Knowledge And Decisions

The most basic of all decisions is who shall decide. This is easily lost sight of in discussions that proceed directly to the merits of particular issues, as if they could be judged from a unitary, or God’s eye, viewpoint. A more human perspective must recognize the respective advantages and disadvantages of different decision-making processes, including their widely varying costs of knowledge, which is a central consideration often overlooked in analyses which proceed as if knowledge were either complete, costless, or of a “given” quantity. Decision-making processes differ not only in the quantity, quality, and cost of knowledge brought to bear initially, but also and perhaps still more so, in the feedback of knowledge and its effectiveness in modifying the initial decision. This feedback is not only additional knowledge, but knowledge of a different kind. It is direct knowledge of particulars of time and place, as distinguished from the secondhand generalities known as “expertise.” The high personal cost of acquiring expertise, and the opportunities it presents for displaying individual talent or genius, make it a more dramatic form of knowledge, but not necessarily a more important form of knowledge from a decision-making point of view. Certainly expertise is not sufficient in itself without the additional direct knowledge of results obtainable closer at hand, and at lower cost, by great numbers of individuals who acquire no personal distinction from possession of that kind of knowledge.

“Society” is not the only figure of speech that confuses the actual decision-making units and conceals the determining incentives and constraints. “The market” is another such misleading figure of speech. Both the friends and foes of economic decision-making processes refer to “the market” as if it were an institution parallel with, and alternative to, the government as an institution. The government is indeed an institution, but “the market” is nothing more than an option for each individual to chose among numerous existing institutions, or to fashion new arrangements suited to his own situation and taste.

The government establishes an army or a post office as the answer to a given problem. “The market” is simply the freedom to choose among many existing or still-to-be-created possibilities. The need for housing can be met through “the market” in a thousand different ways chosen by each person — anything from living in a commune to buying a house, renting rooms, moving in with relatives, living in quarters provided by an employer, etc., etc. The need for food can be met by buying groceries, eating at a restaurant, growing a garden, or letting someone else provide meals in exchange for work, property, or sex. “The market” is no particular set of institutions. Its advantages and disadvantages are due precisely to this fact. Any comparison of market processes and governmental processes for making a particular set of decisions is a comparison between given institutions, prescribed in advance, and an option to select or create institutions ad hoc. There are of course particular institutions existing in the market as of a given time. But there can be no definitive comparison of market institutions — such as the corporation — and a governmental institution, such as a federal bureaucracy. The corporation may be the predominant institutional way of doing certain things during a particular era, but it will never be the only market mechanism even during that given era, and certainly not for all eras. Partnerships, cooperatives, episodic individual transactions, and long-run contractual agreements all exist as alternatives. The advantages of market institutions over government institutions are not so much in their particular characteristics as institutions but in the fact that people can usually make a better choice out of numerous options than by following a single prescribed process.