The Science Of Decision Making

Basketball fans are in their glory as their heroes take to the court. The season is underway and the stars are making news. They make sinking three pointers look easy, almost effortless.

None of those stars are mechanical engineers. They know enough about the laws of nature, however, to find the basket from twenty five feet out. They instantly processes all of the information necessary to release the ball at the exact moment, at the exact angle and with the exact velocity to find the net. The laws of physics can describe what happens in detail, but that knowledge doesn’t make it happen. Only their experience and decisions from moment to moment make it happen.

In the same way, the laws of economics describe what happens in daily life, but when you go to the market, you don’t need to be an economist to successfully provide for your family. Like our basketball players, you instantly process all of the personal preference and market information needed to make decisions.

Mechanical engineers use their knowledge of cause and effect to understand a certain result, the trajectory of a basketball, for instance. If the same conditions, inputs and processes are used, the result will be consistent and predictable. A basketball, backboards and hardwood floors have strictly identifiable characteristics. They will always react the same way to applied conditions.

Social engineers, on the other hand, try to use the laws of economics to bring about what they think is good. To a certain extent, that is possible, because we can anticipate the general reaction of the markets to external forces. There are multiple problems with this engineering approach, however. Real people have their own goals, ambitions and preferences. They have their own ideas of what is good. They don’t always do what is expected. There will be unanticipated disasters, hurricanes, droughts, business failures and government interventions that can dramatically change people’s perceptions, expectations and needs.

Physical scientists work with known quantities and constants. They can control the inputs and precisely describe the reaction of materials. In the social sciences, however, there are far too many variables and unknowns to arrive at any precise cause-effect relationships. Scientists can’t possibly know and measure all of the far reaching effects of actions on each member of society.

Even if they were able to perfectly direct the society to bring about the desired good results, who’s conception of good should be used? With 300 million people in this country, there is a wide divergence of opinion of what is good and appropriate. The more effective the social engineers are at imposing their own view of what is good, the more offensive and abusive they are to those that oppose them. People have a right to act in their own interest as long as they don’t infringe on the rights of others.

While the primary effects of market manipulation are somewhat predictable, secondary effects are usually hidden, but often just as or more significant than the primary. In the social realm, conditions and preferences can vary minute by minute. Humans are acting beings. They are not controllable, and react in different ways at different times.

In any event, the process of manipulation is necessarily political, and expediency is the rule, rather than what is good or right. The changes are guided by the selfish interests of politically powerful groups, and not by the general good, whether or not that good was known or even knowable. They will emphasize the here and now benefits to themselves or their group and ignore the negative consequences to other groups, or longer term effects. The use of political force to bring about good also assumes selfless leaders that act only in the public interest, an obviously unrealistic expectation to even passive observers of reality.

Many people claim to know what is good for the population, the citizens, the people, but the welfare of a population is maximized only when free people make free decisions without coercion from anyone. Economic freedom correlates with improvement in all measures of well-being. It is a rational consequence of the most fundamental elements of human action.

Scientists are trained to understand cause and effect, to explain what is. They can help individual baseball players or market participants achieve their goals, and players should use whatever knowledge will help them in their achievement. Scientists are, however, no more qualified than any other person to dictate to everyone what those goals should be. Decisions and opinions are not the realm of science but, rather, the realm of human choice. Humanity is always better off when basketball decisions are left to basketball players and market decisions to the market players, that is, you and me.

14 comments to The Science Of Decision Making

  • Dirk

    One of the problems with globalization and technology is that it makes it easier to envision a command and control economy on a national level. The idea that we can all “come together” sounds nice, but the reality is that different people have different values.

    However, the essence of civilization is civility- the ability of people to get along. As civilization has risen, so have standards, such as everyone driving on the same side of the road. So, the idea that people CAN agree to allow “scientists” to manipulate economic policy is not in question. The question is- how much, and how?

    Certainly, the Federal Reserve’s manipulation of interest rates and money supply has shown to create severe problems on occasion. Federal tax law and fiscal policy changes have also created shifts in behavior that are not always beneficial, welfare and housing being two obvious examples. The law of unintended consequences can be a real downer when applied on a national- or global- scale.

