"It's very Hayekian"
That's kind of the catch phrase of the first fifty or so EconTalk episodes I listened to. The Hayek point this is referring to (in this article) has become pretty fundamental to my economic thinking. It's the sort of thing I could see going back to school to dedicate myself to fleshing out and formalizing more. There's a couple of other topics I want to write about, but they all end up colored by this idea.
Hayek's idea (this one at least) is that one of the most important things a capitalist/ free market/ price based system does is process information, searching through a vast space of possibilities optimizing for (wealth adjusted) utility.
The normal sort of formulation of economics assumes that everyone's preferences are known and fixed, and that everyone's option to act are known and fixed. But, they're clearly not. People don't know they want an iPad until Jobs shows them they want an iPad. People also don't know they'd be more useful to the economy* as a CPA than a basketweaver without the price indicators built into the market. There really is a lot of information about global shipping costs, industrial processes, depth of ecosystem, and alternatives build into every price of everything we buy or sell (most folks only sell their labor, but it's still vital information.) All that pricing information is a really efficient way to tell people where to put their effort ("copper wire is $1 a foot. I could make more conductive zinc wire cheaper I think. That's worth investigating.")
For Hayek, this idea grew out of a long running academic argument with communists. It's normal now to hear that communism can't work because of greed, or because the incentives aren't right. That's certainly true in some sense. I think it's even more crippled by lack of information provided via the combination of pricing and millions of people's knowledge. Even if everyone was perfectly altruistic, we'd have a very hard time figuring out how much more important it is for me to be a doctor vs designing a steel mill without something like free market pricing.
I find something about this shift really compelling. Moving economics from trying to describe how and who consumes our widget production to more like cognitive science for society.
*-leaving it as an open question how much "good for the economy" translates into good for people.
Hayek's idea (this one at least) is that one of the most important things a capitalist/ free market/ price based system does is process information, searching through a vast space of possibilities optimizing for (wealth adjusted) utility.
The normal sort of formulation of economics assumes that everyone's preferences are known and fixed, and that everyone's option to act are known and fixed. But, they're clearly not. People don't know they want an iPad until Jobs shows them they want an iPad. People also don't know they'd be more useful to the economy* as a CPA than a basketweaver without the price indicators built into the market. There really is a lot of information about global shipping costs, industrial processes, depth of ecosystem, and alternatives build into every price of everything we buy or sell (most folks only sell their labor, but it's still vital information.) All that pricing information is a really efficient way to tell people where to put their effort ("copper wire is $1 a foot. I could make more conductive zinc wire cheaper I think. That's worth investigating.")
For Hayek, this idea grew out of a long running academic argument with communists. It's normal now to hear that communism can't work because of greed, or because the incentives aren't right. That's certainly true in some sense. I think it's even more crippled by lack of information provided via the combination of pricing and millions of people's knowledge. Even if everyone was perfectly altruistic, we'd have a very hard time figuring out how much more important it is for me to be a doctor vs designing a steel mill without something like free market pricing.
I find something about this shift really compelling. Moving economics from trying to describe how and who consumes our widget production to more like cognitive science for society.
*-leaving it as an open question how much "good for the economy" translates into good for people.