There was an excellent op-ed in Monday’s Wall Street Journal by Donald Boudreaux and Todd J. Zywicki, both senior fellows and at the Mercatus Center and professors at George Mason University, which runs Mercatus. Boudreaux also runs the blog Cafe Hayek.
The piece applies Hayek’s thinking to today’s “hubris”, highlighted by Obamacare and Dodd-Frank. But it really can be applied to any government intervention, especially at the local level.
Forty years ago the Nobel Prize in Economic Science was awarded to a scholar who believed the prize perhaps should not exist. As he graciously accepted the distinction in 1974, Austrian-British economist Friedrich A. Hayek worried aloud that thinking of economics as a science might fuel what he called “the pretense of knowledge”—the idea that anyone could know enough to engineer society successfully. He was right to fret.
Hayek’s greatest contribution to economics was to show that society is far more complex than we realize, with little pieces of knowledge dispersed among millions of individuals. “The curious task of economics,” he famously wrote in “The Fatal Conceit,” which he published in 1988, “is to demonstrate to men how little they really know about what they imagine they can design.”
At the risk of overloading readers with C&P, I think Emily Washington at Market Urbanism applies Hayek’s ideas on knowledge to city planning more efficiently than I could.
Urban development is an information gathering process based on dispersed and tacit knowledge of entrepreneurs, like other market processes. As Hayek describes in “The Use of Knowledge in Society,” even if city planners have the best of intentions, they are incapable of accessing the information that would guide land and building resources toward their best uses in a free market (1945).
Unlike private sector developers, city planners do not experience profit and loss, leaving them without the single tool that can best direct the allocation of resources within a city over time.
With access to this powerful learning tool of profit and loss, property owners, developers, and consumers will improve the allocation of a city’s land over time with each day providing opportunities to buy, sell, and redevelop. This process leads to a city that relentlessly improves meeting consumers demands as entrepreneurs see individual opportunities to profit. Because this tool is available only to those with access to the profit and loss mechanism, city planners will never be able to equal the urban development success that a free market can. The absence of profit and loss feedback and the disperse nature of knowledge that leads to profit opportunities are the reasons that efficient resource allocation is impossible under central planning, as Hayek detailed in “Socialist Calculation: The Competitive Solution” (1940).
It’s been a busy week, but another article caught my attention. I’ve written about Houston, Texas on this site and why I believe it is doing so well. So, Businessweek reported that in August, Houston issued more permits for construction of single-family houses than all of California.
In August, the most recent month for which figures are available from the U.S. Census Bureau, metro Houston (including Sugar Land and the Woodlands) issued more permits for construction of single-family homes than did the entire state of California, which has six times the population. And that was no fluke. Houston and California have been running neck and neck in permit issuance since 2000, with California running just about 3,000 permits ahead in that time.