The pretense of knowledge

Posted: Jul 12, 2006 12:01 AM

One of the great contributions of Nobel Laureate economist Friedrich Hayek was to admonish us to recognize the insurmountable limits to human knowledge. Why? Not even the brightest minds, and surely not the U.S. Congress, can ever have the knowledge to shape an economic system entirely to our liking. To think we can represents the height of arrogance and a pretense of knowledge. The billions upon billions of interrelationships between an economic system's human and non-human elements defy human capacity to know.

Let's examine just a few pretenses of knowledge. Under Social Security law, Congress forces workers to set aside a portion of their earnings for retirement. Take a 25-year-old -- let's call her "Mary" -- who earns $40,000 a year. Her Social Security tax is about $2,500. Here's my question to you: Was having $2,500 forcibly taken out of Mary's pay for retirement her best possible use of that money? Mary might have saved and invested several years to open a small business. She might have put it toward private schooling or music lessons for her child, or any number of things that might have made her, and possibly our nation, wealthier in the future.

How about Congress' mandate for more fuel-efficient cars? According to a National Research Council of the National Academies of Sciences 2002 report, delivered by Dr. Leonard Evans to the Washington-based Competitive Enterprise Institute, Corporate Average Fuel Economy (CAFE) standards have contributed to between 1,300 and 2,600 traffic deaths a year. Congress' mandate for higher gasoline mileage leads to the production of lighter, smaller and less crash-worthy cars, resulting in unnecessary deaths. Through technological innovation and natural market forces, cars were already becoming more fuel efficient before CAFE standards were mandated. But more important, how does Congress know whether this loss of life is worth the amount of fuel saved? Do they even know or care about the tradeoff?

A major part of the knowledge problem that Congress faces, and, for that matter, any of us, is what's seen and what's unseen. In the case of Social Security, what's seen are the beneficiaries with a monthly check. What's not seen are the outcomes that might have been had people not been taxed for Social Security. According to the National Council for Capital Formation, Social Security lowers private saving and investment and, as a result, GDP is at least five percent lower than it otherwise would be. Moreover, had people been able to use the money for private retirement plans, they'd earn much more than the paltry sum Social Security pays out. The same principle applies to CAFE standards. What's seen are cars getting more miles per gallon. What's unseen, or the connection not made, are the thousands of Americans killed as a result of the less crash-worthy cars produced as a result of congressional mandates.

Another example of the seen/unseen problem is the Bush administration's 2002 steel tariffs. The tariffs' seen beneficiaries were steel industry executives, stockholders and the approximately 1,700 steelworker jobs saved. According to the Consuming Industries Trade Action Association, higher steel prices, resulting from the tariffs, caused thousands of job losses in the steel-using industries. Since companies that used steel had to pay higher prices, they became less competitive domestically and internationally.

Each of us is faced with the knowledge and the seen and unseen problems. I believe that most Americans would see themselves in a much better position of determining what's in our own best interests than politicians, who are mostly concerned with re-election. At least I hope that's the case.

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