    Hopefully, the lessons from this current scare will be to allow some insulation between states, and to better understand central bank interventions, especially in the absence of major supply side shocks.

  • Raymond

    The wagon full of specie is rushed from bank to bank ahead of the bank examiner. How does bankers get around this?
    Why change the laws of course. Very scientific indeed.

    I’m looking at the $10 Trillion taxpayer debt while I read Mr Z and Dirk’s explanations of economics.

  • Hi Dirk,

    I agree that improvements in technology make many think that they will be able to better control the economy. The Soviets were convinced that, if only they could use powerful enough computers,generate enough data and produce enough information, they would be successful in their command and control over the economy.

    The imposibility of central planning has been demonstrated time and again. F A Hayek called it the Fatal Conceit, the idea that any one person or group of persons could be smart enough or wise enough or have enough information to direct the lives and choices of masses of people.

  • Dan Wilkinson

    Dan,

    How could a disaster relief effort be co-ordinated without central planning?

    In what areas is central planning beneficial, and in which areas is it detrimental? If you suggest ecomomic matters should never be centrally planned, how does one define what is and is not an economic matter? Surely anything that costs society money is an economic matter?

    For example, disaster relief infrastructure requires funding, so how to make the decision about how much funding and what to buy with the money? One could consider a disaster relief agency as a socialist institution, and therefore by your logic would lead to misallocation of resources, since people won’t sufficiently fear disasters. This seems like a trite argument, but I struggle to understand the Austrian position on matters like this.

    Similarly for fundamental science research and technology. Imagine two societies, A and B, with A organised according to libertarian principles and B with a typical western democratic government authority.

    A becomes more prosperous due to more efficient allocation of resources, until B develops a fusion reactor through long term and very expensive centrally planned research. B then becomes vastly richer than A as a result.

    Is a society that always avoids central planning in danger of getting trapped in a local minima as a result of blind spots that result from de-emphasising collaboration?

    Would a truly libertarian society ever build a large hadron collider or pay physiscists to understand quantum gravity?

  • Raymond

    Dan W,

    Central planning in economic sense, such as the old soviet union.

    The socialist planners were able to send a man in outer space but they couldn’t feed their people. Why?

  • Hi Dan W,

    You ask how could disaster planning be coordinated without central planning. I would say disaster planning and relief is one of the most starkly obvious situations proving the inherent weakness of central planning. Hurricane Katrina occurred four years ago, but it is still a disaster area. It was and is the victim of the largest centrally controlled rescue operation in US history.

    The stories are legion about the incredible waste of time, resources and lives in that effort. A flotilla of hundreds of private boaters volunteering to rescue people from hospitals were turned away by authorities. Tractor trailer loads of ice were driven thousands of miles as they were redirected multiple times and finally directed to empty their load at a distant depot. Firemen who volunteered to fight the fires in New Orleans were first directed to Atlanta to undergo required diversity and sexual harassment training while the houses burned. The tales could go on for hours.

    In the meantime, Walmart already had ice and water in place, plenty of food and necessary supplies for thousands of people. They donated thousands of tons of supplies. Billions of dollars of private donations made their way to the disaster area. Millions of hours of volunteer service were donated to help.

    The problem with New Orleans and its current state of devastation rests with its central planning of the recovery. The first thing from the mouths of the Mayor, the Governor and the President of the United States was that anyone caught price gouging would be severely dealt with. That is a de facto price control. When there are disasters there are short supplies and massive demand. With shortages and a high demand, the price has to increase dramatically. When the prices are kept artificially low, there will be a persistent shortage, precisely as New Orleanians have been experiencing for the last four years. They cannot get building materials because no new suppliers are willing to subject themselves to the abuse of the politicians.

    I am sure that the politicians had good intentions in making their decrees, at least some of them. Good intentions don’t change the consequences, however. The present state of disaster rests squarely on the shoulders of those who seek to manipulate the market and prevent it from adjusting to reality.

