The Presumption of Knowledge

Over the past few weeks attention has been focused on the roll out debacle of the Affordable Care Act—aka ObamaCare.  This is a case that is the opposite of too big to fail– too big to succeed.  While it might seem that there is no connection between ObamaCare and alternative energy policies and biofuels mandates, there is at least one common thread—the presumption of knowledge—aka the arrogance of the best and brightest.

The Federal Government has grown in power over the past seven decades and assumed responsibilities that for most of our history were the jurisdiction of states.  In many respects, states are now subsidiaries of the Federal Government that can use its vast regulatory authority to constrain much of what states can do.

The presumption of knowledge problem is much more that an issue of federalism.  It is an issue of decision making–central versus decentralized decision making.  Whether it is taking control of 17% of our GDP, biofuel mandates, or industrial policy initiatives to promote alternative energy, the Federal Government begins with the premise that it is smart enough and capable enough to know what is in the best interests of citizens and to force outcomes to complex problems for which there is inadequate knowledge.

In a recent article—Neither Gods nor Angels– Professor Bruce Yandle of Clemson University explains the failure of “government’s effort to defy age-old problems of human organization and human nature”.  While the examples he used were ACA and the NSA and IRS scandals, the underlying logic applies equally to attempts to mandate and “incentivize” energy technologies.

Yandle draws on Nobel Laureate Frederich Hayek’s work on the limits of knowledge.  Hayek’s work emphasized how the dispersal of knowledge about human wants results in interactions that lead to the production of goods and services that satisfy most consumers .  He concludes that the networks created in the market place are damaged and destroyed by central decision making which “kill off incentives to innovate, and risk destroying more wealth than can be created by command-and-control.”  Yandle further states “ Even if a host of the brightest and best could be found… each…has his or her own idea about what is best for mankind.  Left to their own devices…(they) will attempt to create the world in their images, not necessarily in the image of a sovereign people or even their own bosses.”

Although government objectives like solar and wind power and cellulosic ethanol may be noble, the knowledge problem is overwhelming as is well evidenced by the Congressional mandate to produce specific volumes of cellulosic ethanol on a mandated schedule even though the technology to achieve those targets did not exist.

Market forces may appear messy to the commanding heights of Washington, especially since they do not fit the prevailing paradigm for meeting human needs and may not produce the desired outcomes of ruling elites. But markets provide the incentives to innovate, the clear focus on consumer needs and wants, the competition to fairly sort out the winners and losers in the race for profit and market share, and the networks of knowledge that lead to innovation. Government mandates and industrial policy initiatives have mainly produced crony capitalism.