Anonymous Anonymous said...

Thank God at least 51% have seen the light and we will now begin to turn things around.


Yeah, and that "light" has been brought to you courtesy of:

Bernard Madoff:

... Madoff's connections to the Democrat Party seem to be of little interest to the media.

Very few media stories of the fraud perpetrated by former Nasdaq chairman Madoff mentions the heavy financial support that Madoff has donated to the Democrat Party. Campaign contributions by Madoff show many thousands of dollars going to Democrat candidates and causes. Including $100,000 to the Democratic Senatorial Campaign, thousands to Charles Rangel (D, NY), Charles Schumer (D, NY), ... Madoff also gave generously to Senator Frank Lautenberg (D, NJ) who runs a charitable foundation that invested with Madoff.

Link


R. Allen Stanford:

The Texas financier accused by the Securities and Exchange Commission Tuesday of “massive ongoing fraud” was a generous political donor who gave more heavily to Democrats.

Since 2000, R. Allen Stanford, the chief of the Stanford Financial Group in Houston, his wife and company gave $2.2 million in political contributions – $1.7 million to Democratic candidates and committees – according to Federal Election Commission records.

Link

Don't worry, the Democrats have only your interest at heart, they'll sort it all out.

 
At 2/18/2009 1:49 PM, Anonymous Anonymous said...

"You free market guys should know about this stuff. Of course most of you haven't studied any Austrian literature. "

Thanks, anon 1:21pm. Without your contribution, I'm sure that none of us would be familiar with Hayek (any relation to Selma?) or Austrian economics (were the Von Trapps involved in that?) We are very fortunate to have someone of your intellectual caliber patronize us.

 
At 2/18/2009 1:50 PM, Blogger Andy said...

This example is wrong. It should really say, "now suppose each of these relationships can be on or off".

But this doesn't really prove anything. Indeed it just shows that you can store all the relationships in 30 bits, which is a minute amount of data. The fact that there are many possible configurations of the world doesn't necessarily make it any harder to understand that one we have.

Similarly, there are 10^10 10-digit numbers, but if I give you a specific one, say 1234567890, that doesn't mean it's impossible for you to understand its properties.

 
At 2/18/2009 3:48 PM, Blogger 1 said...

mika whines witlessly: "It takes quite a bit of unmitigated gall for anyone to keep beating the anti-government involvement drum when our economic system has just totally tanked as a result of liassez faire government."...

Hmmm, under what rock have you been hiding under for the last eight years?

Not only was there no major deregulation passed during the past eight years, but the Bush administration and a Republican Congress approved the most sweeping financial-market regulation in decades.

The bipartisan Sarbanes-Oxley Act was enacted in 2002 to prevent corporate fraud and restore investor confidence after the collapse of Enron and WorldCom. It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.

Across the government, the Bush administration supported new regulations that added almost 1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it's hard to imagine a scope that would be effective.


Apparently you must've strived mightily to miss the following: Democrats in their own words Covering up the Fannie Mae, Freddie Mac Scam that caused our Economic Crisis

"Thank God at least 51% have seen the light and we will now begin to turn things around"...

Hmmm, that's how you see the Henrietta Hughes types and the Peggy Joseph types who voted in the pinko influnced Hussein the Inane,eh?

You too need to read I, Pencil...

 
At 2/18/2009 4:22 PM, Anonymous Anonymous said...

Here's a little "light" for you Minka.

The huge economic stimulus package that President Obama signed into law Tuesday will result in “lower wages” for American workers, according to the Congressional Budget Office (CBO).

The CBO analysis, dated Feb. 11 and sent to Sen. Judd Gregg (R-N.H.), says the $787-billion plan will increase employment in the short-term, but will run up deficit spending which will “crowd out” private investment in the economy in the long-term.

The analysis concludes that the stimulus will put downward pressure on Gross Domestic Product (GDP) and wages after 2014. (The Gross Domestic Product is the total value of all goods and services produced in the United States in one year.)

Link

That really is some "unmitigated gall".

 
At 2/19/2009 10:35 PM, Blogger OBloodyHell said...

> Knowledge is impossible because the number of possible relationships exceeds the number of available particles in the universe.

a) Mis-statement -- "Full Knowledge is..."
b) False assumption -- There is no reason to presume that the available particles for data retention are limited to those in this universe
c) False analogy -- There's no reason, given a variant number of states possible for each particle, that only one piece of data can be encoded with each particle. In short, the particles themselves can have relationships which allow them to record more than a single data point. In one orientation, an electron tells you about the velocity of a particular bullet from a particular gun at a particular moment. In another, it tells you about the location of a particular object at a particular instant in time. In a third, it tells you about both (and yes, in defining those, I'm ignoring Heisenberg, which is outside the scope of this argument).


Knowledge is unlikely. It's not even vaguely "impossible".

 
At 2/19/2009 10:37 PM, Blogger OBloodyHell said...

> The FACT of the matter is that Democracy will put the losers im charge of the wealth producers with the objective of taking away their wealth.

Which is one of the chief reasons we aren't supposed to be a democracy, but a republic.

The founding fathers knew the history of the Romans and "bread and circuses".

 
At 2/19/2009 10:41 PM, Blogger OBloodyHell said...

> Oh here we go already. Ad hominem attacks only show the poverty of a poster's arguments.

Not always, Donald. Sometimes it relates to being sick and tired of the same idiotic crap being argued over and over again by some individuals no matter how many times it's been thoroughly disposed of by rational arguments in earlier venues.

At some point, it's human nature to go "Fuck it. You're an idiot, and I'm through wasting my time with you" and be done with it.

Not the best response, but with some of the people around here, it's certainly understandable.

 

Post a Comment

Links to this post:

Create a Link

<< Home