    I believe that you give the government far too much credit for disaster cleanup. While there is a mobilization of government forces, the vast majority of most cleanup efforts involve people returning to their homes, digging in and making it happen in their own yard and neighborhood. In the case of Katrina, people were prevented from staying in or returning to their houses to protect their property or prevent further damage. As it was, it was weeks or months before many could get back in their homes.

    I have no confidence in the government planning function because it cannot work and misfires on a repeated basis. On a small scale, it is possible to make things go. On a massive scale, it is the familiar “pretense of knowledge” that misguides the central planners. I think you are precisely correct in saying it is a socialist institution leading to a vast misallocation of resources. It isn’t a trite argument at all, but rather the core of the whole issue. Almost all of the persistent, serious problems we have in America can be traced to manipulation of markets by politicians and bureaucrats, some of whom may even have good intentions. Economic laws, like physical laws, don’t care about good intentions. You pay the price when you break them.

    One assumption in the central planning debate seems to be that if a central planner doesn’t plan, there is no planning. The fact is that everyone plans, based on their needs and assumptions for the future. The further removed from the individual planners, the more impossible it is to meet their plans and objectives. You assume that collaboration cannot exist without government coordination. That is not at all borne out by history.

    In the case of a large hadron collider, when it makes economic sense to do it, you can be sure that there would be entrepreneurs willing to collaborate to make it work. If it doesn’t make economic sense, then you are taking billions of dollars of taxpayer money to play games. If physicists cannot produce something worthwhile for society, then they should not be paid out of tax dollars. If they do produce something worthwhile, then that worthwhile something is an economic good that could and should be produced by people, not governments. There is no legitimate basis for government to fund science, except to the extent that it is used for military weapons development, assuming that that is a legitimate goal of government, and that is a different subject.

  • Dan Wilkinson

    Hi Dan M,

    Thanks for the detailed reply. I can’t argue with your points re the katrina shortcomings. I’m british, so probably know alot less detail but it was quite clear to all of us over the pond that it was a mess.

    However it seems that leaving it to markets to ensure a relief effort would simply mean that there wasn’t one. What private, for-profit agency would send out choppers to rescue people from rooftops? Would the winch guy go down and get the trapped persons to swipe their credit cards? Presumably those who couldn’t pay or who had lost their means of payment would get left behind.

    It is also important to note that central planning is not the only way to organise state institutions. States may be more or less centralised, with a larger number of autonomous local government entities that interact with local and extralocal economic entities.

    Now, is your argument that:

    a) Any form of state as opposed to private organisation is to be avoided.
    b) Centrally planned states are to be avoided in favour of private organisation.
    c) Centrally planned states are to be avoided in favour of a more distributed architecture, whether private or state run.

    You mention central planning a lot, so I’m trying to understand whether your essential objection is to centrally organised decision making, or to decision making by the state.

    Keep in mind before answering that in theory one could have many small states, perhaps on the level of village or town, or virtual states with voluntary membership (say for a profession), rather than one big state.

    I suggest that in your proposed minarchy, such entities would naturally arise due to peoples innate desire for protection, whether from one another or from nature. One could see this as people entering into voluntary ‘insurance’ contracts in which they agree to pay money to the private state and abide by certain rules and submit to certain jurisdictions in return for protection against aggression and disasters, for example. This would result in some levels of central planning arising of their own accord, and which I also suggest would be attractive to most members of your proposed minarchy.

    By this stage, such naturally arising organisations will have most of the attributes of a state, including central, networked and local planning. Such private states may even decide to issue money and will definitely collect subscriptions (taxes).

    If you follow this chain of logic we are in theoretical terms back where we started. That is, that given total freedom of choice people will come naturally to a balance of private, public, central and local planning as they believe suits their needs. Some or all of these organisations may not use free markets and will therefore distort free markets in the rest of the minarchy.

    Does this not lead to the conclusion that a system based entirely on a free market is not stable and will rapidly decay as people obey their clustering instincts? ‘Private’ states might soon ossify into actual states.

    Personally I think one would get a series of many overlapping states in terms of political organisation jurisdiction and geography, which may well be more desirable than what we have today, but it would certainly be nothing like what you propose.

