Distributed Information and the Role of the State in the Economy

Abstract

I intend to make here some reflections on the role of the state in the government of the economy. More specifically, I want to draw the implications of the fact that knowledge in the economy is very widely dispersed. Neither the state nor any other entity has ready access to any more than a small portion of the myriad of facts, generalizations, and judgements, explicit and implicit, which are known somewhere in the economic system and affect its outcome. This perception is classic among economists, as seen in Adam Smith, if not before. In recent times, there is a prevailing consensus that the government is in a poor position to make economic decisions since its knowledge is such a small part of that scattered through the economy, a position especially associated with the name of Friedrich von Hayek (1945). This view is manifested in practice in the strong current trend towards privatization and towards deregulation even of natural monopolies. I want to re-examine the argument and show that the inference from dispersed information to absence of government intervention is valid only for some cases but not for others. The generalizations common in current rhetoric are too sweeping.