Tuesday, February 22, 2011

Merit, Value, Majorities... and Knowledge

Good evening. This post comes a bit later than I would like, with my apologies; we've had downed power lines from snow and ice for the past two days – so inconsistent internet access. I'll try to keep this brief, because last week's post was so long, and because I don't want to let the best be the enemy of the good… and I want to get this posted now.

Most of your comments were on chapter six; for this reason, and because chapter seven dovetails with much of part two, I'll focus my comments on equality, value and merit.

Ah! More Hayekian epistemology, and more implications of the knowledge problem! Hayek's comments on merit v. value, and equality before the law, all come from his theory of knowledge.

On equality versus merit, Hayek's argument goes back to his statement that we are guided by "signs or symbols, such as prices offered for [our] products or expressions of moral or aesthetic esteem for [our] having observed standards of conduct…" (28). Reward based on merit would be arbitrary – who gets to determine what is deserving of merit? Through what process? What if there are competing definitions of merit? "Value to others" (as opposed to merit) is more clearly expressed and not arbitrary; it represents demonstrated preference, as opposed to stated preference; how much are consumers willing to pay (in the case of products), or what expression of esteem are they willing to give?

This reminds me of two short stories. The first is drawn from Walter Williams' microeconomic classes. What if, he asks, he were to spend his evenings and weekends engraving the Declaration of Independence on a grain of rice? How much would you be willing to pay? $10,000? $1,000? Or, more likely, $5 or even less? But he spent all those hours working on the masterpiece… well, the market is sending him a clear signal that he is misallocating resources in a world of scarcity.

Likewise, a development economist (Bill Easterly, I think) tells the story of an economist visiting a developing country, who sees a public works project being completed by workers using shovels. He asks why the workers are using shovels instead of machinery, and is told that it's because somebody wanted to create jobs. "Oh," says the economist. "I thought you were building a bridge. Why don't you use spoons instead of shovels?"

So much for labor theory of value!

Hayek also talks about law. I think it's important to think of law as knowledge; there will be more on this in section two, so I'll keep it brief. Basically, we live in a world of limited, diffuse, knowledge. We overcome that knowledge problem through institutions (the mark of a good institution being its capacity to communicate and generate knowledge, and to provide proper incentives). The law is just one of those institutions, as it provides knowledge about how we are to treat other people, and what the boundaries of another's personal sphere are. But more on that in the next section. For now, I'd just like to emphasize what I see as the key point on knowledge and equality – and limited government – in this chapter, from p. 88. First, no person has sufficient knowledge, or the capacity, to determine ends for another. Second – because we live in a world of interdependence, where we overcome our individually limited knowledge through institutions that allow us to use the knowledge held by others – acquisition by any member of the community of additional capacities to do things that might be valuable to others (BUZZ: "valuable" to others… not merit!), means a gain for the entire community.

Does all this mean no redistribution, at all, ever? Well, the problem with redistribution, basically, is that it means that one person is imposing his ends on others. Indeed, the proper level of redistribution is arbitrary and/or determined by majority rule (see chapter seven for problems with that). What is, indeed, the threshold of poverty? Of need? And how far do we redistribute? And who decides? What are the boundaries? And why not continue until the reduction ad absurdum of the Harrison Bergeron story (by Kurt Vonnegut, Jr.) shared in one of the comments?

That is not to say that people should never provide support for each other. But we must ask what KIND of support? If it's voluntary, we'll have no violation of ends of some by others – and the person doing the supporting can do so in a more efficient manner because that person has the relevant knowledge. We come to Milton Friedman's four ways of spending money; think of proper knowledge and proper incentives here. (1) your money on yourself; (2) somebody else's money on yourself; (3) your money on somebody else; somebody else's money on somebody else. We come also to the insights of Frederic Bastiat on "what is seen" and "what is not seen" (see www.econlib.org/library/Bastiat/basEss1.html). Sure, maybe there are some outcomes that are more desirable than what we have. And sure, maybe – just maybe – we can achieve them. But at what cost? And what are we giving up? And can we even know what we're giving up… given our knowledge problem and the difficulties of social engineering and central planning? We're back to Harold Demsetz's Nirvana Fallacy…

A final question… what is "society"? Who makes it up? Who decides in a society? How are preferences aggregated?

I'll keep this brief, because (a) I promised a shorter post this week; and (b) much of this material will be covered in greater depth in section two.

For now, I'll simply comment on… you guessed it… the knowledge aspects of democracy. Majority rule has its advantages, to be sure – it's a pretty good method of aggregating preferences, and it's certainly desirable that a majority should be involved in decision-making. But majoritarianism is insufficient, especially if it becomes (as it has today) its own end. Majoritarianism has no limits, on its own, but itself, and can quickly become tyranny of the majority if it does not operate within rule of law. If it does not, it quickly becomes the imposition of the majority's ends on everybody else, in clear violation of the knowledge problem. What is more, democracy can, through its "coercive, monopolistic and exclusive character" (110) thwart the process of institutional self-correction.

It's been said that democracy is two wolves and a sheep voting on what they should have for dinner. Freedom is a well-armed sheep contesting the result of the vote. Many more questions will surface in section two on democracy and rule of law, so I'll leave you with my questions on merit, value and equality.

And I'll close with the delicious quip by E.M. Forster: "Two cheers for democracy: one because it admits variety and two because it permits criticism. Two cheers are quite enough: there is no occasion to give three."


  1. I like the grain of rice analogy. My response to it is, it doesn't really matter how much I would pay for it, what matters is how much someone else would pay for it. Just because I am not willing to spend 10000 $ for the rice does not mean that there is not someone else who would. I think the real question is how long is the artist willing to hold onto this grain of rice in which he has already most likely invested massive amount of his time in creating, until he finds a buyer who is willing to pay his demanded price: a month, a year, ten years? Art is one of those things that generally becomes more valuable over time (don't quote me on that).

    In terms of majority rule I think Hayek states it best on page 108 "We may admit that democracy does not put power in the hands of the wisest and best informed..." I think we see a wonderful example of this in the present and recently retired political leaders of our country today.

    You say that majoritarianism has no limits... and can quickly become tyranny of the majority if it does not operate within rule of law. My question is if the majority decides upon the law, what is to stop them from framing the law in a fashion in which they are legally able to be tyrants?

    As for the two wolves and a sheep democracy analogy, I point to Hayek's comment "Advance consists in the few convincing the many." (110) It is in the sheep's best interest to convince the wolves, that grass is a much better diet than sheep flesh. Democracy provides the forum for the sheep to do so. Democracy's success (just like the life of the sheep) depends upon the ability of the few to do their convincing well.

  2. I remember the spoon anecdote originally being attributed to Milton Friedman, but the setting and context seems to vary depending on who is telling the story.