    It would in fact be a Panarchy. The definition from wikipedia:

    For example – from wikipedia:

    “Panarchy is a transdisciplinary investigation into the political and cultural philosophy of ‘network culture.’ The primary fields of relevance for panarchy are world politics (international relations), political philosophy/theory, and information technology. Panarchy also draws on insights from information/communications theory, economics, sociology, networks, and complex systems. In a master’s essay entitled “Panarchy: Governance in the Network Age” Hartzog states that “the emerging complexity of our social and political structures, composed of many interacting agents, combined with the increasing importance of network forms of organization, enabled by technologies that increase connectivity, propels the world system towards a transformation that culminates in a global political environment that is made up of a diversity of spheres of governance, the whole of which is called panarchy. To clarify, global linkages between individuals and groups create transnational networks consisting of shared norms and goals.”

    These systems theories do not necessarily contradict de Puydt’s emphasis on individuals choosing between competing governance system because these theories of panarchy emphasize more free-wheeling and equalitarian heterarchical as opposed to top-down hierarchical organizing principles.”

  • Dan Wilkinson

    Regarding the funding of science, the problem is related to the black swan problem.

    In his book Nicholas Taleb suggests that almost all scientific discovery is made by accident, rather than by looking for somethnig specific. Therefore the way to make scientific discoveries and profit from them is to allow science to be done for its own sake, since the potential commercial benefits of a scientific discovery cannot be known before making it. If they were known beforehand, then the discovery would already have been made. The key is to be well positioned to take advantage of the unexpected discovery rather than trying to look for something specific, which might not be there.

    One can see how such science could be done commercially with a venture capital type model, with the lab benefiting from patenting or selling the new discoveries. However no commercial organisation would undertake to build an LHC, since by definition we cannot know what commercially useful discoveries may be made through it since it probes the limits of our understanding of the universe. It would be totally impossible to judge the risk profile of such an investment – who would make it? That does not make it a failure in economic terms – we just can’t know or predict its economic value before the investment has been made. This argument generalises to all scientific research.

    A further problem arises when new scientific knowledge is privatised – it restricts the pool of people who can develop technology based on it. For any given scientific discovery, the economic benefits will in general be greater the more minds are devoted to commercialising it.

  • Hi Dan W,

    Thanks, that was a very thought provoking reply. It is great to get perspectives from “across the pond”.

    As you say, it would seem that leaving it to markets to ensure a relief effort would simply mean that there wasn’t one. But reality is very different than what it would seem. I am not sure what it is like in England in a disaster situation, but in America, there is typically an overwhelming private response to disasters. People and private organizations attempted to use their own equipment to help with the rescue, not as a profitable operation, but as a use of accumulated wealth in service of others. The problem with Katrina is that much of the help was turned away, so the officials could take charge.

    Walmart sent 1500 tractor trailer loads of supplies to the hardest hit areas free of charge. There are thousands of stories of people risking their lives and property to help other people. The cases of private efforts are incredibly inspirational. Those private efforts demand much more press than they ever get. In any disaster, including 9/11 thousands of people volunteer their time and resources. Volunteer fire departments from all over the country sent personnel and rescue vehicles. Etc, etc.

    There are private mission groups that go down to New Orleans to rebuild homes and make them habitable again. The problem they run into is a lack of supplies because, even now, there are severe market restrictions imposed by government in the form of price gouging laws and threats of punishment. The economy can’t rebuild because of interference from the central powers.

    My philosophy reflects the words of George Washington, more than two centuries ago. “Government is not reason, it is not eloquence, it is force! Like fire, it is a dangerous servant and a fearful master.” Throughout US history, there has been a struggle between the forces for decentralization and individual freedom and responsibility, the Jeffersonian way of looking at things, versus the Hamiltonian view, which sees government as the solution to all problems, with himself and his cohorts as the chief problem solvers. Unfortunately for the people of this country, the Hamiltonians and mercantilists seem to be winning out. The servant is becoming the fearful master.

