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Neo Nails the Knowledge Problem


Neo-neocon unintentionally describes the Economic Calculation Problem:

Lots of blah, blah, blah in Washington about whether or not to extend those Bush tax cuts, and to whom, and for how long.

The problem with arguing about such things, of course, is that no one really knows what the effect of each course would be. At least, I haven’t seen anything that convinces me that anyone knows. I’m already on record as saying that economics is not my strong suit, but I’m beginning to wonder whether it’s anyone’s.

Here’s why: in economics, what seems obvious ain’t necessarily so. The economy is one of those extraordinarily complex systems that make predictions exceedingly hard to get right.

Economics may not be her strong suit, but Neo’s grasped a core principal of the Austrian school. Other flavors of economics are concerned with how certain levers move certain parts of the overall economy. They’re normative, meaning they believe they how things should be and that their task is to work the levers to make them so.

Austrian economic on the other hand is positive. They take their task to be describing what is and how it works. It shares a philosophical foundation with the scientific method, where a framework derived by reasoning is tested against observation of the world.

In a sense Austrians are concerned with what is True, while the rest are concerned with what is Ideal.

Knowing what is true is an impossible task. The system is too complex to describe. If we cannot even describe the economy, how can we propose a rational vision for how to make it work better? How do we really know how much of anything should be produced?

There are generalities that nearly everyone agrees are desirable. Like more jobs. The trick is to know how many jobs in which industries at which locations. Everything is a trade-off. Picking a winner also means picking a loser. There ain’t no such thing as a free lunch.

The only way to know who needs what where is to let everyone bid for what they want. Nobody has to know everything, but everyone gets the best deal they can afford. That’s the ideal Ideal. And governments twiddling with those levers distorts the bidding, so not everyone gets the best deal possible for them.

The best past, then, to allowing everyone to get those desirable things is to leave them alone. Trying to make the economy “normal” screws it up.