Thursday, October 30, 2008

The Wisdom of Crowds

One of the big reasons I favor markets over central planning is that humans are prone to error. In an abstract sense, if you put all your eggs in one basket (i.e. central planning), errors (which are inevitable) have the potential to be magnified such that they affect many more people than just the decision makers themselves. However, when power is devolved towards the individual (i.e. markets), errors are more localized around the person making the error.

The former system makes change slow (everyone has to agree to try something, then everyone has to deal with a failure), while the latter system makes rapid iterations possible: person A tries something and it doesn't work, but person B, not burdened by the error created by person A, tries something else that does work and is able to spread his/her good idea. Hence the wisdom of crowds: many people trying many different things leads to the emergence of a couple of really good ideas, while the bad ideas are allowed to fail gracefully.

Anyway, blah blah blah with all the philosophical stuff. These words by Arnold Kling sum everything up:

However, we see a shift in power from markets to government as adverse nonetheless. Individual political leaders have less knowledge than is aggregated by markets. They face perverse incentives. And they pervert the incentives of others. Witness today's economy, in which everyone is asking not how they can create wealth but how they can get their share of a bailout.

Image from here.

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