KNOWLEDGE PROBLEM

We’ve often heard the statement ‘good enough for government work’ or have heard the criticism that government workers are incompetent. The truth is, many government employees are highly trained and competent professionals. Unfortunately they don’t always have the correct information or the incentive to act on that information to achieve results. When they do take action, it may not be an action that uses resources in the most effective manner. In this situation, limited resources become more limiting. Government institutions and bureaucracies often generate bad information and terrible incentives.


With markets, partial bits of decentralized information that are possessed by multitudes are coordinated to produce results. Prices provide information and incentives to act on that information. As explained in the article on Public Choice theory, government decision makers have less incentive to take appropriate actions.

Instead of relying on information in prices, which reflect the tradeoffs made by millions of individuals making decisions based on their own well being and first hand information, the involvement of government shrinks the pool of knowledge to just a few ‘experts’ with limited information.

This is the great ‘knowledge problem’ that government decision makers face. It is the reasoning that economists such as F.A. Hayek give for the collapse of the Soviet Union, and why so many free market economists are critical of expanding the role of government.

SOURCES:
The Use of Knowledge in Society
F.A. Hayek
The American Economic Review Vol 35 No 4 (Sept 1945) p. 519-530