Whatever the effects of political incentives and rent-seeking in MEGA’s economic
development efforts, MEGA decisions no doubt usually involve good faith efforts
and research by MEGA officials and the business recipients of the MEGA grants.
Nevertheless, even this is not likely to advance MEGA’s goal of accelerating job
growth above what would have been generated by the market alone. We say this
because MEGA officials face an inherent "knowledge problem" that is widely
recognized in the economic literature: They cannot reliably determine which
corporations will bring the most benefit to the state.
When economic development officials survey the state economy and try to add more jobs to the state employment rolls than would otherwise exist, they are dealing with potentially millions of items to prioritize.
True, most people think of this as a problem that can be solved with good
financial research and foresight. But in the book "The Fatal Conceit: The Errors
of Socialism," Nobel Memorial Prize-winner F. A. von Hayek explains that "the
curious task of economics is to demonstrate to men how much they really know
about what they imagine they can design."
He then illustrates the limits on the transmission of information and knowledge
that can be accumulated by any small group of planners. Hayek recognized that
knowledge is highly diffused and contained in the minds of millions of economic
actors who are working to maximize their own self-interest.
market is the only known method of providing information enabling individuals to
judge comparative advantages of different uses of resources of which they have
immediate knowledge and through whose use, whether they so intend or not, they
serve the needs of distant unknown individuals. This dispersed knowledge is
essentially (Hayek’s emphasis) dispersed, and cannot possibly be gathered
together and conveyed to an authority charged with a task of deliberately
other words, regardless of how talented they are, it is impossible for state
officials to know how to redistribute resources in such a way that would make
society better off than if they had not intervened. At best, they can hope to
just how lucky they would need to be, consider the following illustration,
devised by the respected Stanford University economist Paul Romer, which helps
explain the difficulty in commanding and using information.
are only six ways to arrange three items (see Graphic 13 above). You can
calculate this by using a simple "factorial," where "three factorial" (or "3!"),
simply means 3 x 2 x 1, or 6.
increasing the number of the cards increases the number of potential
arrangements at a dramatic rate. With just 20 items, the number of arrangements
rockets to 2,432,902,008,176,640,000 — over 2 quintillion, and more than all of
the seconds that would tick by in 75 billion years (2,365,200,000,000,000,000).
extend that concept to a full deck of 52 playing cards. It is conceivable that
some theoretically possible arrangements of a card deck have never actually
occurred in any card deck in all of human history.
when economic development officials survey the state economy and try to add more
jobs to the state employment rolls than would otherwise exist, they are dealing
with potentially millions of items to prioritize, including the varied
preferences and plans of the state’s business firms and consumers. Moreover, as
Hayek noted, this knowledge is essentially dispersed in people’s minds;
it cannot be gathered in the first place.
Track Record of the Private Sector
even the highest paid and most experienced Wall Street investment experts with
scores of analysts at their disposal have trouble picking winners and losers in
the marketplace. Ben Warwick, in his book "Searching for Alpha: The Quest for
Exceptional Investment Performance," observes that between 1995 and 2000, "Of
the 45 largest stock funds, only one has beaten the Standard and Poor’s 500
index . . . and that fund outperformed by a scant 0.60 percent per year."
is not an uncommon finding. Despite every conceivable advantage in divining
which companies are good investments and which are not, and despite enormous
economic incentives to succeed, even professional money managers rarely
outperform the marketplace as a whole.
2002, then-MEDC CEO Doug Rothwell told the managing editor of The Observer
Newspapers, "Our philosophy is to support winners, the companies that have a
good business model." It certainly sounds like a good strategy, but
it’s the strategy employed by most professional investors, and they don’t
usually beat the marketplace.
MEGA faces the same "knowledge problem" that plagues central planners in other
governments and that makes it hard for private investors to outperform the
Standard & Poors Index. They cannot somehow survey the marketplace and a sea of
human interaction in all its detail, and then improve it through some state
effort, such as targeting tax relief to corporations. It requires knowledge that
can never be gathered, assembled and organized. Only millions of individuals
acting freely can coordinate the many pieces of local knowledge into a system
that is reasonably efficient at improving human wealth.