"Is the public sufficiently well informed to govern?" This has been the central question of American democracy and was the subject of a long argument between John Dewey and Walter Lippmann in the 1920s. The question grows more complicated with each generation. Today we might ask, "Can anyone know enough to govern?"
Bookending the Bush years are two great dilemmas that will forever change the way we think about the relationship between knowledge and democracy: the Iraq War and the financial bailout. Each has challenged us as citizens not just to form an opinion but to figure out what information we need to be confident in our judgment. Making the right judgment about the Iraq War, it turned out, did not involve knowing as much as a Brookings Institution scholar would about Saddam Hussein, his intentions, or his military capabilities. Instead, what those who made the right judgment in 2003 knew -- and what others could not recognize -- was that our own government was not to be trusted.
"Never trust your government" is hardly a useful rule of thumb and is plainly unhealthy for democracy. But faced with Treasury Secretary Hank Paulson's request for the authority to spend $700 billion to bail out banks, many members of Congress and ordinary citizens found ourselves asking, "Why should we trust this Cabinet official?" -- after everyone from Secretary of State Colin Powell to the president himself had lied about Iraq.
Whether or not to trust Paulson's dire predictions was the most important question anyone could reasonably ask about the bailout, though, because the reality of the situation on Wall Street was so complex and opaque that the truth was unknowable. Indeed, that was the very cause of the crisis: Wall Street had created financial products so complex, and so distant from the actual underlying values of goods and services in the economy, that its banks no longer had any idea what they held and how risky it was.
The financial crisis thus revealed the limits of knowledge in another way: the limits of market knowledge. Perhaps the most persuasive argument for markets as opposed to centralized planning remains Friedrich Hayek's 1945 essay, "The Use of Knowledge in Society," which argued that creating a "rational economic order ... is a problem of the utilization of knowledge which is not given to anyone in its totality" but instead involves "dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess." Those dispersed bits of information are prices, and the market economy -- what Hayek elsewhere called the "catallaxy" -- aggregates the information contained in prices and puts it to work in the way that Google aggregates information on the Internet.
Hayek had a good point (in this essay, at any rate), but what happened this month on Wall Street is a complete meltdown of his catallaxy. Wall Street's delusion was that it could put a price on anything -- through the use of the Black-Scholes formula for valuing options and vastly more sophisticated risk-pricing models -- and it constructed an entire financial economy based on these derived prices. When it turned out that the underlying risks were misunderstood, the entire structure, based on knowledge that wasn't really knowledge, collapsed.
Wall Street then essentially handed it all to the United States -- to us -- saying in effect, "We don't know what this is worth; you figure it out." And while the U.S. government may not have any better knowledge of the rational economic order, it at least has the capacity to absorb the risks.
And so, we find ourselves back where Hayek started in London after World War II, with the government -- and citizens -- in control of critical levers of our economic order. It did not happen because of a sudden reversal in the post-war consensus, so that centralized ownership and planning are now favored over the dispersed knowledge of a market economy. Rather, it was the total failure of the market in one sector that led it to fall desperately back on government and, in effect, centralized planning.
Now that we, as citizens and not shareholders, own much of the financial economy, there will be countless complex decisions ahead, all with giant numbers attached to them. Can any of us, or our elected representatives, know enough to make those decisions well? And if we can't, can we find our way back to trusting government as much as we trusted the market before the meltdown?
You may also like
You need to be logged in to comment.
(If there's one thing we know about comment trolls, it's that they're lazy)