An essay from economist Arnold Kling in the latest Cato Policy Report discusses what Kling calls the “knowledge-discrepancy problem.” This occurs when knowledge is dispersed but power is concentrated, and it is particularly acute in government.
In short, it’s impossible for government “experts” to aggregate the vast amount of knowledge that is dispersed throughout the economy in order to optimally direct economic activity. And as Kling notes, concentrating power over the economy in the hands of experts leads to ever more undesirable government interventions:
As we have seen, the expectations placed on government experts tend to be unrealistically high. This selects for experts with unusual hubris. The authority of the state gives government experts a dangerous level of power. And the absence of market discipline gives any errors that these experts make an opportunity to accumulate and compound almost without limit. In recent decades, this knowledge-power discrepancy has gotten worse. Knowledge has grown more dispersed, while government power has become more concentrated.
But on the same day in March 2009 that Shenetta Coleman picked up applications from 46 companies, she received an email from the Michigan Department of Human Services telling her she couldn't award work to anyone.
The problem: Ms. Coleman hadn't met requirements for her advertisement. Those included specifying the precise wages that contractors would have to pay, and posting the advertisement on a specific website. There were other rules—federal, state and local—for grant and contract-award processes, historic preservation and labor standards.
The bureaucratic obstacles Ms. Coleman hit took more than a year to clear. Some were mandated by the stimulus bill, the same legislation that was supposed to rapidly create jobs. For example, there is a union-backed provision that requires that weatherization workers receive the prevailing wages in the area.
She studied energy-saving principles, practiced drilling holes into walls and blowing in insulation, and learned how to install windows. She graduated in March, at the top of her class. For the next four months, she couldn't find work. “I was hanging on by a thread,” said Ms. Wallisch. In July, she was hired for energy-conservation work funded not by the stimulus plan, but by Michigan's utility companies.
What the issue of job creation illustrates is the problem of treating government experts as responsible for a problem that cannot be solved by a single person or a single organization.
Economic activity consists of patterns of trade and specialization. The creation of these patterns is a process too complex and subtle for government experts to be able to manage.
The issue also illustrates the way hubris drives out true expertise. The vast majority of economists would say that we have very little idea how much employment is created by additional government spending. However, the economists who receive the most media attention and who obtain the most powerful positions in Washington are those who claim to have the most precise knowledge of “multipliers.”