June 20, 2015

Information and ignorance

Comment on ‘Information Matters?’


Information is a good thing because if people have the right information they make the right decisions. This is the idea of the market system as a gigantic information processor that helps to achieve the overall best outcome.

Interestingly, Adam Smith said exactly the opposite, i.e., that it is self-deception that keeps the system running: “Smith turns from these self-deceptions to the role that the striving in pursuit of such mirages means for society. For society’s sake, he assures us, it is well that these ‘deceptions’ are widespread because ‘this deception rouses and keeps in continual motion the industry of mankind’: ...” (Kennedy, 2009, p. 247)

In any case, this easily explains how bubbles are kept in motion. Note well that Smith solves also a moral dilemma because the self-deception of the myopic egoistic individuals assures that they unintentionally work for the best of all. Ignorance is exactly what puts the Invisible Hand to work.

“... the social sciences are largely concerned with the unintended consequences, or repercussions, of human actions. And ‘unintended’ in this context does not perhaps mean ‘not consciously intended’; rather it characterizes repercussions which may violate all interests of the social agent.” (Popper, 1960, p. 158)

The real problem, however, is this. Information is not enough. In order to arrive at the right decision, the agents need the correct model of the market system. Now, we know for sure that neither the Walrasian nor the Keynesian theory is correct and this makes the whole concept of rational expectation/decision self-contradictory.

It far surpasses the economist's capabilities to realize that economic theory cannot be built upon behavioral assumptions and that economics is quite different from psychology, sociology, moral philosophy, anthropology, information theory, etcetera. Economists show up in every domain — except economics.

When it is the Invisible Hand that actually runs the show then it is consequential to change the very definition of the subject matter to economics studies how the economic system works.

Egmont Kakarot-Handtke

Kennedy, G. (2009). Adam Smith and the Invisible Hand: From Metaphor to Myth. Econ Journal Watch, 6(2): 239–263. URL
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.