What One Article Should Obama Read Tonight?

Thom Lambert —  19 January 2009

Imagine what must be going through President-elect Barack Obama’s head today. Tomorrow he begins what must be the most stressful job on the planet (just look at before-and-after pictures of Presidents Clinton and Bush, both of whom appeared to age decades in only eight years). He’s just come off a love-fest featuring the likes of Beyonce, Bono, Bruce Springsteen, and Pete Seeger. He’s spending today performing volunteer activities as part of a national day of service honoring Dr. Martin Luther King, Jr. It’s gotta be sensory overload.

I know a bit about how Mr. Obama thinks. He was my constitutional law professor, and I spent many hours watching him reason through tricky questions of doctrine and policy. He’s a smart guy with a well-intentioned heart. While I disagree with him on many matters, I like him very much, and I wish him all the best.

I have no idea how Mr. Obama will spend his last night as President-elect, but knowing his thoughtful, reflective nature, I wouldn’t be suprised if he did a little reading. What would he read? What should he read?

If I could recommend one article for Mr. Obama to read tonight, it would have to be F.A. Hayek’s The Use of Knowledge in Society. I just re-read the article the other day while preparing for my first Business Organizations class, and I was struck by how appropriate it is for the time in which we find ourselves.

Hayek’s article was written in 1945, when socialism was all the rage among the intelligentsia. At that time, the Soviet Union was making remarkable economic progress with its Five-Year Plans, and many of the world’s developed economies were moving toward socialism. Indeed, even the United States was heading in the direction of centralized economic planning. The successful war effort, after all, had been centrally planned; why not incorporate such planning into economic affairs?

Against this tide of scholarly and popular opinion, Hayek insisted that centralized economic planning was destined to fail. The key problem was not motivational (i.e., why create wealth if the planners can take it from you and redistribute it?) but informational — no economic planner or group of planners is privy to the time- and space-specific information needed to ensure that resources are put to their highest and best ends, and even if some central mind could access such information, it would have no way to process it. As Hayek explained:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources — if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Who, for example, could say that society needs more widgets (and employees involved in widget-making) and fewer gizmos (and gizmo-makers)? To make that call, you’d need all sorts of information about how millions of people value widgets versus gizmos versus all the other goods and services that could be created using the inputs needed for making widgets and gizmos. No one has access to all this information — most notably, the subjective valuation individuals ascribe to the various goods and services competing for inputs — and even if a central planner could access all relevant information, how on earth could it reconcile conflicting data?

The solution to this problem, Hayek argued, is the price mechanism, which he dubbed a “marvel.” Indeed it is. Market prices incorporate gobs of information and quickly process it to produce a single metric that tells consumers and producers precisely what they need to know: whether they should increase their production/consumption or cut back on it.

Suppose, for example, that you own an oil well and can select the level at which you produce oil. You pick up the morning newspaper and read four headlines: (1) “Unrest Worsens in the Middle East”; (2) “Huge Oil Reserve Discovered Off Coast of New Jersey”; (3) “New Senate Leadership Refuses to Budge on Offshore and ANWR Drilling”; and (4) “GM Announces Plans to Switch Production from SUVs to Hybrids.” What should you do??? Well, headlines (1) and (3) would suggest that oil supplies are going to be tightening, so you should increase production; headlines (2) and (4) suggest just the opposite. What you really need to know is the expected magnitude of each of these effects (and all the others related to oil supply and demand). Fortunately for you, though, you need not spend all day scouring the newswires for oil-related information and estimating the significance of each datum. All you need to do is look at the price of oil, which tells you the best guess of millions of folks about whether or not we need more oil. This is utterly amazing. In Hayek’s words:

The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. … The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction. … I have deliberately used the word “marvel” to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind.

In the last few months, our federal government has taken unprecedented steps toward centralized economic planning, primarily by directing the allocation of capital. The powers that be, in their wisdom, have decided that the level of investment capital Ford, GM, and Chrysler are able to attract from voluntary investors is “not enough,” so they’ve decided to use involuntarily conscripted money for the purpose of correcting the private market’s misallocation of resources. Tens of millions of investors, they say, are collectively wrong. The 535 of them (536, including the President) know better how productive resources should be allocated. And those 536 individuals are now poised to spend $550 billion of other people’s money on various projects that they, in their wisdom, know are the highest and best uses for that money. Whew! Thank God for these Platonic Guardians.

I truly believe President-elect Obama is a smart man. My personal experience with him leads me to believe that he is also, fundamentally, a humble man. Of course, it’s hard to stay humble — to recognize the limits of your abilities — when much of the world treats you as though you walk on water. My hope is that Mr. Obama will resist the urge to over-estimate his abilities, will retain an intellectual humility (one not possessed by President George W. Bush, by the way), and will remember that free markets, despite their current bad rap, produce the sort of information no bureacrat or government agency could ever produce. He would do well to re-read Hayek regularly.

Or, if he’s more classically inclined, he might turn to Plato’s Apology. Consider this account of Socrates’ encounter with a man reputed by all to be exceedingly wise:

I thought that he appeared wise to many people and especially to himself, but he was not. I then tried to show him that he thought himself wise, but that he was not. As a result, he came to dislike me, and so did many of the bystanders. So I withdrew and thought to myself: “I am wiser than this man; it is likely that neither of us knows anything worthwhile, but he thinks he knows something when he does not, whereas when I do not know, neither do I think I know; so I am likely to be wiser than he to this small extent, that I do not think I know what I do not know.”

I wonder what articles, essays, or books other TOTM readers would recommend to Mr. Obama on this historic eve?

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

2 responses to What One Article Should Obama Read Tonight?

  1. 

    John F. Kennedy: “Profile of Power” by Richard Reeves at UCLA. -Showed the blunders of an overly confident and inexperienced President.

    Let’s hope Obama breaks from the “organized chaos” theory of management that captured both the Kennedy and Clinton administrations.

  2. 

    Well I agree with you on the merits of Hayak’s arguments, but you have to remember that if Obama fails to follow Hayak’s advice, the results will be something less than catastrophic: In the long run, we will all be a little poorer, and politicians will have a little too much power. Bad, but not terrible. Thus my pick is Graham Allison’s “Nuclear Terrorism: The Ultimate Preventable Catastrophe.”