The Extended Society wants more effective Use of Knowledge

My main argument is that society should find better ways to use dispersed knowledge. Victor Steenbergen was worried that I might be distracting some readers from my central message and asked me yesterday to refrain from making the argument that “Markets are Good” and “States are Bad”. I have indeed criticized the state for “picking losers” in “Government picking Losers in Public Transport”. Not many economist actually believe that picking winners is the role of the state. Even Prof. Krugman seems to agree with me in “What do Undergrads Need To Know About Trade? “. Victor has also accused me of talking too much about “left” versus “right” in relation to development aid. When in actual fact I believe that the blind application of the Washington Consensus by the “right” is as dangerous as the omniscient belief associated with the “left” in the central allocation of development aid. I think it is good for the public debate to point out moments when I we should make different decisions.

Am I an anarchist who believes there should be no state? No! The state has the important ability to enforce agreements and mitigate informational problems often related to public goods.

The article “The Other Hand: High Bandwidth Development Policy” by Ricardo Hausmann, that Victor linked, emphasises that I may be misunderstood and I should make my argument clearer. The point that many seem to be missing is that I believe states are not using the dispersed knowledge available in society. Public policy competition will create a race to the top and better institutions for developed and developing nations. Indeed Ricardo Hausmann emphasises the complexity of societies and how societies differ in their public policy design. There is probably not one best solution for all societies. We must allow an evolutionary approach in which society optimizes along some internal solution.

In the same way that central planning can not work, because the right information is not present at the central level, information about how one policy idea, often designed for one purpose, may have unintended consequences in other sectors, is ignored because the correct information is not available to policy makers at the high level. Therefore a decentralized (competitive) approach where decisions are made at the level where the relevant information is available may work better for the provision of public policies. A competition in which policy designs compete in a similar fashion as I envisaged for financial regulators” Competition creates a Race to the TOP: The EU should seek Liberalisation not Harmonisation” could work. Competing policy makers will enhance the important connection between private and public sector as they keep the internalized public benefits. Competition in regulation and policy making is not an alien idea. As Hernando de Soto points out in this video, the majority of the world’s population live in the extralegal system and many use local rules and traditions to enforce contracts and deal with information problems. The reason they use this system is not because they are Libertarian, but because they feel this extralegal system serves their needs in a better way.

It is not up to me to decide what an optimal policy design should look like. Every society is different and subject to innovation and change. The policy designs will develop and adapt to deal with change as long as different designs are given the opportunity to compete in the use of knowledge, to increase the productivity of the economy. As Rodrik stated: (in “Institutions for high–quality growth: what they are and how to acquire them”) “participatory and decentralized political systems are the most effective ones we have for processing and aggregating local knowledge.”