Hayek and Big Data

It is said that any job is easier if you have the right tool.  What is implied by that statement is that one needs to be able to identify what the right tool for the job is in the first place.  A hammer is the right tool for hammering a nail, but if you use it to slice cheese, you’ll be very disappointed. 

We just discussed Hayek’s “Use of Knowledge” in class.  The focal point of this article was Hayek’s belief that it was impossible for a central planning board to use aggregated knowledge to achieve a working economy.  (A “rational economic order,” using Hayek’s words.) 

In the 1940s, the big debate in economics (and among other fields) was the “socialist calculation debate.”  Hayek was the star of the side that stated “you can’t use statistical aggregates to substitute for the price system.”

So, the question remains, when CAN you use statistical aggregates to make decisions?  Hayek thought that you could not use them to substitute for the price system, but I wonder what he would think about the use of “big data” to improve things like education, health care, advertising, etc.

Consider this talk:

http://www.ted.com/talks/anne_milgram_why_smart_statistics_are_the_key_to_fighting_crime.html

So, when is the hammer of big data the right tool?  I agree with Hayek:  that it can never be the right tool for comprehensive economic planning.  Market prices are the best at that.  But if we ignore data when we are making decisions about education, criminal justice, etc. we are fools.

Tech may not be driving us apart after all

“We’re really bad at looking back in time,” Hampton said, speaking of his fellow sociologists. “You overly idealize the past. It happens today when we talk about technology. We say: ‘Oh, technology, making us isolated. We’re disengaged.’
Compared to what? You know, this kind of idealized notion of what community and social interactions were like.”

http://www.nytimes.com/2014/01/19/magazine/technology-is-not-driving-us-apart-after-all.html?hpw&rref=magazine&_r=0



 

Although this researcher has maybe never taken an econ class, he is a great economist because he asks the question "Compared to What?"

Then when we make the comparison, we have to make sure we are comparing apples to apples as opposed to comparing our imperfect lives with some romanticized, unreal version of the past that never existed.

It does not matter the issue, we do this all the time.  It’s nostalgia.   

Whether it is issues like community involvement, crime, college access, the supposed shrinking middle class, and many others, when you make comparisons, make sure you are making a comparison to some something that really existed, not an idealized, embellished version of it.

Net Neutrality and Hayek

What do economists do and what do they not do?  Alternatively, perhaps I should ask what should economists do and what should they not do?  What economists should not be in the business of making value judgments about many things in the economy?  We really are not qualified to do those things.  Therefore, economists should not declare that this firm is too big, or that this industry does not have enough firms or enough competition.

What we should be doing (and this is the belief of Chicago Economist John Cochran) is trying to find out if something is working:  are the incentives good?   Are there distortions?    What, if anything, is causing markets to work or fail to work?  What Cochran says about the financial sector of the economy, I’d say about everything, including the Internet.  This week we have a new court decision that strikes down “Net Neutrality,” the rule that insists that ISPs treat all internet traffic equally.   With the court decision, ISPs can now favor some content over others and restrict user’s access to certain content.

Certainly, this has the potential to have a huge impact on how the market works.  After all, this affects the institutional framework in which the Internet exists, so economists should certainly think about its implications and try to consider how this will make the Internet work better or worse.   What economists should not do is entertain notions that this new framework will allow firms to get too big or give existing big firms an unfair advantage at the expense of consumers.   Economist Don Boudreaux makes this point on his blog.  His point is that we perhaps have reason to believe that companies have incentives, more so than government regulators, to serve customers and further that large businesses may have become large because they have an advantage in serving customer needs. 

I would like some commentary on what will happen with the net neutrality decision instead of what might happen.  OK.  My ISP can now block my access to Facebook if it wants.  Those making that claim need to explain why that might happen.    My grocery store is not legally required to sell me Dr. Pepper, but it still seems to have it on the shelves.  Why?  Because I would go somewhere else if it did not.  When Net Neutrality became an issue 10 years ago, bandwidth was expensive and competition was nil.  In the last 10 years, bandwidth has become cheap and there are many substitutes.   At my house, I have many options for internet service:  ATT, Suddenlink, Dish TV, Direct TV, ATT wireless, Sprint, Verizon, etc.  Why should we think that the marketplace would not give us what we want?

Furthermore, not only are there many options right now for internet service, there is significant threat of even more firms entering to provide internet service.  If, one of the articles suggest, that firms will be able (or try to) to double charge content users and creators double on both sides, there is a considerable profit motive.  By striking down the FCC’s ability to regulate, maybe ISPs will discover ways to package their product in a way that serves consumers better.

In other words, Net Neutrality may have been a great policy 10 years ago.  Net Neutrality may have been even necessary for the internet to come into being.  But that does not mean it is good policy now.  Maybe it is time for the courts to force FCC to allow competitive forces to reign without restrictions on the agreements firms can make to try to make to serve consumers.

This idea is very optimistic and relates very nicely with my student’s impending assignment of Hayek’s Use of Knowledge in Society.  With Net Neutrality, the government placed a restrictive environment on the types of agreements that companies could make as they did business.   The court decision takes those restrictions off.  The question to me at least is what do you trust the most.  Which institutional framework will serve consumers better?    Now, in this narrow arena, businesses can use their particular knowledge of the market to operate.  Will that benefit us?  We will see.

Of course, there are many anecdotes that support and contradict my arguments here.  I will allow my students to fill in the blanks.  Educate me.

First post. Just to test.

I am going to force my students to read my new blog.  Cool?  You bet!