Knowledge And Decisions

Plain and commonsensical as this approach may seem, it goes directly counter to the way many of the issues of the day are discussed. Much of the literature on racial or sexual prejudices and their discriminatory economic effects, for example, proceeds in utter disregard of knowledge-validation processes, such as competition in the marketplace. It has often been asserted that women receive only about two thirds of what men receive for doing the same work. While this assertion is open to very serious challenge on empirical grounds,⁵ the more relevant analytical point here is that it treats employers' perceptions as if they were independent of the validation processes of economic competition. For women to be paid only two thirds of what men are paid for doing the same work with the same productivity would mean that an employer’s labor costs would be 50 percent higher than necessary with an all-male labor force. If all that was involved was blind prejudice, that might seem to be a viable situation. But even a cursory consideration of the economic implications of trying to compete and survive in the marketplace with labor costs 50 percent higher than they need be must at the very least raise serious questions. Similarly, the owner of a professional basketball team might read Mein Kampf and become a convinced racist but, if he were then to refuse to hire black basketball players, would there be no economic repercussions — or would he be more likely to disappear as a basketball club owner via the bankruptcy courts?

Note that what is involved here is not enlightened self-interest on the part of individual economic decision makers but the systemic effects of competitive processes which winnow out those whose decisions diverge most from reality. Under special circumstances, such as those of a government-regulated monopoly or cartel, the costs of arbitrary discrimination can be reduced or eliminated, thereby allowing discrimination to continue indefinitely because of insulation from market feedback. The point here is not that discrimination is impossible, nor even an attempt to assess how much discrimination there is. The point is precisely that we must look at the actual characteristics of decision-making processes — their incentives and constraints — if we want to gauge the likely outcomes of particular decisions in particular circumstances. Put differently, sweeping assertions about the consequences of perceptions alone — even racist or sexist perceptions — ignore inherent circumstantial constraints, such as those affecting dogs, bats, and people. Much, if not most, of what is said about many of the great issues of the day pays little or no attention to these kinds of concerns, which predominate in the first half of Knowledge and Decisions.

The growing prevalence of words like “perceptions,” “stereotypes,” and “socially constructed” serves ultimately to mute or eradicate the distinction between ideas and realities. Yet it is precisely the role of feedback through decision-making processes to sharpen that distinction. The disparagement of facts in history, or of original meanings of words and phrases in the Constitution, is part of the more general tendency to treat reality as plastic and the fashions of the times as equal to, or better than, the evolved understandings produced by experience and validated by the assent of successive generations. When works of literature which have gained the respect of generation after generation of readers are called “privileged” writings, not only is a validation process made to disappear into thin air but the very concept of achievement ex post is equated with a privilege ex ante.

Economic achievement, for example, is often seen as mere “privilege” and failure as “disadvantage,” again obliterating the distinction between the ex ante and the ex post, to the detriment of any empirical study of the foundations of achievement and failure, since the very distinction itself vanishes by verbal magic.

ECONOMIC TRENDS

Knowledge and Decisions was published some months before Ronald Reagan was elected president of the United States. His eight years in office were marked by both by changing economic conditions in the United States and by changes in economic decision-making institutions and processes — the “Reagan revolution” — that were imitated by many other countries around the world. Whether that revolution marked an enduring change in economic and social institutions, or just another passing blip on the great screen of history, is the large, unanswered question of our time.