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Members: The Knowledge Problem - Join CiVL.COM · Words & Numbers

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  The knowledge problem refers to decision makers who are making
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  decisions for others, right? So this is not this is not about
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  you making decisions for yourself where you don't have
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  full information. And actually, that alone is an
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  interesting topic that's that we deal with in economics.
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  But rather this is a situation where we have a decision maker
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  who's making decisions for others.
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  So, you know, think government, legislators, regulators, this
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  sort of thing. And this person who's making the
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  decisions does not have enough information to be able to make
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  decisions for people that are better than the people can make
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  for themselves. Imagine that we attempted to do
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  driving through some kind of centralized decision making
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  process. So again, we'll give the the
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  maximum benefit of the doubt to the decision makers.
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  Imagine that you've got, you know, a set of decision makers
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  and they're off somewhere and they're going to make decisions
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  about driving. And when I say they're going to
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  make decisions about driving, I mean the actual decisions that
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  the driver makes, like speed up, slow down, turn left, turn
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  right, these sorts of things. And, and so from the from the
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  individual cars perspective, imagine that instead of you
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  driving as you normally do, we black out all the windows on the
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  car and we mount cameras on the car.
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  And these cameras are fed into this central location where the
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  decision makers reside. And they're seeing camera feed,
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  real time camera feeds of all the cars that are on the road.
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  And they process this information.
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  And you can even imagine that they're processing it via
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  computer and all this kind of thing, right.
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  And then based on that processing of the information,
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  the decision makers make decisions.
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  So they decide, OK, there's Davies in his car.
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  He needs to speed up 5 miles an hour.
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  So they, they contact me and I've got as I, as a driver, you
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  can imagine I've got a headset, right?
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  So I'm in this blacked out car. I've got the headset in the
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  order comes in, speed up 5 miles an hour.
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  OK, So I dutifully speed up 5 miles an hour and they're
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  looking at their other information.
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  They see James, they say OK, Harrigan needs to turn left.
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  So they radio Harrigan, Harrigan turned left, Harrigan turns
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  left, this kind of thing. So all the decisions are being
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  made in this central location. Now stop.
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  Take it seriously and think about for a moment what kinds of
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  things the decision makers would need to know.
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  They've got to know, First off, where I'm going, where James is
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  going, which of us are in a hurry, what the road conditions
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  are, do we want to make stops along the way, all kinds of
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  things like that. And imagine that when we got
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  into the car, we fed all that information in.
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  And so the decision makers have all of that plus whatever other
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  information they need. And they make.
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  The best decisions they can and you know immediately what's
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  going to happen by the time they've got this information and
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  they make the decision and they radio James, they say James turn
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  left the decision. The situation has changed.
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  There's now a truck there and James bangs into it and you've
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  got an accident. And clearly it's a stupid way to
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  do driving, right? So the way we do driving is you
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  let each driver make decisions for himself.
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  And that system, notice, is not perfect.
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  We know it's not perfect because 40,000 Americans die every year
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  in accidents. Every one of those deaths is
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  somebody making bad decisions. So it's not perfect, but the
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  question isn't is it perfect? The question is, is it better
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  than an alternative? So our alternatives are you let
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  the individual drivers make their own decisions versus the
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  centralized planners make the decision and the individual
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  drivers do it better. Why?
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  Because each driver has access to the information that's
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  necessary for that particular driver, and he's getting it and
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  updating it much faster, processing it much faster than
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  the central decision makers can do.
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  That's why the individual drivers make better decisions
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  than the centralized decision makers.
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  And that is an example of the problems with the knowledge
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  problem when you attempt to get the decision makers to make
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  decisions for you. And we, we can think about that
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  one, I think a little more too, Aunt, because really, if you, if
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  you want to think about cars, we, we do now have self driving
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  cars. I, I mentioned on the podcast a
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  couple of weeks ago, I guess it was now that I was out in Santa
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  Monica and we had to get somewhere and the guy said, oh,
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  I'll, I'll call a car. And a car came and there was
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  nobody in the car. And I, I said, yeah, I sat in
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  the front seat because I wanted to see as much of it as I
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  possibly could. And there was no central
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  decision maker there either. The car was loaded with, with
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  cameras and sensors. So even in a driverless
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  situation, the, the, the level at which you must understand
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  things is at the individual level.
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  And isn't that something, right? That's really, really something.
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  And when when you and I talk about the knowledge problem with
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  people, we inevitably begin with me holding up a pencil, which I
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  would have done virtually if slides worked in the whatnot.
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  But alas, I have no pencil on my desk.
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  Which is weird because I have at least 20,000 pencils in my
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  office. Excuse me, but I want you to
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  think about a generic yellow #2 pencil and ask yourself, could
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  you make 1? And I, I don't, I don't mean
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  could you go out to a wood shop. I mean could you make one from
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  scratch, starting from nothing, Starting from nothing with your
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  own two hands. Could you build a pencil?
