Friday, January 30, 2009

Plato's Philosopher Kings and Lack of Information

Here is an article from last week on information problems related to Keynesian stimulus. This continues the same idea that I just talked about recently with the information issues that even the wisest of leaders will inevitably face. Mario Rizzo is talking about deciphering whether an economic slowdown is merely the result of the lack of confidence and the aberrant whims of peoples' "animal spirits" (the Keynesian theory) or is rather due to malinvestment (more of the Austrian theory). The two interpretations require different approaches to address the problem, and the problem could be aggravated by picking incorrectly. But how is one to know whether it is malinvestment or lack of confidence or both or neither. And the larger the population and the more centralized the leadership, the less likely the leadership is to understand it. Thus, decentralization is better able to handle such problems.

We might ask: "is frenzied activity when you don't know what you're doing better than doing nothing?" Why doing nothing is usually the best policy when you don't know what you're doing. A nice metaphor: if you're camped near the edge of a cliff on a cold night, is a good idea to collect firewood, or wait until morning and not risking falling off the edge of the cliff?

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