Economic decisions cannot be made well by centralised, expert bureaucrats because they do not, in fact can never have, all the knowledge needed. Moreover, they lack transient information about people, local conditions and special circumstances. Only the man on the spot has these.
We have seen this in government responses to the COVID crisis. The problem has been given to Chief Health Officers to solve. The solutions have been dire. Whole states have been locked down because of the fear of a few cases spreading uncontrollably. The Chief Health Officers have limited information about the epidemiological issues. They know where a few cases are and can isolate known contacts. But they have no idea whether or not the virus exists beyond these few locations.
Significantly, the CHOs are not expert in matters of business, sociology or education. Even their knowledge of medicine may be limited. They have no way of balancing their decisions by considering the impact on the livelihoods of the owners and workers in the businesses they shut down, the impact on the education and social development of the children unable to go to school, or the impact on the mental health of people denied the opportunity to socialise with friends and family. Many of the adverse consequences are long-term and may not be noticed for years.
Choosing a solution that will minimise health risks, CHOs lockdown the whole state. Throughout the metropolitan area, even well away from the known outbreak, a punitive lockdown is enforced. Citizens are confined in their homes and not permitted to have visitors. A family in Warrnambool is prevented from having a funeral for their child; in Mildura, miles away from any outbreak, businesses are shut; parents are not permitted to watch their children play sport, but in Geelong, a select 7000 people are allowed to sit close together to watch their team play professional football.
Officials with insufficient skill, expertise, knowledge and data are making decisions which impact the lives and livelihoods of millions in both the short and the long-term. Their solutions do not address the whole problem. They do not take account of all the factors. They are unbalanced. They are sub-optimal. The reasons for arbitrary and inconsistent regulations are never explained. Maybe there are no reasons, just gut feel. Maybe they are not explained because they would not stand up to public scrutiny.
This will not be the last pandemic. We cannot shut everything down every time someone sneezes. We must find a better way.
The problem is a complex one. It was addressed by one of the great minds of the twentieth century, F.A. Hayek, in his essay The Use of Knowledge in Society which examined how to make rational economic decisions.
The premises for his analysis are twofold. Firstly, that not all knowledge is scientific, about general rules. There is also the knowledge of time and place – the knowledge of people, of local conditions, and of special circumstances. Secondly, that the knowledge of time and place is held by millions of individuals and cannot be agglomerated without losing its essence.
Perhaps this is easier to understand with a concrete example. If you needed to determine how many COVID vaccine vials you need to vaccinate all Australians over the age of 18 then you can get population statistics and do your sums. But if you wanted to know how many residents of an aged care home to vaccinate next week, then you need to know how many missed out last week due to an outbreak of diarrhoea and whether local nursing staff can be rostered to supply the injections.
Business managers are constantly making such decisions, varying what they are doing on a daily basis to meet changes in demand for their products, or the supply of raw materials, or the unexpected failure of a machine, or the unavailability of key staff.
Because the aggregation of data obscures the knowledge of time and place the central planner will have to find some way or other in which decisions depending on them can be left to the "man on the spot", and how information can be conveyed to the men on the spot so they can fit their decisions into the wider context.
Hayek's solution is the price mechanism, which he proposes is a marvel, one of the great triumphs of the human mind.
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