Sound economic decisions cannot be made centrally by expert bureaucrats because they 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.
For example consider government responses to the coronavirus crisis. The problem was given to Chief Health Officers to solve. Their solutions were dire.
Curfews were imposed, keeping us in our homes at night. In the daytime we were permitted to venture out, within 5 kilometres of our homes, for an hour or so each day, for exercise and essential shopping. Businesses deemed to be non-essential were forced to close. Children were unable to go to school. Friends and neighbours were not allowed in our homes. Families were unable to visit elderly relatives. Surgery deemed non-urgent was deferred. There was no public entertainment: art galleries, libraries, concert halls, cinemas, sporting venues were all closed. Religious events were banned, including weddings and funerals. Travel was curtailed. Interstate holidays were not permitted. International students and back-packers were forbidden to come here to study or work. Anyone who happened to be overseas was unable to return. The regulations were enforced regardless of the local incidence of the virus.
Significantly, Chief Health Officers are not expert in matters of business, sociology or education. Even their knowledge of medicine may be limited. They may have spent most of their working life in administration rather than technology. 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.
Thus officials with insufficient skill, expertise, knowledge and data have been making decisions which impact the lives and livelihoods of millions in both the short and the long-term. Their solutions have not addressed the whole problem. They have not taken account of all the factors. They have been sub-optimal, unbalanced, and sometimes punitive. The reasons for arbitrary and inconsistent regulations have never been explained. Maybe there were no reasons, just gut feel. Maybe they were not explained because they would not stand up to public scrutiny.
It seems obvious that lockdowns were necessary to prevent the spread of the virus. But did they have to be mandated? What would the consequences have been if the health advice had been communicated to us and we had been able to make up our own minds on safe practices? Would the restrictions have been more nuanced? More relevant to our own circumstances? Just as effective in terms of combating the virus. Less harmful with regard to everything else.
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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 aggregated 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 extols as a marvel. It is one of the great triumphs of the human mind, yet mostly underappreciated.
He illustrates this by explaining what happens when, somewhere in the world, a tin mine collapses or some new opportunity arises for the use of tin. It does not matter which! The price of tin rises and consequently business managers throughout the world have to economise on tin or find alternatives. The price system enables the business manager to make decisions without needing to know the cause of the changes in demand. It is a conduit for the minimum information required to make decisions.
But the impact of the price mechanism is even more profound. It has enabled the division of labour on which our prosperity is based. It has enabled individuals to choose their employment and to use their knowledge and skill to their own and the community's optimum benefit.
Hayek's The Use of Knowledge in Society is an important contribution to economic thought. It provides the theoretical underpinning for the tale about the price miracle told so well by Leonard Read in I, Pencil.
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Returning to the issue at hand, what is the most effective way for our society to respond to the pandemic? Could we usefully apply the principle of subsidiarity?
What do you think might be the minimum set of tasks that we should leave to the government?
Can our health departments be relied upon to run a hygienic and secure quarantine system?
Do they have the skills to roll out a vaccine program?
Can the ABC be relied upon to deliver timely and accurate health information to the public?
Would a health department website be more effective?
Or is the optimal solution to distribute health information through general practitioners and pharmacists?
Who do you think would be the most competent person to decide whether a business should be open or not, whether you should work from home or not, how many people should attend the footy, or whether your school should be open?
What about your own level of responsibility? Can you be relied upon to wash your hands, and to isolate at home if you are sick?
The solution to our pandemic problem is to reduce government involvement and control to a minimum, and to find the best mechanism to ensure that the public is as well-informed as can be without overloading them with unnecessary information. Then we can leave the detailed decisions to the man (or woman) on the spot.
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