Freeman

ARTICLE

Information in the Market

APRIL 01, 1985 by JOE COBB

Joe Cobb is an economist with the Congressional Joint Economic Committee.

During the “energy crisis” of the 1970s there were many false rumors about major oil companies hoarding petroleum to keep prices high. When the U.S. Department of Energy was created in 1977, one of its main branches was the Energy Information Administration. This agency has an annual budget of about $60 million to compile statistics on the energy resources and energy production in the United States.

Few people oppose collecting this kind of information. Even oil and gas producers thought it might be a good thing to dispel hostile rumors. Yet, there is a theory behind this program that is basically flawed. The Energy Information Administration was created to provide a reliable central data base for the National Energy Plan. The kind of information that a government agency like the Energy Information Administration collects, however, is completely useless in a free market.

There are two different theories of information. When we understand the differences between these theories, and the concepts of economics that rely upon one theory or the other, we are much better equipped to explain to friends, associates, and even politicians why the free market is the only way to solve things like an energy crisis.

Information is absolutely critical for any kind of planning, both the socialist idea of centralized national planning and the free-market method of decentralized entrepreneurial planning. Ludwig von Mises identified planning for the future as the main human quality that sets us apart from lower forms of life. Some animals prepare for the coming of winter, like squirrels by storing nuts, but only mankind plans for the future by forgoing consumption today to create tools, capital goods, to enjoy greater wealth through higher productivity later on.

Two Models

There are two basic models of the economic process in most people’s minds. One is the decentralized, incentive-led market where consumers are the final judges of business performance, where bad decisions are punished by economic loss. The other is a centralized model, in which the economy is like one big company, headed by the President with the Congress serving as a Board of Directors.

In a corporation, the managers need reliable information to choose what to produce and where to offer it for sale. A staff of statistical marketing specialists and cost accountants, as well as computer models that can simulate different “what if” situations, are valuable tools for business planning. In this case, businessmen are trying to make the best decisions they can, but they know that most forecasting is just guesswork. They can’t control the consumers’ buying habits. If the buyers reject their products or services, heads may roll.

Although the corporate model of economic planning is helpful for businessmen, it is a logical fallacy to think about the larger economic system as one big company. The task of everyone in the “extended order of human cooperation,” to use the term favored by Nobel-laureate F. A. Hayek, is to discover information and act upon it to meet the needs and economic demands of other people, most of whom cannot be identified in advance.

This kind of information cannot be reduced to statistics and stored in a computer. It is often not known in advance. Only after the consumers have judged the businessmen’s attempts can anyone see who made a profit and who made a loss. Profits are informative and help the successful business planners obtain more capital to expand their activity. Losses are also informative, and they diminish the supply of capital in the hands of poor business planners. Information about success and failure is the real, hard data in a free market economy. Investors monitor winners and losers very closely.

Even for the business planners, who can benefit by using computer models and statistics, the most important facts are the relative prices of the raw materials and labor they must buy before bringing a new product to market. Is it less costly to produce a product like shoes with computerized equipment and a few educated workers in the United States, or by hiring hundreds of skilled handcraftsmen in Asia? The relative prices of capital and labor will determine the answer, and the prices can only be seen accurately in a free market.

Market Price Information Essential to Business Planners

If the business planners don’t have free-market price information, their cost accountants can’t tell them what to do. If they don’t have accurate price information about the consumers’ other alternatives, their statistical marketing specialists can’t forecast sales and other “what if” questions. Before computers can help anyone, they have to be fed facts and figures that can only come from a free, competitive market—from the choices and buying decisions of consumers.

The reason why business planning is useful but “national planning” is worse than useless—it is destructive to progress—is that when the government tries to take over planning, it wipes out the most important source of planning information, the relative prices of all the different products and services that permit computers and statistics to be of value to businessmen.

This is the reason why government statistics programs are such a waste of money. The Energy Information Administration is useless to the producers of oil, gas, and electricity. It doesn’t do anything for the consumer. It just creates jobs for a small number of well paid statisticians and computer operators. If this were all, however, it would be as harmless as an old warehouse full of obsolete, military surplus tents.

Unfortunately, programs like the Energy Information Administration are regarded by Congressmen and others who worry about the possibility of another energy crisis as “essential” for emergency planning and coping with any problem that may arise. The socialist theory of abolishing the free market and replacing it with the corporate model whenever it seems expedient is alive and well in Washington. Like a time bomb, this false theory of information will someday destroy us unless those who see what is wrong with it speak out and dismantle it.

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April 1985

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