User:Xerographica/Decentralized knowledge

It must be remembered, besides, that even if a government were superior in intelligence and knowledge to any single individual in the nation, it must be inferior to all the individuals of the nation taken together. It can neither possess in itself, nor enlist in its service, more than a portion of the acquirements and capacities which the country contains, applicable to any given purpose. - John Stuart Mill, Principles of Political Economy with some of their Applications to Social Philosophy

The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world. - Friedrich Hayek, The Use of Knowledge in Society

Jay Lund's chapter explores the informational problems implied in finding the best way to allocate water resources. In this respect, the main advantage of water trading is that its effectiveness does not require having in advance detailed information on the value of water on any place and for any alternative use. Engaging in trade is a voluntary decision, thus the market is itself a preference revelation mechanism. No particular prior information on people's preferences is then required in advance for trading to find mutually beneficial deals. By definition, when a transaction takes place, the maximum willingess to pay of those buying water is higher than the minimum compensation required by the sellers of water property rights and the deal improves the welfare of those engaged in it. Allowing for water trading thus reduces the information burden of water authorities as they do not need detailed information beyond that required to reach a decision on the overall constraints on the water use in the entire economy. - Carlos Mario Gomez, Incentives and prices in water trading

It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of the gaps between private and public costs could interfere with individual choice. - Arthur Pigou, Some Aspects of the Welfare State.

It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little. This is as true of business as of other spheres of activity. The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge. - Frank Knight, Risk, Uncertainty, and Profit

Individuals are not, of course, omniscient, even those who think themselves to be. The securing of information about the predicted effects of alternatives is a costly process, even in a world with reasonable certainty. Recognizing this, individual utility-maximizing behavior remains “rational” when choices are made on the basis of less-than-perfect information. There is some “optimal” investment in fact-finding and analysis for the deciding individual at each stage of his deliberation. - James M. Buchanan, Public Finance in Democratic Process

Development happens thanks to problem-solving systems. To vastly oversimplify for illustrative purposes, the market is a decentralized (private) problem solving system with rich feedback and accountability. Democracy, civil liberties, free speech, protection of rights of dissidents and activists is a decentralized (public) problem solving system with (imperfect) feedback and accountability. Individual liberty in general fosters systems that allow many different individuals to use their particular local knowledge and expertise to attempt many different independent trials at solutions. When you have a large number of independent trials, the probability of solutions goes way up. - William Easterly, The Answer Is 42!

This process of redistribution of wealth is not prompted by a concatenation of hazards. Those who participate in it are not playing a game of chance, but a game of skill. This process, like all real dynamic processes, reflects the transmission of knowledge from mind to mind. It is possible only because some people have knowledge that others have not yet acquired, because knowledge of change and its implications spread gradually and unevenly throughout society. - Ludwig Lachmann, The Market Economy and the Distribution of Wealth

One of the strongest arguments in favor of letting people interact freely in a market under property rights institutions is that it is the best known way to utilize the decentralized knowledge of the society— including the knowledge that each individual has about his own values. - David Friedman, The Machinery of Freedom

We know that the essence of markets is that individual cost and value information is private and dispersed, and that command and control economies inevitable must fail to deliver the goods because the appropriate information is not, and cannot be, given to any one mind. - Vernon L. Smith, Commonwealth North Forum

Expositions of welfare economics typically assume that the analyst possesses knowledge that is in no one’s capacity to possess. A well-intentioned administrator of a corrective state would face a vexing problem because the knowledge he would need to act responsibly and effectively does not exist in any one place, but rather is divided and dispersed among market participants. Such an administrator would seek to achieve patterns of resource utilization that would reflect trades that people would have made had they been able to do so, but by assumption were prevented from making because transaction costs were too high in various ways. A corrective state that would be guided by the principles and formulations of welfare economics would be a state whose duties would exceed its cognitive capacities. - Richard Wagner