The Knowledge Problem in a Complex Society

It is clear that incorrect economic model building and government interventions, which lead to moral hazard, have contributed to this current economic crisis. Amid the confusion, political sound bites and the blame game, the free market has been labeled as the culprit. If only market forces had been allowed to act in the beginning then the inefficient actors in the market place would be long out of business and not hanging around looking for bailouts. Apart from the house of cards in the area of financial assets a house of cards of economic theories has been building up over the years. In the almost 80 years that have passed since the great crash the feeling is that economic theory has advanced so much that a return to such a disaster would be able to be prevented. The claims of this advance in knowledge must surely be in doubt now. Further could the utilization of such incorrect knowledge have led to an even worse outcome? With the Nobel prize in economics being handed out each year for often diametrically opposing schools of thought it is hard to know what economics is telling us right now as governments look to it for guidance.

This knowledge breakdown due to information overload and competiting narratives in a world of complexity brings us nicely to a problem which should be considered for the global economy. Are there problems now, as global societies are becoming ever increasingly more complex, that the free market faces as the optimum means of organising the economy that would not have been an issue in the past? In answering this let us remind ourselves of the main reason why the actions of individual people for guiding economic activity is better than that of government. In our complex societies knowledge is not known to any single mind or group of people therefore it is better to allow people to make the decisions in areas they have the best knowledge in. As Fredrick Hayek put it so well:

"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."


However, it would do us well to point out that there are some problems with disaggregated knowledge of individuals with our increasingly complex world.

1) In the networked world there is such a deluge of information that it is a real challenge for people to interpret it correctly. In fact it is possible to created the knowledge you want by simply picking the information you want. Whatever you want to believe it is possible to find some information to back up your view out there on the information highway.

2) There are also vast amounts of information that is hidden by complexity or simply sitting in databases without the ability to view or understand. Many people involved in the financial industry are admitting now that they couldn't even understand the complex models that were pricing derivatives and hence simply did not have the knowledge of what the risks and values were.

3) The free market looks to the knowledge superiority of individuals but huge global firms, often made up of mergers of many other firms, have been emerging. Simply trying to unify the information systems of such firms are projects that often involve years. Beyond the information systems there is all the knowledge in the employees heads which led the Hewlett-Packard's Lew Platt to lament "If only HP knew what HP knows"

4) There are massive cultural differences in a relativistic post modern world. Cultures are changing much faster than before and due to different generational cultural beliefs the communication of what each knows becomes much more difficult. A financial industry worker quoted in the English Independent put this succinctly:


"The belief systems of the three groups – the strategists, the managers and the traders – are entirely different," concludes Glassey. "They don't really understand one another at all. And they didn't know what each other really wanted or expected out of the complex financial architecture they created.

As societies become more complex there are increasing costs associated with the complexity and when the costs start to outweigh the benefits there is a threat of a breakdown. Some of these costs have manifested themselves in the areas such as the environment and energy. However in the information age where optimum knowledge is harder to find there is clearly a breakdown. If the world of economics is looking for the culprit in the current global breakdown perhaps it should pay more attention to the knowledge problem.