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  And, and you know the Leonard Reid wrote an article years and
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  years ago, 1958 I believe it was called Eye Pencil and I
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  recommend it to everyone. You should read it if you
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  haven't. It is.
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  It's very easy, Reed. You could probably get through
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  it in 10 minutes. But Leonard Reed said there is
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  not now, nor has there ever been a person who has ever lived who
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  could build a pencil from scratch.
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  Yet we all know that pencils are relatively easy to build, right?
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  There's only four or five different materials in a pencil,
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  which is why Reed chose that and not in 1958.
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  He probably could have chosen a book or maybe even a rudimentary
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  calculator, but no, he he went for the simplest thing.
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  He that was on his desk. And what is it?
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  It's a wood, graphite, some aluminum, some rubber for the
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  eraser and some paint and that's that's about it.
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  And he makes this fantastic claim that there has never been
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  a person who could make one from scratch.
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  That's amazing. And if you really think about
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  it, it's right. You can't make one from scratch.
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  What what are you going to do? You got to go cut down a tree.
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  The first thing you need if you're going to cut down a tree
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  is an axe. In order to build an axe, Let's
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  not even get into the metal. Let's just how you going to get
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  an axe handle? You don't have wood yet, right?
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  So you see the you see the problems that emerge immediately
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  when you start thinking about these sorts of things and, and
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  come to find out, no matter how simple a thing is, you can't
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  make it from scratch. You can only make it using
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  things that other people have already made.
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  And it gets even more complicated than that Ant
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  because saying I could get the wood and probably not much else,
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  but OK, I can get the wood. What now?
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  Well, now we have to ship the wood to a factory that will make
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  pencils and the rubber needs to get shipped to that factory and
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  the aluminum needs to get shipped to that factory.
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  We haven't built roads yet. I know.
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  Libertarians love. Libertarians love talking about
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  building roads, so let's talk about built and roads.
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  We haven't built roads yet. There's no way to get these
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  things to the factory. Oh, we haven't built a factory
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  yet. There is no factory.
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  There are no trucks to bring these things to a central place.
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  And you start to realize that if you just think about a simple
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  pencil, all of the 10s, even hundreds of thousands of people
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  who are involved in making that simple thing.
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  And we haven't even talked about the managers, the lawyers, the
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  accountants who make business run right.
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  And and all of this is coordinated not not on high, but
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  by markets themselves. And let me let me give an
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  example of this. There's a YouTube channel that I
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  absolutely love called Primitive Technology.
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  And, and this guy, this guy started from zero.
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  That is he, what he does exactly what you're describing.
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  He I think he's Australian. He goes out into the wood woods
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  and he breaks off a branch and now he's got a branch and he
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  does, you know, rubs it against a rock.
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  Now he's got a a steak. Now he can dig stuff.
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  And what he's done over the I've been watching this channel for
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  years. Over the course of all these
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  videos, he goes from, you know, getting the stick and then, you
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  know, the stones and forming them and lashing make he has to
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  make the lash, lash it. Now he's got an axe and do the
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  axe and he's progressed up to the point of being able to smelt
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  iron. So he's, he's first he had to
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  create, he had to create clay pots that were waterproof and he
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  gets the water that has iron content and sifts it out and
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  does whatever he does and he gets the iron and all of this.
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  So he's, he's up to the point that he can, he can make, he's
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  got the wood under control. He's got some metal, albeit very
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  low quality. He doesn't have the rubber yet.
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  He doesn't have the graphite, but you could see him being a
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  few steps away from that. I would imagine.
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  He hasn't made a pencil. And I can tell you from what
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  I've been watching, he's not there yet in terms of
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  technology. Give him another couple years,
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  he will be. And people point to that and
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  say, well, look, that guy, it took him years, but he made a
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  pencil. Except it's not going to look
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  anything like the pencils that we think of when we talk about
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  pencils, no. And, and the beauty of it is, is
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  that once, once the market coordinates all of the
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  activities that go into the making of a pencil, you can then
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  go buy a pencil for 10 to $0.15. Yeah.
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  And, and I think you you skipped over an important piece, which
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  is while nobody knows how to make a pencil, we do know how to
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  make the specific components. Maybe there's nobody who knows
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  how to make the the metal piece on the end.
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  But there are people who understand how to get iron ore
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  out of the ground, and other people who understand how to
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  melt it, and other people who understand how to build the
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  machines that form it. That's called the feral.
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  The feral, I, I know it was a feral.
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  I didn't want to say, but here's the point.
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  It goes back to my example of the driving.
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  The driving doesn't work when you have a bunch of people
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  trying to make decisions for everybody else because the
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  knowledge that they need is spread out.
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  That's right. So too with the pencil.
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  The knowledge that's required to make a pencil is spread out over
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  so many people that collectively we can do it, but no one of us
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  can do it. Words of Numbers Live is a
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