    I am not saying that central planning, per se, must be avoided. It may be appropriate for a military or similar organization, where there is one goal to achieve. In a free society, however, a million people have a million different goals, and that is very good. That is the source of progress. It is not possible for a central planner to take every individual’s goals into consideration, and thus, necessarily imposes his own goals on at least a portion of the population against their will. That imposition limits the contribution those individuals will make, by preventing them from achieving their own goals.

    I am not saying that the state is necessarily to be avoided. I am saying that freedom of the people requires a severely limited state, otherwise the fire will start to devour them, as it is doing in many countries today, including America.

    What I do say, is that when there is competition among political powers, the people are better off. Centralized power is an inherent evil, because, as Lord Acton said, “Power corrupts…” It is the absolute enemy of free people. As it grows, freedom necessarily diminishes.

    A good starting point for America would be a devolution of power back to the states. The Federal government has usurped the powers of the states and now holds them hostage. If the states were the primary source of political power in this country, there would be competition among the powers. Those that abused their powers would lose population and economic growth to states that didn’t. With centralized power, there is nowhere to go to get away from the abuse, unless one decides to move to a different country.

    As a principle, the more centralized the power, the more severe the limitations are needed on its actions.

    The chain of logic you describe, with free choice bringing about a system that gives people what they want, assumes a democracy. America was never intended to be a democracy. It is a constitutional republic with the powers of government limited to those specifically granted. Opinion of the times of the founding of this country held that democracy was tyranny of the majority. That is why, under the original constitution, the president was not elected through popular vote. He was, instead, elected by representatives appointed by the state legislatures. The purpose was to prevent the utter nonsense in political races and dangerous concentration of power that we endure now since the rule was changed. Modern judges and politicians use creative wordsmithing to provide nearly unlimited power of the federal government, destroying the original framework.

    The only time that the form of government is important to the people is when they can use it to get goodies for themselves. Most times, people just want to be left alone. It is the abuse of the coercive power of the state to take from some and give to others that makes its power so dangerous. That is the entire history of centralized power. In a free country, the legitimate functions of the state are to protect the life, liberty and property of the individuals, not to redistribute anything.

    From a practical standpoint, you may be right, that there would be a tendency over time for private organizations to ossify into states. That doesn’t mean that we should pursue that ossification as a goal or encourage it in any way. It means that people interested in preserving freedom must recognize that tendency and fight it with all means. It only means that we need to be on guard against people who would use the power of an ossified state for their own good against any individual in that society, and constantly remind people of the danger of using government as a source of goodies for themselves.

  • Dirk

    When there’s a disaster here, the last place I’ll look for help will be Washington, DC.

    I do think the Fed plays a role in disaster recovery, although I wish they’d stop creating them.

  • Hi Dan W,

    Regarding science, I would agree with Mr. Taleb that discoveries are often made by accident. Those accidents, however, typically come in the normal course of trying to solve some particular problem. Nearly all inventions come about because someone sees a problem and sets out to solve it.

    In order for any government funded research to take place, it first has to take the money from other people. To me, that is an abuse of government power. The political problems in government funded research are many and sizable. The problem of waste is a constant where the spenders are not accountable to anyone for profitable results. A far greater problem, however, that government funded science is necessarily politicized. A wonderful example is the whole issue of global warming science. If a scientist doesn’t come up with the politically correct results, he or she does not get funding, and thus the research results are grossly skewed.

    The problems for science and discovery that you discuss were never a problem before mass funding of science, at least in America. There were still discoveries and inventions and rapid progress, in spite of lack of government funding.

  • Dan W

    Dan,

    If you acknowledge that civilisation will tend towards some form of statism from a hypothetical free-market initial condition (if it were to be achieved at all), then answer me this:

    Would the efforts of libertarian thinkers not be better directed towards assisting in the development of a system of governance that admits a role for the state and the human need for a state rather than simply arguing for a platonic ideal that can never be realised or sustained in practice? Otherwise what have you but dogma?

    By way of example, you suggest eternal vigilence against the encroachment of state power (and I hope, any other form of entrenched power – which could include an oligarchy or monopoly that could easily form in an entirely free market system).

    I agree with your stated goal of defending liberty, but what I never hear from libertarians is how exactly we might achieve this in practice using practical measures. A further problem of liberty is when people define it differently – how then shall both party’s liberty be preserved?

    I know for example that the austrian school assigns little or no rights to future generations and little or no rights to children. This is a philosophy I disagree with. If I were living in a society modeled on libertarian principles, I would aim to form a collective organisation (a state, perhaps with coercive power) that would protect the future liberty and happiness of my progeny against the depredations and resource consumption of my peers.

    How is my stated aim to be accomodated fairly – if it is not to be, how can the society you suggest be termed libertarian? If more persons agree with me than you, and we agree to form a state to achieve our goal, how could this be prevented without taking away our liberty?

  • Dan W

    DanM, you say that:

    “The political problems in government funded research are many and sizable. The problem of waste is a constant where the spenders are not accountable to anyone for profitable results. A far greater problem, however, that government funded science is necessarily politicized. A wonderful example is the whole issue of global warming science. If a scientist doesn’t come up with the politically correct results, he or she does not get funding, and thus the research results are grossly skewed.”

    Again, I agree with all your points above. However the obvious answer is that if people don’t like the results you can not vote for the government. This is however unsatisfactory, since as well all know that currently, changing a democractic government rarely changes anything, and the opportunity for change (i.e. an election) is too infrequent.

    To me, this merely suggests to me that our democracy should be reformed, or swapped for another system (demarachy, futarchy, panarchy?) that will serve individual interests better. it does not warrant discarding the idea of a state, since to date we have only really tried tyrannies, monarchies, democracies and theocracies. There are many more options to try, of which a marketocracy is only one.

  • Hi Dan W,

    One thing that I think that is getting in the way is the idea of “the libertarian thinker”. Libertarian is a general term, taking in a wide swath of thinking, just as with socialist, conservative, or any other description of political views. A sizable portion of libertarian thinkers do admit a role for the state. That role, however, is very limited, to the protection of rights of individuals.

    Your suggestion of substituting a different system for the present democracy left out a very important alternative – constitutional republic. That new system would strictly protect the rights of individuals from encroachment by all parties, including the government itself. The rules of the constitution would delineate the bounds over which that government could not cross.

    That does not, in any way, infer a free for all. If individual A is protected by the constitution from encroachment by individual B, that same protection applies to B from A. A has the right to do anything for his own benefit, including helping B from A’s own property, as is often the case in free societies. A does not have the right to take or use B’s property or prevent him from using his property in any way. The state has a role in correcting B’s legitimate grievances when A does encroach, and vice versa.

    That was the original understanding of the US Constitution. The further we stray from that idea, the more we approach the tyranny of the majority.

    Ideas have profound implications. The collectivist mentality that has become pervasive over much of the world today is not a natural progression, but rather a very concerted, deliberate and focused effort over many decades by those who seek collectivism in the world. A concerted, deliberate and focused effort by those who seek free societies can result in a similar shift away from collectivism. There seems to be a growing interest, and it is hopefully a matter of time before a critical mass is achieved. When enough people recognize the obvious failures of collectivism for what they are, it will lose its grip.

    Personally I would agree with you that children do have rights, and I think that many, if not most, Austrians would agree also. But in all cases, whether for children or adults, the rights are negative rights, protection from the depredations of others. Again, that is the role of the limited state. Those negative rights protect the property and resources you own but don’t give any inherent right to property and resources you don’t own. With that in mind, a state that enforces your rights to your property also enforces the rights of your progeny to your property, should you desire to leave it to them.

    One of the most useful books that I have read, one that has influenced my thinking to a large degree is “The Ultimate Resource” by Julian Simon. It gives a very interesting and useful perspective on resources, the idea that all resources only become so when the mind of man uses them to solve a problem. There will always be problems and there will always be solutions, as long as mankind is free to think, to innovate and to progress. If oil wells dry up, there are other virtually unlimited sources of energy that will then become practical and economical. For all practical purposes, resources are unlimited.

    One side note regarding monopoly. If you take the definition of monopoly as an organization that restricts supply and raises prices for its own profit, there has never in history been a monopoly that lasted over a long period of time that was not supported and enforced by government. Monopolies love government regulation because it locks out competitors.

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